Asia's Choice

Restructuring Industries and Corporate Governance

Jaime Augusto Zobel de Ayala II

Asia's Choice: Open Markets or Government Control?

Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999

This is the 10th Annual Corporate Conference on Asia that the Asia Society has organized here in our part of the world, but this forum was perhaps never more needed by our countries and institutions than it is now.

When the history of this era is written, it will doubtless speak of the economic crisis that Asia is now living through. The demanding economic climate has already lasted 20 months. Whether future historians will write about a two-year crisis or a much, much longer one, rests in large measure in the hands of government and business leaders in the region, some of whom are gathered here at this conference.

The Folly of False Dawns

The hope and prayer of Asians today is that the crisis has finally bottomed out, and that our economies are at last on the road to recovery. But the crisis has also made realists of most of us, and we know the folly of false dawns, which only exacerbate the problems by delaying the taking of the needed medicine.

Whether we speak of corporate or political governance, the prevailing reality is the same. Some major policy reforms and restructuring have been undertaken, but they have not been enough to turn the situation around. While a measure of monetary and financial stability has been won, the international capital markets remain wary. While industries across the region have undertaken some restructuring, they remain hobbled by the contraction of external demand and shortage of capital.

Yet we can not let this become a chicken-or-the-egg situation: where we give up on reform and restructuring because international capital will not come in, and investors will not come in because reform has not gone far enough.

No Asian country can afford to get weary of this struggle against crisis. A crisis, it has been said, is based on perception. So at the end of the day, this is really a struggle for us to regain credibility; and it has led both Asian companies and Asian governments to search and dig into the character of their organizations and cultures, and their ability to compete in the world economy.

The Bar Has Been Raised for Asian Enterprise

If we believed back in 1997 that the crisis could be wrestled down with small answers - by a little reform here and a little adjustment there - we certainly know better now. Even the IMF does not seem beg enough for the problems. So both the private and public sectors have major challenges to meet.

On the private sector side, we must brace ourselves for the fact that in the new environment in which we must operate, the bar or standard for performance has been raised for Asian enterprises. This we can ascribe partly to the crisis, and partly to the forces of globalization.

As the saying goes, "once bitten, twice shy." Having been bitten once by the crisis, international lenders and investors are now applying stricter standards in evaluating Asian companies. By the same token, globalization and the steady lowering of tariff barriers has meant that Asian industries and corporations must measure up to world standards in order to become competitive.

This is a totally different environment from the pre-crisis one where the Asian economic miracle seemed like a party that would go on forever.

Today, we have to take the new message to heart: we can no longer afford to be "parochial" in our business operations, we have to think "internationally" in setting our standards for planning, financing, and managing our business ventures. Whereas in the past one could just rely on one's own way of doing things; I would argue that today international credibility is vital to business success. We have entered a period where capital is scarce, bank financing is stringent, resource allocation requires strict justification and our widening stakeholder base will be increasingly demanding. And while we must fix our sights on the short term to ride out an unpredictable and volatile environment, we have to continue to plan and develop the right strategies for the long-term rigorously if credibility is to be earned.

Consequently, restructuring Asian industries and companies is more than just a process of cost-cutting, debt restructuring or consolidation. It involves as well systemic changes and tougher regulations in the way companies are governed and managed.

"Corporate governance" or "stewardship" based on internationally accepted models is relevant to the process of Asian reform because it defines standards of structure, behavioral conduct and public accountability for the direction and control of corporations. The stakeholders of companies continue to expand and building credibility in this new environment demands on adherence to principles which can be recognized, respected, and understood by a broader regional and global community. Trust cannot be built without clarity of action and transparency of information that can cross national boundaries.

Here in the Philippines, many companies - including those that have survived the difficulties of 1997 and 1998 - are hearing the challenge to build healthy, coherent and modern business organizations. Many are going through their own processes of reshaping their structures and manpower as global competition has intensified and crisis has bitten into their bottom lines. Most are challenged by the entry into the country of high-quality and lower-priced products and services from abroad, and they are striving to produce the same or better products here at home. Some have made strategic alliances with large multinational enterprises in order to acquire new technology and capital and tap into a broader supply base. Others have merged to realize new economies of scale and gain a step over competition.

