Will Western corporate governance work for us?

(Last of two parts)

The structure of business is different and economic power is concentrated on dominant shareholder groups, which could be families or government. According to Wash SyCip, studies show four prevalent models: a) the widely held publicly traded corporation; b) the closely held publicly traded corporation; c) the government or state-owned enterprise; and d) the family corporation.

Given this categorization, there are still many who think that key governance issues developed in the US and the UK can be transplanted. SyCip therefore poses the question, "Are standards for widely held corporations applicable to family-dominated companies?" And they abound in the Philippines. Coming to mind immediately are Ayala Corporation and the predominance of the Zobel family; the Henry Sy group of companies, with a former student of mine, the extremely intelligent Tessie Sy-Coson at the helm now; the Concepcion group of companies with the current patriarch in the person of Raul Concepcion (I hope Ronnie doesn’t mind my calling him "patriarch"), and quite a number of other entities.

For example, according to SyCip, it is being proposed that for publicly traded corporations with dominant shareholders, the governance issues should center on those between investor and dominant shareholders. A critical concern thus emerges – protection of other shareholders, so that the key drivers for governance suggested are the independence of a board member on boards and board committees, which of course is understandably regarded as providing minority shareholder protection.

Wash says this "sounds good to be sure, but is it right?" He says he is not certain. He stresses this fact as he poses the following queries, "Will the independence of a majority of the board members really make a difference? Is it not connections or the guanxi that is more important? Are we not protecting the minority shareholders better by appointing those with better connections over those who are independent?"

A very witty allegory is posed by Wash when he says, "They say we should not chisel the foot to fit the shoe. Let’s not make the shoe of Western standards fit by chiseling the foot. And if one must give, isn’t it that we should chisel the shoe, not the foot?"

Explaining that some gurus have said that for family corporations, the key to governance is the professionalization of management, and, although this may sound right, SyCip is not sure that he agrees. There seem to be some "normative conclusions" that professionalization of management and the adherence to governance standards, Western style, is the ideal for the Asian family business… that entrepreneurship will somehow continue after management has been professionalized.

While he argues that professionalization is indeed necessary, he urged the conference CEOs to assess very carefully several truths within the Asian context. Large businesses here operate in a politicized environment; there is a lot of dependence on informal alliances; paternalism is accepted and even desired; relationships are paramount, for instance in the Philippines, a fraternity brod can be more than a brother in business and in government. The owner normally is the force behind the business, is the liason with government and financial institutions, is the boss and is not normally questioned about his policies and rationales for actions undertaken.

Wash takes it a step further and postulates that it has been noted that it is the family council that decides, with the Board being the concurring legal entity. Rationally he stresses that the funds of the family are at risk, and very often the liability to financial institutions carries the personal guarantees of the family. The critical need is there, therefore, to develop the governance standards that will balance keeping alive this family soul that makes the business prosper and the need for professionalization and governance rules on the other.

Professional managers are not yet displacing owners from positions of corporate control. In the US there is a marked separation of ownership from management and control, where ownership became widely dispersed and actively traded, and professional managers were looked upon to satisfy the needs of the shareholders. While much good came from this, as Wash puts it, "It also led to unbridled use of takeovers, hostile share transactions, mergers and acquisitions, and the unethical tactics employed in the name of shareholder value. This, as many of us already know, led to the urgent and critical need to protect the shareholders from the greed and bias of managers."

This situation is quite different in Asia, where the interest of management and the major shareholders are usually identical. The vastly experienced corporate man that Wash Sycip is, not only in the Philippines and Asia, but in the Western world as well, now asks the question: "What governance standards do we develop in this setting? We know that owners are not naturally transparent since in many cases they can pursue opportunity only in secrecy. They have a paternalistic outlook over the minority and their employees and expect loyalty. Owners do not make decisions by committee, and do not like to be questioned. But these are immensely successful people. They decide fast, move fast, and make things happen. It is their competitive advantage."

He advocates that perhaps we should encourage these long staying owner-managers to go on doing what they are good at, making their businesses successful and contributing to national development. "If so," Wash says, "let’s not make the rules of governance a discouragement for entrepreneurship."

The difference in culture where harmony and relationships are the foundations for doing business. I certainly agree with Wash when he says that to be successful in Asia requires an intricate network of contacts, the granting (and receiving) of favors and building interpersonal trust and harmony. In the US, the system is much less personal and it invokes the rule of law and merit more. According to him, the way codes of governance are being drawn up emphasizing the need for independent directors bothers him a bit, for if these codes lead more to confrontation than to harmony, business in Asia cannot move ahead speedily. There is thus a need now and not later, to find a balance between those sets of standards that will allow us to maintain our culture and identity on the one hand and on the other, allow a system to evolve that will be fair and just.

The different stages of development and the maturity stages of the capital markets in Asia: In Asia, they are nowhere as developed as their US counterparts. There is a need by the US, Britain and other developed countries in the West to be able to do business in Asia in accordance with the rules of the game, as they understand it. This is understandable, but is it desirable? Wash definitely says we have to look at governance standards from the point of view of what we need to keep our economies vibrant and our businesses growing.

He proves the need for this by giving the example of China. Because of its huge domestic market, China has set new rules for multinational participation in key industries. Western firms have had to accept these restrictions even though they would reject these guidelines from smaller countries. "Where else", he exclaims, "will you find a local company being the partner of both General Motors and Volkswagen, two bitter competitors!"

Finally tackling globalization of trade and industry which will increase rather than diminish of course, the challenge that inevitably lands on our laps in order to be players in the global setting is to make those changes that will help us compete more effectively. Standards must therefore be set that will allow us our uniqueness and yet satisfy the needs of the global marketplace.

Saying that confrontation may bring out the best in the US, but harmony may bring out the best in Asia, Wash SyCip, a respected guru in the world of business, poses this challenge, "Can we who are in positions to influence the future of governance standards in Asia, find a way not to stifle the energy and the motivation of the business growth engine, and yet be part of an ever closer and smaller world order?"

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