Asian Eclipse: Exposing the Dark Side of Business in Asia
Written straight after the 1997 crisis on opacity, related-party dealing and family control.
Summary
Backman, a business analyst who had worked in the region, wrote this after the 1997 Asian financial crisis to argue that the crisis exposed corporate governance and business practice problems that had been present throughout the growth period.
His catalogue covers the specific mechanisms. Family conglomerates controlled listed companies through pyramid structures and cross-shareholdings, so a family could control a group with a small fraction of the economic interest, which created an incentive to move value from companies where their stake was small to those where it was large. Related-party transactions moved assets and cash between group companies at prices no arm's length party would accept. Accounting and disclosure standards were weak and audit was unreliable. Banks lent to companies connected to their owners. Political connections determined who received licences, contracts and credit, which meant the return on political relationships exceeded the return on operating performance.
He examines these across countries: the Indonesian conglomerates under Suharto, Malaysian corporate structures and the political connections behind them, Korean chaebol governance and their debt levels, Thai finance companies, and the overseas Chinese business networks that operated across borders on personal relationships.
Backman argues that these arrangements were not incidental to the growth model but part of it, and that the crisis was their consequence rather than an external shock.
The book is sharply written and was well received when published. It generalises across very different countries, and its treatment of ethnic Chinese business networks has been criticised for essentialism. Corporate governance in several of these markets improved substantially after the crisis, with Korea in particular changing chaebol disclosure and debt practices, so parts of the analysis describe a period rather than a permanent condition.
Key takeaways 7
- Pyramid structures and cross-shareholdings let controlling families exercise control with a small fraction of the economic interest.
- When control and economic interest diverge, the controlling party has an incentive to move value between group companies.
- Related-party transactions at non-market prices were the standard mechanism for extracting value from listed subsidiaries.
- Banks lending to companies connected to their own owners removed the credit assessment that lending is supposed to provide.
- Political connections determined access to licences, contracts and credit, so returns to relationships exceeded returns to operating performance.
- Weak disclosure and unreliable audit meant minority shareholders could not detect what was happening to their capital.
- These arrangements were part of the growth model rather than incidental to it, which is why the crisis exposed all of them at once.
Who should read it
Investors in Asian equities who need to understand ownership structures and related-party mechanisms, recognising that governance has improved in several markets since.
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