Parmalat: It can, has and will happen in Asia
By Gary LaMoshi
HONG KONG - The holiday season brought much cheer to investors in Asia. Thailand's main stock index more than doubled in 2003 and ranked as the world's top performing bourse after Argentina's. Mumbai's benchmark finished second in Asia, rising 73 percent amid record inflows of foreign money. Singapore and Hong Kong's markets and economies rebounded from the outbreak of severe acute respiratory syndrome (SARS) to gains of more than 30 percent.
Throughout Asia, stocks were enjoying their biggest, and in many cases their first, annual gains since 1999, and with many indexes poised at or near four-year highs. Jakarta's market, a 63 percent gainer in 2003, hit a four-year high in its first trading session of 2004, bringing President Megawati Sukarnoputri out to open Monday's session. Even Japan's Nikkei 225 that's made billionaires into millionaires over the past decade rose 24.5 percent in 2003.
Asian economies and investors can be excused a tinge of smugness as they count their money and see continued scandals elsewhere. In the United States, 2003 revealed widespread cheating for personal profit among mutual fund managers to whom tens of millions of Americans entrust their retirement nest eggs. Better homemaking billionaire Martha Stewart was indicted on charges stemming from allegations she used illegal insider information to avoid a US$45,000 loss, the equivalent for her of stealing a candy bar.
The final days of 2003 brought reminders that Europe is badly infected by the disease, too. Italian food conglomerate Parmalat collapsed after discovery of a gaping hole in its accounts, estimated at 8 billion euros (US$10 billion). On the legal side, the US Securities and Exchange Commission announced a $76 million settlement with Vivendi, the French water utility that tried and spectacularly failed to become a global media player.
The Parmalat scandal appears to be a classic case of corporate fraud involving several usual suspects. Founder Calisto Tanzi and members of his family milked Parmalat through offshore affiliates designed to confound prying shareholders, lenders and regulators. Parmalat's long-time auditor, if not co-opted into the conspiracy, had become far too comfortable with the company to be an effective watchdog for the company's stakeholders.
No cause for gloating in Asia
At Vivendi, the story was more complex, featuring ridiculously bad business judgments and poor oversight by an overly compliant board of directors. Those problems, however, quickly led Vivendi executives to cross the line to fraud by failing disclose the true extent of the company's financial difficulties.
These scandals may bring gloats from Asian observers, but they can happen in Asia. In fact, they have happened here and they will happen here again. US-type corporate abuses are not unique to Europe and the US.
Asia is full of publicly listed, family-controlled companies like Parmalat. Hong Kong's richest man and most admired investor Li Ka-shing runs his Cheung Kong and Hutchison Whampoa vehicles as family businesses and has arranged for his son Victor to succeed him. Rupert Murdoch encountered uproar from shareholders when he tried to install his son James as head of Britain's BSkyB, but Li's choice of successor hasn't provoked many peeps. Cheung Kong's board of directors, like most others in the region, makes the Vivendi bunch look like ruthless watchdogs by comparison.
Under Italian law, Parmalat had to change its auditor after nine years, but a loophole allowed it to retain that friendly auditor for its overseas subsidiaries, the alleged conduit for its fraudulent activities. In those Asian countries that even require independent audits, there are few rules about auditor independence or auditor rotation.
As for those new US scandals, there are no Asian laws to prevent local fund managers from engaging in the same practices that cost US investors billions. Martha Stewart's use of insider information to avoid a loss would be smiled upon in China as guanxi, that one-hand-washes-the-other form of business camaraderie.
Asians know about over-expanding overseas
The Vivendi case points the way toward new and dangerous ground for potential scandal for Asia. The basic path of over-expansion overseas has been well worn, particularly by South Korea's chaebol. Daewoo provided the most spectacular example, grabbing enough assets around the planet to briefly hold the number two spot on the national corporate roster. Daewoo founder Kim Woo-choong allegedly used those holdings and the complex financing that accompanied their acquisition and operation to skim billions of dollars.
The new twist on this old Asian theme is that acquirers aren't just fast talking, sleight of hand artists with friends in high places like Kim or Vivendi's Jean-Marie Messier, who came out of the same schools that spawn French ministers. Messier's biggest mistake may have been going Hollywood after acquiring Universal Studios, thus losing the respect and, eventually, the protection of Vivendi's traditional patrons.
Today, Asian government-controlled companies are increasingly moving overseas. They're not only seeking listing on foreign stock markets in order to gain access to international capital and respect, but they're buying actual businesses. Mainland Chinese companies are making the leap from privileged lives at home to competitive markets abroad, while older hands Japan Tobacco and Singapore Telecom are increasingly seeking growth overseas.
State-controlled companies operating overseas pose risks to local investors. Suppose that after a takeover, a state company acquirer decides to walk away from local debts or arbitrarily dilute local shareholders. That state company may lie beyond the jurisdiction of local courts, forcing investors to take action in courts that are overseen by the same government owner they're suing. That's not illegal; it's just scandalous.
Similarly, there's no law against much of the market manipulation and individual investor abuse that's rampant in Asia. The low incidence of scandal in Asia in comparison with the West in recent years is due mainly to Asia's lax rules and relaxed enforcement. Enjoy Asia's high returns, but don't let them seduce you into thinking honesty and integrity have gained the upper hand. |