Beyond this, however, the new environment has widened the stakeholder base corporations have to deal with. There was a time when satisfying the concerns of providers of capital, stockholders, employees, and customers was enough. The broader demands of civil society, in a time of increasing social stress, warrants attention, particularly in an Asian setting. Building trust and credibility in this broader community is imperative to future success and will demand accountability from corporations in areas that will range from issues regarding quality of life, like the preservation of one's environment, to concerns over social welfare that are beyond the capabilities of government.

Finally, the concept of risk management has changed dramatically and the new environments demand more rigor in how it is defined and controlled across the different industries.

Overall, therefore, the raising of the bar for Asian enterprise is needed if corporations and industry will be seen as playing a productive role in the development of our respective countries.

The Role of Government

As in the private sector, Asia has had to make major adjustments in the public sector, whose role in economic recovery can hardly be exaggerated.

A key part of this role is legislating the policies and reforms necessary to lift our countries out of crisis. But policymaking is only one part of the reform process. The other part has to do with policy implementation and administration.

It was Samuel Huntington of Harvard who first contended that the "most important distinction between nations concerns not their form of government, but their degree of government." This led to the development in political science of the notion of political capacity and its relation to economic development. There is no guarantee of economic success to democratic countries, just as there is no assurance of economic failure to communist and totalitarian regimes. Political capacity and effective government make all the difference -- especially in the surmounting of crisis, irrespective of private sector initiatives.

Huntington's point helps in explaining the paradoxical story of the Philippines - which is more democratic than most of its neighbors, more fundamentally sound during this time of crisis, and yet is also so vulnerable to the difficulties of other countries.

Today, there is political stability in our country, which ensures that our government can legislate and implement needed policies and reforms. Many reforms have been institutionalized in the economy, which has made our adjustment to the crisis much easier. Yet despite this I would argue that the public sector must do its share to support industry by providing the framework for a level playing field and through the rigorous implementation of the law. It must also play its role in building the platform of credibility.

If the corporate sector is to come out of the crisis stronger, our public sectors would be wise to address this issue now, because our hopes for the future depend squarely on how resolutely and effectively we remove these shackles on economic effort. While we must demand new standards from the private sector, we need government to set and implement the rules in consistent, fair and productive ways.

Government-Private Sector Interdependence

This brings me to my final point - the interdependence between Government and the Private Sector in enabling our countries to surmount the present crisis and return to growth.

The role of Government in Asia is clear because the crisis points to the failure of the policies and systems when the financial crisis first hit is in June 1997 and seeped into the real economy in the following months. Major economic reforms and restructuring have been required, and they have ranged from the strengthening of financial systems, to the repair of the fiscal positions of governments, to the overhauling and improvement of administration all around.

But policy changes alone - no matter how far reaching - have not been enough. Reforms in business practices and institutions, as I have argued earlier, are required as well. Just as the crisis was the result of private decisions gone wrong - both by international lenders and Asian borrowers - so the private sector must drive the engine of economic recovery and growth.

I believe these two currents of reform must join together for economic recovery to take place. Governments must lead and supply the blueprint. Private enterprise must bring it to life. Most importantly, it is imperative that we set the agenda jointly to move from a short term oriented, crisis approach to problem solving to long term, value enhancing solutions that are needed for long term economic success.

Today, after 20 months of crisis, some credit is deserved by Asian governments and Asian enterprise for their efforts at reform and restoration of credibility. I believe that in many countries in the region, systemic changes have taken place and there are real sources of dynamism. And many of the qualities that underpinned the earlier miracle remain.

We may be approaching the point - if we haven't already - when continuing investor skepticism about Asia is no longer prudence but sheer aversion to risk, when what needs fixing is no longer our house, but the architecture of international finance itself. Ironically, Paul Krugman, the economist who forecast the Asian crisis, has become one of Asia's biggest defenders today. He observed recently that Asia bashing must stop. "The scale of the punishment is wholly disproportionate to the crime."

I say Amen and I thank you.