Asia 'may need to farm out markets'

Mobius suggests contracting out market regulation would be good for Asia

In this story: 'Enlightened' countries Governance a hot topic Family dominance likely to disappear Bullish on China's regulation RELATED STORIES

By CNN's Alex Frew McMillan

HONG KONG, China -- How public companies are run in Asia is a huge threat to shareholders, one of the region's most influential investors said Thursday.

Threats to good corporate governance are so severe that many Asian countries may need to hire overseas regulators to run their markets, a panel at the Fortune Global Forum suggested.

AUDIO Hang Lung's Ronnie Chan says Asia should farm out regulation 1.33MB/2:06mins AIFF or WAV sound

"Yes, there is a big problem," said J. Mark Mobius, president of the Templeton Emerging Markets Fund. Bad corporate governance in emerging markets often hurts minority investors, he said.

Mobius, who has invested in Asia for over 30 years and is well-known for his first-hand approach, said much of the push for better management needs to come from investors.

But he agreed with Ronnie Chan, chairman of the Hang Lung Group, that the continent's governments aren't always strong or interested enough to improve the situation.

"I have given up hope on East Asia, especially Southeast Asian governments, to enforce changes," Chan said.

'Enlightened' countries

Chan conceded that corporate governance is "terrible" for most Asian public companies. But he said it was naïve to look for companies to reform themselves voluntarily.

"It is unrealistic to expect businessmen to be saints," Chan said. "If you don't understand human nature, then tough luck."

"It is unrealistic to expect businessmen to be saints," Chan says

The most enlightened countries should consider contracting out their stock-market regulation, Chan said. Only with outside oversight will investors get the protection they deserve, he said.

Chan did not elaborate on how the process would work. But there is a precedent in Indonesia, which briefly contracted its customs operations out to a Dutch company.

Mobius said contracting out stock-market regulation to a multinational organization was a "good solution." Most markets answer to their brokers, he said, who also don't always have the best interest of investors at heart.

Governance a hot topic

Improving the way public companies are run -- corporate governance -- has become a hot topic in Asia. The complicated structure of many Asian companies means investors sometimes get short-changed.

Many public companies have cross-holdings in other companies and tight government ties. Those often lead to conflicts of interest between founders, management and the investors they serve.

Laws aimed at protecting investors often aren't enforced well enough. Boards of directors are not independent. Accounting standards aren't uniform.

A particularly Asian issue is that many Asian companies grew as family operations. Many have recently gone public but still answer to a controlling family or an insider group.

That frequently leads to poor treatment of minority shareholders. They suffer when, for instance, the company they own pays an unfair price to buy or sell other operations that the family or insiders own.

"The approach to running a public company is quite different from a family one," Mobius said. Many management teams battle to make the transition.

Family dominance likely to disappear

The situation is improving. The panelists said they expect family ownership to dwindle as Asian industry becomes more mature.

Mobius praised Thai conglomerate Charoen Pokphand Group for recently paying a fair price when it bought a stake in TelecomAsia's mobile business.

Dhanin Chearavanont, chairman of the group, conceded it didn't understand the needs of its shareholders. Templeton and other investors forced the company to answer to them.

"We finally understood that small investors are our bosses," Dhanin said.

But substantial problems remain in Thailand, the Philippines, Malaysia, Indonesia and even its most developed markets such as Hong Kong.

Mobius thinks China could end up with the best investor protections in Asia

The legal and accounting infrastructure is often lacking in Asia, according to Joseph Berardino, CEO accounting company Andersen.

Better accounting is part of the solution. But change also needs to come from regulation, management and sufficiently independent directors.

"You build in quality on the front end," Berardino said. "You don't inspect it in on the back end."

But the change will not come quickly, the panel suggested. Where the government struggles to enforce rules, outside help from a regulator may be necessary.

Bullish on China's regulation

One area the panelists were particularly bullish on is China.

Its 11-year old markets are often criticized for a lack of support for investors. But the state has always controlled business there, not families.

That may mean China skips the stage of family control and the problems that come with it. Chinese regulators have also launched a push to improve the way public companies report results.

There has been clear improvement. The panelists said they are encouraged by signs corporate governance is being taken seriously in China, for its own self-interest -- its companies need overseas capital to compete and expand.

"China could be the best country on corporate transparency in Asia, including Japan," Mobius said.

The Fortune Global Forum is organized by Fortune magazine, a unit of AOL Time Warner. CNN is also part of AOL Time Warner.

'Get China right,' Clinton tells U.S.
Japan, China different keys to Asian growth
Jian reaffirms business welcome

Note: Pages will open in a new browser window

External sites are not endorsed by CNN Interactive.