20000221

Asian corporates need new management to reduce lingering risks

HONG KONG: Many Asian corporates must axe their top management if the region is to cut out the lingering systemic risk which sparked its crippling financial crisis, analysts say.

Most of the region's top businesses are still controlled by the people who took advantage of lax lending regimes at banks, sending financial systems crashing in 1997.

While they cling to power, investment risk in Asia remains as high as ever, despite apparent economic recovery, analysts say.

"Unlike in the case of the banking system where you can sit back and say the systemic risk has actually declined, we can't really say the same about the corporate sector," said Raja Visweswaran, head of Asia securities research at Bank of America.

"Most of the people who made the mistakes are still there," Visweswaran told financial sector leaders at a Thomson Financial Market Insights seminar.

International Monetary Fund (IMF) bailout plans forced change in financial sector supervision, corporate law and privatisation policy in Indonesia, South Korea and Thailand, but it had little immediate impact in practice on the management of corporations.

The power bases of many family-built corporate empires remain largely intact and analysts reckon as many as 90 percent of the region's firms are controlled by their pre-crisis management.

Analysts say the situation is exacerbated in Malaysia -- also badly damaged by the crisis -- because of the capital controls it imposed to protect its economy and avoid an IMF rescue.

Management's reluctance to relinquish control and its ability to hold on while regional stock markets soared an average of 53 percent in 1999, has put the brake on restructuring.

"The problem is that the equity markets are rewarding a lot of people for doing nothing," Visweswaran said.

It is a view echoed by other analysts.

"Things getting too good too quickly is still the biggest risk in Asia," Richard Schmidt, director with Jardine Fleming Asset Management in Hong Kong, told Reuters.

But he says the rise in asset values cannot permanently hold back the changes in management that are beginning to be seen.

Changes at the heart of the financial system necessitate a change in management because the old guard's access to bank lending -- at record lows around the region -- will disappear.

Tapping capital in the equity market is unlikely to be popular because selling shares means diluting power, meanwhile the market would not be willing pay high prices for stock in dinosaur firms.

"Old managements -- even though they have survived and continue to be in control of their assets -- their valuation in the market and their access to capital will be diminished," said Schmidt, whose firm has $50 billion of assets under management.

"The air that those companies breathed to survive and create the businesses of the past is gone. They will slowly suffocate unless they change," he added.

Thailand was already demonstrating this, said Visweswaran, pointing to the example of Thai Farmers Bank which had fully provisioned for its bad loan problem, linked up with an international bank to manage bad assets and boosted its capital.

"If Thai Farmers Bank has done it, they are going to try and effect the same sort of change in all the people borrowing from them," he said, adding that Samsung Group was leading corporate reform efforts in South Korea.

"There are a lot cleaner and a lot leaner corporates out there today, that's the good news. But there's always the bad news. There's still a lot of bad eggs," Visweswaran said.

Indonesia is arguably home to a lot of them.

Analysts say the country has taken only one major step along the path of corporate reform so far -- removing the head of Astra International earlier this month to facilitate the sale of a 45 percent stake in the auto maker controlled by the Indonesian Bank Restructuring Agency (IBRA).

IBRA's success in selling the Astra stake, one of the jewels in its $80 billion portfolio, is seen as a crucial test of its ability to speed up asset sales and push deals through in the face of opposition from vested interests.

"But why is IBRA doing what it's doing? Not because it wants to, but because the IMF says you're not getting your next round of funding unless you start selling off assets and raising money," Jardine Fleming's Schmidt said.

"We still haven't got enough institutional shareholder depth in Asia to create that (change)," he said.-Reuters