In the past two months, CIMA has been writing about the Eastern and Western models of corporate governance and how the two approaches have held up during the recent global financial crisis. This article is the final part of the four-part series of articles, and focuses on case studies of Asian companies and their corporate governance structures and practices. The three enterprises are Singapore’s Banyan Tree Holdings, Japan’s Toyota and India’s Tata Group.
Banyan Tree Holdings
Banyan Tree Holdings, a Singapore-based leisure group, began life in 1994 when founder Ho Kwon Ping opened a luxury holiday resort in Thailand in a bid to move his family business away from contract manufacturing. At the time he was quoted as saying that was seeking a business that could be built on brand reputation and in an industry that would not easily be taken over by mainland Chinese companies.
Despite the crises that pounded Asia’s tourism industry, including economic downturns, the SARS epidemic and terrorism, the company quickly expanded its network of resorts, spas and hotels, eventually branching out into luxury consumer labels.
Banyan Tree became “one of the world’s most lauded luxury boutique-hotel brands,” according to the Wall Street Journal. Revenues in 2008 were US$293 million, down slightly from a record year in 2007, largely because of the closure of Bangkok’s international airport owing to political unrest. Revenues last year were US$231 million, as travel and tourism suffered from the crisis, but business this year is improving with the waning of the global recession.
Among its portfolio, Banyan Tree counts 27 resorts and hotels, 67 spas, 74 galleries and 3 golf courses in 23 countries, with plans to expand further over the next four years.
Throughout his tenure, Ho has managed with a very personal style, visiting with employees and customers regularly. In a 2008 column for Singapore newspaper The Straits Times, he wrote: “As East Asia emerges as a major economic region, it should not simply adopt the Anglo-American or European models, but create its own alternative. The common, recurring socio-ethical tradition of East Asia is its communitarian, family-focused webs of mutual obligations”.
“This communitarianism can, if thoughtfully enhanced, nurtured and developed, replace the highly individualistic Darwinian ethos of Anglo-American capitalism or the state welfarism of Euro-capitalism.”
He continued: “Of course, critics will argue that this neo-Confucian capitalism is compatible with crony capitalism, as the 1997 Asian financial crisis highlighted. They have a point. But the flaws of East Asian culture do not negate the need to develop a socio-cultural alternative to the Wall Street ethos. Indeed, they only make more urgent that East Asian thought leaders refine and redefine neo-Confucian values.”
Toyota is an interesting example of an Asian company that has run into recent problems – arguably because it lost touch with its traditional strengths.
Founded in 1933, Toyota became the world’s largest car maker by sales in 2008, overtaking General Motors in the process and building a 12% share of the global car market. It has long been regarded as one of the world’s most admired companies and has built a reputation for engineering excellence based on a philosophy known as the Toyota Way.
At the heart of this is a long-term approach to problem solving even at the expense of short-term goals. Through its development of such concepts as lean manufacturing and just-in-time inventory management, Toyota has had a profound influence on manufacturing throughout the world. With the Prius, it also created the first hybrid car, setting standards for others to follow.
However, more recently, its reputation has been tarnished by the recall of eight million cars due to mechanical failures, which US regulators believe have been responsible for over 50 deaths.
Commentators have suggested that Toyota’s push for robust cost-cutting and rapid expansion since 1995 put the company under too much strain. Toyota boasted US$10 billion in savings over six years up to 2005. It then went even further by slashing the time from design to production to about 12 months, compared with the industry average of 24-36 months.
In the end, something had to give – and that was quality. A US parts supplier, on inspecting a Toyota Camry in 2007, was, for example “surprised by how much the traditional Toyota craftsmanship had been watered down by years of nips and tucks,” according to a Bloomberg Businessweek article.
Toyota’s former top US executive recently argued that the company had lost its customer-first focus as it had been effectively been hijacked by “anti-family, financially oriented pirates.”
Earlier this year, the grandson of the company founder admitted to a US congressional committee that he feared that the company had grown too quickly. He said, “Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before.”
There are early signs that Toyota’s sales are rebounding in response to substantial discounts, but there is little doubt that Toyota executives will be looking to recapture the traditional virtues of the Toyota Way.
Since its founding 142 years ago, the Indian based Tata Group has become one of the world’s largest conglomerates – or ‘family’ as its own executives prefer to call it. It is now a US$70.8 billion commercial enterprise, which employs 350,000 people in 80 countries across a wide array of business sectors including cars, steel, hotels, IT and tea.
The Tata name is becoming more widely known globally in the light of recent high profile acquisitions such as Jaguar Land Rover and the Anglo-Dutch steel company Corus. It is currently in its fifth generation of family stewardship and is respected for its adherence to strong values and ethical principles.
The distinctive feature about Tata is its commitment to investing in community and human relationships. Indeed, the community is regarded as the very purpose of Tata’s existence. All the constituent businesses in the group earmark part of their operating expenditures to social, environmental or ethical programmes. In 2009, social expenditure was over US$159 million.
Since the early 1990s, Tata has undertaken an ambitious programme of global expansion in response to the opening up of the Indian market to foreign investment and the removal of exchange controls. This has not been without its challenges, for example, managers having to apply their expertise to labour relations in non-Indian markets. Tata was criticised for the way it dealt with the closure of a Jaguar Land Rover factory in the UK.
Nevertheless, Tata appears to have emerged relatively strongly from the recent financial crisis. However, it will be interesting to see whether Tata can continue to maintain its global expansion strategy while sticking to its core founding values. If it succeeds, it could provide an example for other companies seeking to run sustainable, responsible businesses.
- The corporate governance model that’s familiar in Asia, Africa and most developing nations places strong emphasis on trust and relationships. This can be beneficial for stakeholders: the typical pattern of ownership in businesses means that there can be a longer-term view of an organisation’s success compared with that in a Western company. But the system is potentially vulnerable to corruption and cronyism. It can also be difficult to implement basic control procedures.
- The prestige of what can be broadly termed the Western governance model has diminished in the aftermath of the financial crisis. This model has driven globalisation and has emphasised a combination of legislation and standards as well as transparency, with a focus on developing appropriate structures, processes and frameworks. This is widely understood and helps to create a level playing field. But major financial failures over the past two years, such as that of Lehman Brothers, have shown that there are limits to what can be done to tighten checks and balances. A new emphasis on the behavioural aspects of governance is overdue.
- Both models have their strengths and it is important to understand the benefits and drawbacks of each. CIMA’s model of boardroom leadership is useful in illustrating the importance of both behavioural and structural issues in achieving good governance. One particular area where both Western and Asian models remain unduly weak is in creating a culture that allows people in authority to be challenged constructively.
- The key indicator of good governance in an organisation is that it’s sustainable in the longâ€‘term. There should be confidence that the business model will deliver this, using appropriate risk mitigation, and that performance indicator and incentives will reinforce the desired culture and behaviour.
- Management information that’s relevant, accurate and up-to-date is a crucial success factor for all organisations worldwide. Professionally qualified management accountants, bound by a code of ethics, have a vital role in providing and demonstrating the long-term strategic value of high-quality management information.
CIMA’s report, ‘Global Perspectives on governance – lessons from East and West’ just launched at the World Congress of Accountants 2010 (November 8-11) in Kuala Lumpur. CIMA was the proud Gold Sponsor of WCOA 2010. For more information, please visit www.cimaglobal.com/wcoa.
This sponsored article is the final part of a four-part series.