The Asia Crisis: Causa Sine Qua Non
By Timothy M. Devinney

Why Asia needs more transparent Institutions

The recent buffeting of the Asian economies has led to a lot of soul searching both within government and business circles along with a growing anxiety on the part of average Asians who wonder about their jobs and futures. However, in spite of all the 'Monday morning quarterbacking', few commentators understand that the problems in Asia have a simple and root cause – a failure in social and corporate governance – that calls into question the fundamental logic of 'Asian' capitalism.

In the discussion that follows, I argue that deep-seated tendencies serve to stifle transparency in everyday commercial and social interactions in many troubled Asian economies. Only by focussing policy reform, both in the society and the corporate realm, on the achievement of transparent governance will any true reform be achieved. An overemphasis on macroeconomic policy reform without a parallel plan for making decision making authority clear and contestable will be little more than a half-measure.

The style of capitalism operating in Asia is normally thought to be different in form and substance from more traditional 'Anglo-Saxon' capitalism most obviously represented by American corporations. Unlike Anglo-Saxon capitalism, Asian capitalism is more relational, being based upon expansive networks of family, ethnic and regional ties that replace the contractual arrangements dominant in developed economies. The traditional nature of Asian capitalism, with its emphasis on frugality, authoritarianism, and simple top-down management structures is well suited to the needs and demands of developing societies, particularly those with a weak tradition of social transparency most clearly seen in a lack of rule of law.

For the past several decades, Asian corporate networks have substituted quite effectively for arm's length governance and contractual guarantees. Thin capital markets and a dubious relationship between investment in a company and the ability to exercise any degree of ownership provided an incentive for the formation of 'closely-held' corporate structures. It also led to a tendency to expand based upon 'relational' logic rather than corporate logic. The incentive to expand operations using one's network of relationships provided a degree of financial and psychological security at a cost of strategic sense. Such a system could work only for so long. Asian corporations, already woefully lacking in middle management talent, could hardly be expected to manage (rather than simply own) chicken farms, retail outlets, and industrial equipment all under one roof. Furthermore, as expansion required more funds, the new 'owners' of these companies would begin demanding not just performance but a clearer statement of corporate purpose.

It is my contention that traditional relational capitalism will ultimately die and that those corporations and societies that recognise this fact first will be those most likely to ride out the current storm and be successful in the coming decades. Clearly, relationships and trust are important in any society and are a key ingredient to transacting business successfully. However, they cannot be sustained as the core logic of a society and business, particularly societies that are facing true directional change rather than simple random turbulence. The strength of relational systems is not their flexibility but their ability to hold firm in the face of troubles. In the coming decades, a ship's anchor will become less valuable than the crew's ability to chart a path through continual storms.

If Asian societies and corporations are to be successful in the future they will require not only skilled managers and political and social leaders but also a sea change in the way in which they think about corporate and social governance. The paramount condition for economic success, and ultimately social success (as measured by the people and not a political plutocracy), is the dominance of the logic of transparency. The success of the Anglo-Saxon model of capitalism is due to its embodiment of the principle of transparency and all that follows from it. The ability of societies such as Singapore, Hong Kong and Malta to thrive is hardly unrelated to their inheritance of the British system of law with its natural contestability and transparency.

Much has been written about the success of Hong Kong and Singapore and the importance of the rule of law. However, this misses the point. The rule of law is not itself important, but the fact that the rule of law exists is a reflection of the importance the society places on the transparency of social structures. Martin Lee, in a recent International Herald Tribune editorial, noted that the time had come for democracy in Hong Kong. As history has shown, democracy has many forms. For example, is the British system of 'first-past-the-post' any more or less democratic that the American electoral system, the Australian system of preferences or the French two-stage electoral processes? What Mr Lee should be calling for is that Hong Kong civil structures remain transparent and contestable rather than simply 'accountable' to leaders elected by one form rather than another.

Similarly, in many parts of Asia much has been made about 'crony capitalism'. Again, this is too simplistic. If corruption were a matter of simply paying a price for a service it would be little different than other license fees. The problem is not whether there is or is not a price of doing business but that you know the price, it is the same for everyone, and it is clear to whom you make the cheque.

