Sunday, November 2, 2014

"It is my company:" Corporate Governance From the Perspective of an Asian Entrepreneur

Asian companies are different from their developed market counterparts: majority of them, even the very large ones (when not government owned), are controlled by a single owner-entrepreneur, or at best a family. They may have sold the shares to investors, but few of these entrepreneurs like to cede control. 

Over my 11+ year career as an equity research analyst and fund manager, I have met over thousand listed Asian companies, many of them multiple times. Armed with MBA, CFA and with hubris gathered from years of investing experience, I have nodded my head in disgust at lazy balance sheets, wasteful capital allocation, general disregard for corporate finance principles and poor corporate governance. On numerous occasions I have given unsolicited advice to CFOs, CEOs, and the big bosses, on how to run their companies, at least the financial side of it.

Today, I'm going to turn the tables, and think from their perspective, the perspective of an Asian Entrepreneur. The typical profile I have in mind is not the savvy founder high-tech internet enterprises listed in the US; that forms just a very small universe. Typical profile is a first generation entrepreneur, often without a college degree, zero knowledge of high finance, but a gut for business, risen typically from a trader to a manufacturer, a self-made man.

So here it goes, in his own words.

It was my company
I used the entire savings that I had, borrowed money from relatives to start my business. Initial years were tough. Banks denied me loans. I used my house as a security for the loan, and when that was not enough, my wife's jewelery. As the business grew, profits came in, but I didn't see much of that. I ploughed nearly everything I earned back into the business. Banks were less reluctant to lend money now, but I still had to beg and they still charged very high rates.

Then, two sleek guys in smart black suit, cuff-linked shirts and glimmering ties paid me a visit. With their shining faces, intent look in their eyes and gelled hair, they looked like clones. They were investment bankers, they said, not bankers. Apparently there is a difference, I was about to find out.

We will raise money for you, they said.

You will give me money? I asked.

No, they said. Mr. Market will give you.

How much will it cost? I asked.

Nothing, they said.

No interest? I asked.

No interest. And no repayment, imagine. This is called equity. 

I took them to dinner. They paid for it, and I knew they were different from bankers. Over drinks they told me, they will help me sell a part of my business.

But it is my company, I said.

It will still remain your company. The other guys -- so called investors -- will just get a piece of paper. They'll get tired of it in one, three, or at most six months. Then they'll trade that piece of paper among themselves. Some of them may request to meet you periodically, but you can always hire someone to do it for you.

It is still my company 
So I did what the investment bankers said. We were just making cheap batteries, but a bunch of their nerds wrote up some crap about how we were the next e-vehicle play (whatever that means), and these investors couldn't have enough of my paper. I got more money than I needed.

And I enjoy meeting my investors, mostly young kids in suit and tie full of themselves. I humor them, pretend that I listen to them, take them to a tour of my plant. When they ask all sorts of bookish financial questions, I turn to the guy I hired and gave him the fancy title of CFO.

They're worried about corporate governance, my CFO said once.

What corporate governance? I asked.

They want to see minority interest protection -- audit committee, compensation committee, more independent directors, things like that.

That only opened up more job opportunities for my relatives, friends and people I wanted to oblige. One independent director is a government official I needed on my side, another is my brother-in-law. The audit committee head is my brother; he just uses a different surname.

When I want to take some money out, my accountant shows me the way. One year I used M&A, another year I over-invoiced capex. Every year I give myself and my cronies stock options.

For now, I'm enjoying this game. If I get tired, I'll just have to show some bad numbers, poor corporate governance, and privatize the whole thing at throwaway prices.

They think they own a part of my company; of course they're dreaming. I let them, and go back and do what I want. It is, after all, still my company.    


No comments:

Post a Comment