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Business Advice

'Looking East' for sound corporate practices

Asia may offer pointers as faith in boards of Western firms falters
The Straits Times - October 3, 2011
By: Goh Eng Yeow
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'Looking East' for sound corporate practices Former chairman of China's Sasac Li Rongrong (left) with Temasek Holdings president Hsieh Fu Hua. Mr Li feels a board should consider the interests of workers in its decisions. -- ST FILE PHOTO

AS AN emerging economy, we have long been used to looking up to London and New York as models of good corporate practices, but our unquestioning faith has been badly shaken in recent months.

As Temasek Holdings' president and a former boss of the Singapore Exchange, Mr Hsieh Fu Hua, observes, boards in big Western firms are becoming less trusted by shareholders. As a result, their power to act is being eroded because of this diminishing confidence.

To shore up their authority, boards are adopting short-term fixes to appease unhappy shareholders, but that is surely not the way to run a company as such measures may run contrary to its long-term interests.

Two examples immediately spring to mind - tech giant Hewlett-Packard (HP) and Swiss bank UBS, both once highly admired but which are now marred by bad publicity.

It makes for a sorry tale on either side of the Atlantic, as the axing of the two chief executives has done nothing for the tarnished reputations of the two companies' boards.

HP sacked its CEO of less than a year, Mr Leo Apotheker, after a string of disappointing quarterly results, while UBS boss Oswald Gruebel quit after revelations of a US$2.3 billion (S$3 billion) trading loss by a rogue trader.

HP's board came under fire for having to replace its CEO for the third time in five years, a move that created uncertainties at a time when the company has to head off challenges from rivals snapping at its heels.

As for UBS, the Financial Times observed that in accepting Mr Gruebel's resignation, the board had simply lost its nerve and lost the man most able to steer the Swiss bank back on course.

It leads to a burning question: Are boards running scared of growing unhappiness among shareholders and taking short-term measures to try to appease them?

In the Western context, the overriding duty of a board has always been to kow-tow to shareholder interests, almost to the exclusion of everything else.

And when a company faces financial difficulties, this can mean the first action it takes is to swing the axe, pruning the workforce ruthlessly to cut costs.

So when worries surfaced over the financial health of Bank of America last month, it made for depressing reading to learn that the banking giant might sack up to 40,000 staff to try to regain investor confidence.

Even for Asians who are used to looking up to the West for guidance on corporate matters, this would seem like a particularly brutal way to nurse a company back to health.

It therefore comes as a pleasant surprise to find an alternative being offered by Mr Li Rongrong, the former chairman of China's state-owned Assets Supervision and Administration Commission of the State Council (Sasac).

When he was Sasac's boss, he had to oversee rules being drafted for mainland state-owned firms and appoint their chief executives. So what he said has a bearing on how the boards of some of the biggest companies in China conduct themselves.

Mr Li asked if it is good enough for a board to consider an issue and then make a decision by putting it to the vote which allows the majority to carry the day.

To him, this means that insufficient effort has been made to consider an issue as the majority may not always be right.

And he observed that when a wrong decision is taken and the business suffers, jobs are lost and this brings financial hardship to the families that depended on the income of those sacked workers.

For those of us trained to assess a company's performance in terms of dollars and cents, taking the interests of workers into consideration when making a sound business decision may sound like an alien concept.

But Mr Li has a point that when a company's future is charted and tough business decisions are taken, the board ought to consider the consequences that its course of action may have on other stakeholders such as workers, other than shareholders.

Workers, after all, have as much incentive - if not more - as shareholders in ensuring that a company stays profitable, considering the pain if something goes wrong.

Mr Li wants more discussions among directors before board meetings, especially on sensitive issues, to ensure that the right decisions are taken.

Market observers, who often wonder if an independent director really has the time to consider the issues confronting a listed firm if he also sits on the boards of half a dozen or more other companies, will find Mr Li's views interesting.

Mr Li maintains that non-executive directors in a big mainland firm must spend three months a year with the company in order to make effective decisions.

What is noteworthy is that these directors are appointed for a brief span, perhaps as short as two years. This can turn out to be a face-saving measure, if things fail to work out.

As he observed: 'This gives both sides a choice. If I find your performance is no good, I don't have to hire you after that. But if you find the going too tiring, you can also leave.'

Whether Mr Li's yardstick will end up producing more effective boards remains to be seen.

But it is certainly an eye-opener on what China is doing on the corporate governance front, giving us a 'Look East' alternative for good business practices.

 

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