Just as the Fords, Duponts, and Carnegies ultimately yielded control of their corporate empires, so too will many of the dominant Asian families find that 'familial' governance must be ceded to professional and faceless management structures. In addition, the top-down patriarchal system is antithetical to modern equity financed corporate structures. If one looks at history, there are two triggers for these changes. First, financial demands caused by the firm's need to expand weaken the power of the original owners. This shows up in two ways. In countries with thinner equity markets, control moves into the hands of the banks (until recently the continental European and Japanese model). In countries with well-developed equity markets, control moves into the hands of independent investors and fund managers (the American and British model).

Second, performance wanes as the strategic ability of the patriarch and his advisers are called into question. There are inevitable conflicts of interest between the financial and personal goals of this patriarchal management and the financial interests of the investors. The old interests will always lose this battle in the end.

Demands for transparency of corporate governance have profound implications for the nature of a firm's management and decision making. First, transparency opens up a firm's strategy to external scrutiny. Not only do external investors demand that a coherent strategy exist but that this strategy is based upon some fundamental corporate logic. The history of many Asian companies has been expansion based upon opportunity, relationships, and government fiat. The fact that these companies have been successful is a testimony to hard work and a booming market (you really had to be unlucky or outrageous to fail in these circumstances).

Second, transparency requires that the firm's management be accountable for the implementation of that strategy and be directly responsible for its implementation. This imposes on the corporation increasing demands for professionalism in management and clear rules and procedures for the measurement of performance.

Third, transparency requires simplicity and focus. Conglomeration in Asian firms has its roots in the weak liquidity and poor structure of many Asian financial markets (i.e., the inability of owners to exercise control over management). Focus not only forces the firm to commit to specific strategies but makes measurement and control by external investors easier.

As we look at the Asian landscape today we see many firms rethinking who they are and what they do. In this sense, the recent turbulence in the marketplace should be looked upon as an opportunity to make truly fundamental changes. Many of the social changes that must be confronted are daunting and will take at least a generation to work through. However, achieving transparency in corporate governance is both easier and less contentious and can serve to pave the way for more open social institutions. In thinking about adjusting to these changes, a few simple ideas need to be kept in mind if Asian corporations are going to be prepared for the next millennium.

First, modern accounting, finance, operations, and marketing principles diligently applied by well-educated managers are only a small part of modern corporate governance. A well-governed corporation requires a fundamental purpose guided by a senior management and board personally and intellectually committed to its implementation. Second, this corporate logic must be open to scrutiny by an unbiased skilled board and the ownership at large. The ability of senior management to subject its thinking to a process of due diligence is sine qua non of its ability to gain the commitment of the rest of the firm. It should be noted that such scrutiny in not anti-Confucian, in that it does not imply conflict between management and the board if done well.

Third, the strength of many Hong Kong and Singaporean firms has been their openness to outsiders, including non-Asians, at the very senior levels of management and on their boards. Like the best Western companies, they look to their boards for diversity, skills, and knowledge of locals markets. As Asian companies tap international financial markets, it would be illogical for them to expect that these investors would not, in many cases, want a more direct say in the way in which their money is being used. It would be equally illogical to think that they could or should be ignored.

I have argued that the dominant model of corporate and social governance is one built on transparency. This does not, however, deny that alternative transparent structures can and do exist. For example, the mitbestimmung (codetermination) system of governance is seen only in Germany. The mitbestimmung system divides the governance of German corporations between a management board and a supervisory board made up of bankers and investors, management, and union representatives. It is an approach uniquely adapted to Germany's postwar cooperative system between unions, banks and management.

Asian corporations and societies, whether they are Chinese, Malay, Thai or Korean, will no doubt evolve systems that they feel work well within their social contexts. However, in today's interdependent world, financial ownership and control is the great mediator. Corporate and social structures that fail to match world-best practice will pay a price in the future, just as Indonesia, Korea, Malaysia, and Thailand are paying the price today.

Timothy Devinney is a Professor at the Australian Graduate School of Management, University of New South Wales, Sydney, where he teaches strategy and international business. He travels and works throughout Asia. Allen & Unwin have recently published his latest book, The Essence of Corporate Strategy.

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