Wednesday, December 15, 2004

When global corporations go bubble and bust

From The Statesman

ND Batra

Corporations exist to make money, not to spread capitalism, freedom or democracy. One of the best ways of making money is to dominate the market by eliminating competition. So corporations expand through mergers and acquisitions. Or they make unique products that give them unique positions in the marketplace. When they grow big and rich, it becomes difficult to keep their capital bottled up in one place. Some of it flows into the pockets of the people who control them. These people become victims of their own success and meet their hubris. Consider what Arthur Levitt Jr., former chairman of Security and Exchange Commission, said in a recent article in The Wall Street Journal entitled “Money, Money, Money”. “Exorbitant compensation feeds the worst instincts and egos of powerful CEOs, fuelled by their desire to win at all costs and resulting, too often, in the cutting of ethical corners.”

Could that observation also be true about Raymond V Gilmartin, the CEO of Merck & Co.? In his testimony before the Senate Committee, Gilmartin said that even his wife took Vioxx, the painkiller that for some people became a killer drug. Freudians might say he had a subconscious desire to hasten his wife’s mortality, which of course is ridiculous, but did he care enough for the American patient as much as he did for the shareholders of his company? Cynics might say, wives come and go but a corporation has to go on.

Levitt blames the prevailing corporate boardroom culture of interlocking relationship, of “you scratch my back, and I yours,” for unseemly greed. And he wonders, “How likely is that a board member would challenge the person who invited him to join, and can re-invite him? How likely is it that a board member would stand up to the CEO who directed the company’s foundation to support his favorite charity? Or hired his law firm? Or his wife’s interior decorating shop?”

Greater corporate board independence and accountability, public exposure of excessive executive compensation based on comparative performance of similar work might offer some hope, Levitt says, but I am afraid it won’t be more than a palliative. And thereby hangs the question: In the era of resurgence of America values, if the recent vote for George Bush is really worth something, how much does a company executive deserve? Or what punishment he wouldn’t deserve if he pulled the company down the drain. Did Michael Ovitz, for example, who was fired from Disney, really earn $140 million for 15 months of work in 1995?

Talking of American values and corporate executive greed, where should one draw the map? Is corporate greed limited to the blue states? Are the red states too “red in tooth and claw”? Pardon me for mixing metaphors and cultures, but in the age of globalization shouldn’t our sight extend to the roaring economic giant China? If a Chinese business goes bust, can the USA turn the other cheek? Consider the case of Chen Jiulin, the Chinese entrepreneur who used his country’s mystique of flying dragons and crouching tigers, “Chinese Wisdom and International Expertise,” to turn China Aviation Oil (Singapore) Corp. into a most sought-after investors’ sweetheart. Millions of dollars of investors’ money poured into the company and by October the stock had risen by 80 per cent. But then the truth was out.

On 25 November, Chinese Aviation Oil bent its knees before a Singapore court and sought protection from its creditors. The miracle company had lost $550 million in speculative bets on oil. But the state-owned parent company in Beijing knew the unfolding disaster and tried to stem it by selling 15 per cent of China Aviation Oil (Singapore) to investors to raise money to cover the losses, however, without full disclosures to the investors. In the USA, this kind of hush-hush sale is called inside trading, the kind of illegal activity for which many American CEOs, Martha Stewart et al, are serving jail terms. Of course Chen Jiulin, the East-West business philosopher, the suspended CEO of China Aviation Oil (Singapore), who ran away to his village in China where he grew up as a farm boy, has been brought back to Singapore to facilitate the inquiry in the biggest collapse since the Barings Bank 1995, which suffered a loss of $1.2 billion.

“The scandal has raised questions about corporate governance in China,” wrote Clifford Coonan in The Times. But Coonan isn’t alone in this; Michael Coleman, managing director of Singapore-based Aisling Analytics Pte. was quoted in, saying: “It does raise some serious questions about Chinese companies. Can they govern themselves effectively? So far, all the evidence suggests that they can’t.”Which should be a mater of serious global concern and more so when the world is rushing to invest in Chinese companies without knowing how hollow are those outfits. By controlling information and hyping their prospects, they blow bubbles that can’t be sustained. So they bust, but who do you call? China Aviation Oil (Singapore) was simply an arm of the parent Chinese government controlled company, which had created a monopoly over aviation oil supply to China.

Even outside its borders, China tries to create conditions of complete command and control by creating cartels and monopolies. Singapore might convict China Aviation Oil’s Jiulan, but that would be shadow fighting. What can Singapore or any other government do about the Chinese government that spreads its tentacles abroad through private companies?

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