Firm Beliefs

When Asia plunged into crisis in 1997-98, and the IMF was forcing Western economic medicine down the throats of Asian governments, it was also assumed that the region’s opaque and
07 Apr 2015 10:01
Firm Beliefs

When Asia plunged into crisis in 1997-98, and the IMF was forcing Western economic medicine down the throats of Asian governments, it was also assumed that the region’s opaque and over-diversified business groups would be compelled to swallow the Anglo-Saxon model of capitalism.

Whether controlled by tycoons or the state, these outfits would become open, focused, responsive to investors and managed by professionals.

Today the idea that corporate Asia will converge with the West seems quite mad.

About 70 per cent of Asia’s stockmarket value is represented by state-run firms or “business houses”—broad conglomerates that are usually family-controlled.

Asian firms pay out just a third of their profits in dividends and buy-backs, compared with three-quarters for European firms and 90% for American ones.

In 2014 Apple spent more on repurchasing stock than the top 500 Asian firms combined.

East of Suez lies a continent that the modern doctrine of shareholder value never conquered.

Indeed, to Anglo-Saxon types, corporate Asia often appears to be going back in time.

Consider China’s supposed reforms of its state firms. In January CITIC, a conglomerate that thrived under Deng Xiaoping, sold stakes to CP Group, a Thai firm whose patriarch has Chinese roots, and Itochu, a Japanese trading house. CP and Itochu were among the first foreign firms to invest in China, in the 1970s.

The alliance’s use of cross-shareholdings and the vagueness of its strategic goals were a flashback to a murkier era.



In September Sinopec, a Chinese energy giant, sold a $17.5 billion stake in its marketing arm to a consortium of state bodies, entrepreneurs and shell companies in tax havens.

The deal epitomised the opacity at the heart of Chinese governance.

The subprime crash and other scandals have tarnished Anglo-Saxon capitalism’s image. Many of the West’s rising tech stars have spurned its ideals.

Alibaba, a Chinese e-commerce firm, has listed in America with a complex ownership structure that leaves investors all but powerless—inspired to do so by Silicon Valley’s young moguls as well as Asia’s older ones.

India’s biggest private conglomerates are still sticking fingers in every nook of the economy, as they did decades ago.

Reliance Industries recently bought a broadcaster, giving it even more political clout. Tata Sons, which has strong corporate governance but sloppy capital allocation, is starting two airlines (its first was nationalised in 1953).

South Korea’s business houses, the chaebol, also seem at times to be reverting to old ways. Hyundai, a carmaker, has infuriated some investors by spending $10 billion on land in Seoul’s posh Gangnam district for a new headquarters.

The daughter of the tycoon who runs Korean Air was sentenced to jail last month after humiliating a flight attendant who served her nuts incorrectly.

For Koreans the episode showed the abiding sense of entitlement of the chaebol’s founding families.

A recent survey by CLSA, a stockbroker, concludes that firms’ governance in Asia—judged by measures such as board independence—has slipped since 2012.

Perhaps Asia just has its own way of doing business.

Scholars have long debated whether weak legal systems and capital markets lead Asian firms to diversify and rely on political and familial networks.

To its detractors this habit breeds cronyism. Fans say it allows long-term decision-making. But both sides probably now agree that “Asian” corporate values will only grow more powerful, as the continent’s economic weight in the world rises.

In fact this view is as complacent as the belief that Asia will mimic the West. Strong long-term forces will push Asia’s firms to change, as has just been illustrated by Li Ka-shing, the continent’s second-richest man. In January he announced an unscrambling of his empire of interlocking property, retail and telecoms assets.

That helps with succession, making it easier for his children to exert control—Mr Li is 86. It makes institutional investors happy—the group’s value has since risen by $12 billion.

And it helps marshal capital so that the group’s main businesses can gain scale. This week Mr Li closed a deal to buy O2, one of Britain’s largest mobile-phone operators, for $15 billion.


The rigours of mortality

These three forces—mortality, the need to please shareholders and the drive to achieve global scale—will lead other firms to reform. Hong Kong’s richest five tycoons have an average age of 82.

In South Korea Samsung and Hyundai are trying to reshuffle their holding chains in preparation for a new generation to take over. To do so they need to win over their outside investors.

After its Gangnam-style fiasco Hyundai launched a share buy-back. Both chaebol have faced shareholder rebellions and been forced to sweeten or abandon restructuring plans.

As patriarchs get older, institutional investors will gain more clout, especially as more Asians save for retirement. Already, global funds such as BlackRock are many firms’ biggest outside investors.

This month South Korea’s state pension fund opposed the election of two directors of Hyundai companies.

Japan’s state pension fund is pushing firms to boost their profits.

On March 13th Fanuc, a secretive Japanese robot-maker, said it would create an investor-relations department and consider paying more dividends. It has been a target of Third Point, an activist fund.

Globalisation does not affect every industry—property, the bedrock of many Asian fortunes, is a parochial affair.

But firms active in sectors that are open to foreign competition will need to concentrate their firepower to gain economies of scale, rather than follow the old way of sprawling diversification.

Two of Asia’s most valuable firms are focused multinationals—AIA, an insurer, and TSMC, a Taiwanese chipmaker. More will follow.

The result of all this could be a rising cohort of Asian firms like Mr Li’s—with families (or the state) still exerting some control, but with accountability to other investors and an emphasis on global scale.

The view that Asian firms would converge with an Anglo-Saxon ideal was mad. But so is the idea that they will stand still.


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