Enron players warned Asia before meltdown


Hong Kong-based Ronnie Chan, then an Enron director, warned Asian companies last May to shape up, on a panel with Arthur Andersen's CEO

By Alex Frew McMillan

HONG KONG, China (CNN) -- Asian companies risk collapsing stock prices and even total failure if executives and directors don't run them properly, a report suggests.

Regulators can only do so much to prevent investors losing out in situations like that, and are in any case often too late, investment bank CLSA states in its annual report, Corporate Governance in Emerging Markets.

"Constraints on regulators being able to step in effectively before it is too late are one of the many lessons of the Enron debacle," the bank wrote in a statement accompanying its report, which came out last week.

But six months before Enron's own collapse, key figures in the Enron meltdown were warning Asian companies to improve corporate governance.

Joseph Berardino, then CEO of Arthur Andersen, and Ronnie Chan, then an Enron director and chairman of Hong Kong property group Hang Lung, together discussed the need to improve how Asian companies are run, as they sat on a panel in Hong Kong last May discussing corporate governance. (Full story)

At the time, Berardino noted that there were significant shortcomings in the way companies were run in Asia. The legal and accounting infrastructure was often lacking in Asia, he said.

"You build in quality on the front end," he noted at the time. "You don't inspect it on the back end."

Enron unraveled some months later, resulting in the largest bankruptcy in U.S. history. Berardino resigned in the scandal's aftermath, which has triggered intense congressional scrutiny.

Arthur Anderson close to collapse

Arthur Andersen is in talks to settle a U.S. federal indictment. Internationally, the partnership is unwinding. The Hong Kong office has chosen to ally with a competitor, for instance.

Berardino and Chan, who was one of six Enron board members to resign in February, did not respond to requests for interviews. But according to one of the world's best-known emerging markets investors, Chan is not at fault in Enron's collapse.

Mark Mobius, president of the Templeton Emerging Markets Fund and an outspoken critic of bad management, joined Chan and Berardino on the corporate-governance panel in Hong Kong.

When contacted by CNN, he said the fault was with Enron's own finance department and its accountants, Arthur Andersen.

"It is unfortunate that Ronnie [Chan] got tied up in the Enron situation," Mobius wrote by e-mail. "It is quite unfair to blame independent directors who have to depend on the external and internal auditors who are supposed to be giving independent and capable reports."

At the May 2001 panel, Mobius noted that Asian companies need to break from a family-run structure that sometimes sees companies overpay to subsidiaries run by interested parties.

Class-action on off-the-book partnerships

A class-action lawsuit accuses Enron of using off-the-books partnerships controlled by executives to hide almost $1 billion in debt and create nonexistent profits.

Enron's collapse has cast investors' spotlight on questionable accounting in the United States, notably at blue chips such as Tyco International, IBM and General Electric.


Mark Mobius says Chan was relying on the information provided by the auditors, who should have been responsible

But corporate governance has actually been improving in Asia, according to CLSA. There was a 2 percent improvement in the overall scores in its corporate governance report.

That is "slight," CLSA noted, and the worst companies have problems with responsibility, fairness and accountability.

But the investment bank praised some rapid improvements at companies in South Korea and Hong Kong.

Singapore continues to have the best-run companies in Asia, on average, with a composite score of 65.4 percent. Hong Kong (64.4 percent) and Malaysia (64.1 percent) come next, followed by South Korea (62.0 percent).

The countries that have the worst governance, on average, are Indonesia -- the lowest at 38.2 percent -- followed by the Philippines at 44.0 percent and China at 50.8 percent.