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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

WITH AN OPEN BOOK

Keeping companies and governments honest

By Alejandro Reyes / HONG KONG


Who's the cleanest? The nations, by graft

AMARI IS ONE WORD that may well return to haunt Fidel Ramos after he steps down as Philippines president on June 30. In the biggest corruption scandal during his term, the government sold 750 hectares of the Manila Bay waterfront to the consortium, Amari Coastal Bay Development Corp. Critics allege a $61.5 million sweetener. Amari and the government agency involved deny any wrongdoing. The truth may out before too long: Joseph Estrada, who looks set to win the presidential polls, has an investigation in mind. According to current Philippines Finance Minister Salvador Enriquez, there is now less dishonesty than under previous governments. But "it will take more than a Ramos to do something about corruption," he says.

Can anything be done about corruption? After years of hand-wringing and lip-service to openness and honesty, perhaps the backwash from Asia's economic turmoil will finally do the trick. Asia's troubles, so the received wisdom goes, are due partly to wanton investment in non-productive assets, corrupt practices, cronyism and poor corporate governance.

Greater transparency - something of a post-crisis mantra - will remedy many of these problems. The aim is not just to limit bribery, but to introduce honest administration in both private and public sectors. For governments, that means beefing up independent auditing systems, freeing the flow of information and the media, and giving teeth to law-enforcement agencies and the judiciary. In corporate boardrooms, the solutions include imposing stringent accounting standards, improving communication with investors and protecting the rights of minority shareholders.

The concept is not new to places like Hong Kong and Singapore, where there are effective corruption-fighting bodies and whose financial markets have long been under the supervision of competent authorities. Hong Kong's Independent Commission Against Corruption, for instance, is credited with cleaning up the territory. In addition, the office of the Director of Audit, the government's spending watchdog, plays a key role in deterring graft by issuing its annual assessment. Few other administrations in Asia have a similar department.

Most would agree that the rule of law is fundamental to the effective functioning of any system of accountability. In post-colonial Hong Kong, democratic politicians fear this standard is being eroded. As a warning sign, they cite the Justice Department's recent decision not to prosecute newspaper proprietor Sally Aw Sian in a fraud case. She was named as a co-conspirator along with three of her executives who were charged. In another instance, the government chose not to go after the local branch of China's official Xinhua News Agency for breaching a privacy ordinance. The Hong Kong government has denied that its judgments in both cases were politically motivated. But, comments local academic Jermain Lam, "under the new system operating in a sensitive context, political consideration in judicial cases seems to be inevitable."

Since the economic crisis erupted last year, several countries, including Thailand and South Korea, have begun to require officials to publicly list their wealth. Such declarations by members of the Thai cabinet and their families have been published in the press following constitutional changes last year. In March, Indonesian President Suharto announced that his ministers would also be required to declare their assets - but only to the boss. The statements are kept confidential. To Peter Eigen, chairman of the Berlin-based anti-corruption coalition, Transparency International (TI), Jakarta's measure "will have absolutely no impact." He says: "This is either a tragic lost opportunity or simply window-dressing." The Thai initiative offers a better route out of endemic corruption, he believes.

Eigen's group publishes an annual "corruption perception" index. Its 1997 ratings, based on seven international surveys of business people, ranked 52 countries according to how corrupt they are perceived to be - not how corrupt they may actually be. Of the Asian economies polled, Singapore and Hong Kong fared the best. India, Indonesia and Pakistan were the poorest performers. The TI index has prompted both the Pakistan and Malaysian governments to consult the organization in sharpening their anti-graft initiatives.

Corruption is a two-way street. Solutions have to come from the boardroom as well. To many executives around the world, bribery is part of doing business. A 1997 anti-corruption convention adopted by the Organization of Economic Co-operation and Development should help change how the game is played. The 34 signatories so far are obliged by the end of this year to make bribing a public official a crime - wherever it may take place.

Still, there is much more to achieving corporate transparency than preventing kickbacks to bureaucrats. The economic crisis has exposed just how little of companies' operations is made known to shareholders. In the tougher environment, businesses will have to improve disclosure to be competitive. The simple matter is that investors have become far more demanding. If companies want to attract new capital (particularly urgent for the seriously cash-strapped), they will have to open their books and overhaul management systems. "If you set out a program and deliver on it, confidence will grow," says Zafer Achi, director of management consultancy Booz-Allen & Hamilton Indonesia. But this must go in tandem with better communication with corporate backers. Managers who take heed will be rewarded by investors' interest in putting money into their companies, Achi adds. And that will help the business survive.

The same lesson applies to China, which is is keen to quickly develop its capital markets. Its stock exchanges in Shenzhen and Shanghai are driven mainly by retail sales (about 95% of transactions), which means high volatility. Institutional investors have to be brought in if the bourses are to be stabilized. And to attract them, China will need to improve disclosure and governance, as well as beef up its monitoring of corporate practice. This holds true, too, for its reform of ailing state-owned enterprises.

Taking an ostrich-like attitude to trouble only increases the shock when the edifice comes tumbling down - and builds distrust. Japanese officials are learning the hard way as details emerge on how the finance ministry advised the president of the now-defunct Yamaichi Securities to conceal its huge debts. The brokerage collapsed on March 31, four months after $2.1 billion in hidden losses were uncovered. In Malaysia, the market is suffering because of perceptions that the government has engineered bailouts for preferred companies.

With confidence at an all-time low, reliable accounts are essential to wooing investors. Accounting practices across the region have been so questionable that "a company could get by with almost any set of books or accounts," says Achi, an expert on corporate restructuring. Even books audited by reputable accounting firms may be suspect. "I have worked with privately held companies whose accounts look simpler, clearer and more dependable than a lot of listed companies," he says. Take the format of financial statements. "It was not the norm in Asia at all to go to investors and say, 'Here is my consolidated cash-flow statement and here is exactly how it breaks down.' Everything was aggregated to the highest degree possible," Achi says. "If you start revealing performance at the business level, a lot of bad news will start jumping out."

Family ties can be a hindrance. Many Asian companies, including the large conglomerates, originated as family businesses and continue to be run that way. "It is the ultimate right of a wholly family owned company not to disclose anything. But if you are seeking public funds, then disclosure standards should be a lot higher," says Achi. In Southeast Asia, especially, family-controlled corporations use listed vehicles in their stable to raise funds from the market. But how the capital is put to work is a guessing game, he says.

Are companies finally mending their ways? It's early days yet. Restructuring is just starting among the chaebol in Korea and in enterprises elsewhere. In Indonesia, Achi believes "pioneers" in open managment could emerge in a couple of years. Meaningful changes, though, can take at least three years to implement. Many companies are struggling to survive into the next week. Yet it may not be too late for these crisis victims to reform. Showing a willingness to open up may be the only way to avoid certain death.


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