Corporate Restructuring and Governance in East Asia - Finance & Development - March 1999 - Magdi Iskander, Gerald Meyerman, Dale F. Gray, and Sean Hagan

Corporate restructuring and improved corporate governance are essential parts of economic reform programs under way in many countries. How can corporations be restructured to promote growth and reduce excessive debt without placing undue burdens on taxpayers? What framework is needed to promote better corporate governance? ORPORATE restructuring involves restructuring the assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash-flow needs to promote efficiency, restore growth, and minimize the cost to taxpayers. Corporate governance refers to the framework of rules and regulations that enable the stakeholders to exercise appropriate oversight of a company to maximize its value and to obtain a return on their holdings. Both corporate and financial sector restructuring are central to ongoing reform programs in East Asia. This article focuses on reform efforts in Indonesia and Korea, as well as Malaysia and Thailand. Corporations, government, and banks have close relationships in many East Asian countries. Many sectors of their economies are dominated by conglomerates controlled by a small group, nontransparent accounting, interlocking ownership between the corporate and financial sectors, and weak minority shareholder rights. It is estimated that the top 10 families in Indonesia in 1997 controlled corporations worth more than half the country’s market capitalization. Comparable figures are one-half in Thailand, one-fourth in Korea and Malaysia, but only 2–3 percent in Japan. Fundamental cultural and institutional changes are required if a new corporate governance structure is to be established with arm’s-length, transparent relations between corporations, government, and banks. Changing corporate governance, however, is a long-term process. In East Asia, the immediate task is to deal with the present crisis by undertaking integrated restructuring of the assets and liabilities of highly indebted firms, external debt restructuring, and financial sector reform. Integrated restructuring of both corporate assets and liabilities is required if competitive enterprise and financial sectors are to be developed, the risk of crises recurring is to be reduced, and the cost to taxpayers of accomplishing these goals is to be minimized. Buildup of vulnerabilities in the corporate sector. Before the crisis hit, many East Asian corporations expanded into sprawling conglomerates making extensive use of debt, because equity markets were undeveloped and, in many cases, owners preferred to retain control of firms with concentrated holdings. There were also structural weaknesses in these countries’ banking supervision systems and internal bank management. Much of the debt owed to banks and corporations was unhedged and short term, which led to extreme overindebtedness following the devaluations and high interest rates of 1997 and 1998. Two factors that make financial crises in East Asia difficult to manage are the large, short-term internal and external debts and openness of many East Asian economies, both of which constrain their monetary and exchange rate policies. Need for a comprehensive approach. Resolving corporate sector, financial sector, and external debt problems requires a comprehensive and integrated approach. Since good firms are necessary if an economy is to have good banks, corporate restructuring must be linked to bank restructuring, which, in turn, must be linked to the settlement of external debt problems. Perverse incentives and inequitable burden sharing can result if obligations to short-term external creditors Corporate Restructuring and Governance in East Asia