The reasons that Asia remained relatively isolated from the shocks of the financial crisis go well beyond corporate governance. Governments such as those of China and Singapore were able to respond quickly; immature capital markets had yet to move into riskier and less understood debt vehicles; and strong domestic credit demand limited exposure to sub-prime loans and their variants in the US and elsewhere.
There was another contributory factor: the proprietary and even patriarchal link between Asian corporate leaders and their businesses instils a longer-term view than that held by many Western executives of a company’s success. Asian business leaders tend to see themselves as custodians of valuable property that will be passed on to future generations. This view inspires a more cautious approach to risk, a deeper understanding of the business itself, and a willingness to sacrifice short-term gains for long-term health.
“There’s no doubt in my mind that this approach creates a focus on the long-term,” says Charles Tilley, CIMA’s chief executive.
Such stewardship can go beyond the company itself and encompass wider society. With their fixation on shareholder value, many Western companies cannot entertain the view that the ultimate purpose of business is not to create profit, but to serve society. Profit is simply the fuel needed to continue serving society.
Jack Welch, credited by many with triggering the West’s intense focus on shareholder value in a speech he made in 1981 as CEO of General Electric, now appears to be having second thoughts. He said last year that, by itself, “shareholder value is the dumbest idea in the world.” The big problem in the West is that share ownership in some countries has become so dispersed, with a small proportion of shareholders willing to exercise responsible stewardship, that we now have what’s been described as the phenomenon of ‘ownerless corporations’.
Ho Kwon Ping, Executive chairman of Singapore-based firm Banyan Tree Holdings says: “If you flip through all the business textbooks nowadays, you see terms such as ‘maximising shareholder value,’ ’economic profit’ and so on. But they never mention that, in a world where there’s no more communism or socialism and where capitalism is the most powerful driver of economic growth, well-being and development, the fundamental mission of business is to make a better world. CEOs have the social responsibility to provide leadership and values, not just maximise shareholder value.”
CIMA’s Tilley has a similar perspective. “If, in running a company, the aim is purely value creation, it feels like you’re probably going the wrong way about things,” he says.
The academic John Kay has observed competitive advantages derived from structures of implicit contracts with suppliers, employees and customers. In his Financial Times column, he cited the renowned British retailer Marks and Spencer as an object lesson in what happens when a company turns its back on these in pursuit of shareholder value.
“If the success of M&S demonstrated the power of relational contracting, the company’s decline illustrated a process that swept across business – and above all the financial sector – from the 1980s,” he wrote. “The substitution of transaction-oriented dealings for relationship contracting added to profitability in the short run, but in the long run it eroded relationships that had been the underlying source of much of that profitability.”
Giving relationships pre-eminence can expose fault-lines in governance: failures and fraud can go undetected, systems that lack transparency become more susceptible to corruption and the rights of minority shareholders are jeopardised, for instance. But, as the global crisis has shown, the Western model also carries its share of risk, including an intense focus on short-term shareholder value that can overshadow the prospects of long-term sustainability.
The weaknesses of both models must be addressed as the global economy enters a new era, and their advantages preserved.
Shareholder value and trusted relationships are not exclusive. They can (and possibly should) co-exist in a governance model that balances the two approaches. CIMA’s boardroom leadership framework provides a useful basis for understanding the relative merits of the two models.
The framework was designed to illustrate how a number of critical factors are necessary to achieve board effectiveness – and, by implication, good governance. It can be applied to understand the Asian and Western corporate governance models.
The diagram is divided into two halves:
- People and behaviour
- Frameworks, processes and structures.
Broadly speaking, the Asian model has placed relatively more weight on the people and behavioural aspects of governance, while the Western model has tended to address structural and process issues. (Note that this is not a hard and fast distinction, and also that creating an organisational culture that allows leaders’ decisions to be questioned constructively is a challenge under both models.)
But, as we have seen, the financial crisis is leading to a reappraisal of the Western approach: more attention is being paid to behavioural issues. And, while the Asian model emphasises relationships, it is important to recognise the need for supporting tools and frameworks to ensure that decisions are made for sound reasons – i.e., whether work will be done properly – and not purely to maintain a relationship.
The main purpose of the framework is to illustrate the mutually reinforcing value of both dimensions of good governance and how the benefits of the Western and Asian models can be applied to each other.
Check and balance
Western-style rules and transparency have been shown to aid corporate governance, although corporate governance by itself cannot ensure success, of course. In Asia, where so many businesses are controlled by majority shareholders, companies’ fortunes are more directly intertwined with the interests of their ‘owner-shareholders’.
Minority shareholders, on the other hand, can be classed as ‘investor-shareholders’, who have shorter attention spans and may simply be looking for quick returns.
These two groups have divergent interests. Investor-shareholders have only one stakeholder role – that of shareholder – and they are generally seeking only personal benefits. Owner-shareholders are possibly more accepting of multiple stakeholder roles, as they may feel a more direct responsibility towards business associates, employees and the community, at which level personal relationships play an important role.
But beyond the relationship level, there may be a diminished acceptance of stakeholder responsibility, such as towards the environment, which is where the Western governance model may be more effective through stricter regulation and enforcement.
While the relationship-based model promotes longer-term thinking, rules and transparency are essential in helping to prevent the excesses of individuals, especially those at the top of the corporate ladder. ‘Old-boy networks’, as they are known in the West, can often hide dealings that are illegally detrimental to competition, customers and community alike. Many Western standards and laws have been set in place specifically to break these opaque networks.
In practice, many multinationals from the East and West have approached finding a balance by mixing employees from the home office with local staff, particularly in senior roles. Managed badly, this structure can create damaging conflicts between expatriate and local views. Managed well, it can create a healthy tension that brings out the best of both views. Sophisticated recruitment policies are crucial to crafting a functional team, as are performance metrics that are customised for local contexts.
Role of accountants
It is important not to overlook the powerful and fundamental role of management accountants in providing the most relevant and accurate management information to business leaders, wherever the business is located and however it is governed. One possible danger in a top-down management culture is that the integrity of the management information is compromised because people are afraid of telling their bosses anything they don’t want to hear.
The professionally qualified accountant, bound by a code of ethics, has a duty to resist this temptation. A key task of the professional accountant in business is to demonstrate in practice the long-term strategic value of the right information.
In helping companies in both the East and the West find this balance, management accountants must be careful not to haphazardly impose Western models, which have their own intrinsic faults. Instead, they would be wise to understand the benefits that relationship-based models offer and help to create a system that mitigates the disadvantages and keeps the advantages through appropriate financial plans, incentive structures and information systems. Those who are successful will build tremendous shareholder value.
Wim Van der Stede, CIMA professor of accounting and financial management at the London School of Economics, summarises this idea pertinently. “I don’t know of a senior finance professional who is not under pressure from others around their organisation,” he says. “The difference may be that in the West they face pressure from the executives to show bigger returns for stock markets, whereas in the East they may be under pressure from a powerful majority shareholder to pinch profits from minority shareholders.”
“But they are always between a rock and a hard place. The rock and the hard place are just different parties.’
About the Author
Robert Jelly is CIMA Executive Director, Education. CIMA’s report, ‘Global Perspectives on governance – lessons from East and West’ was launched at the World Congress of Accountants 2010 in Kuala Lumpur held recently (November 8-11). CIMA was the proud Gold Sponsor of WCOA 2010. For more information, please visit www.cimaglobal.com/wcoa
This sponsored article is the third in a four-part series.