Making the case for accountabilityEconomists and investors who deal with Korea talk about what they call the “Korea discount.”
In line with the notion, Korean stocks are thought to be undervalued by about 20 percent because of the shortcomings investors perceive in Korean business practices ― specifically, a lack of transparency and accountability, not just in the corporate sector but in the government.
To put the problem a different way: Can what corporations report about their own financial situations be believed?
The response by the rest of the world to the 1997-98 financial crisis here testified to a lack of faith in Korean business. Since then, various policies have been implemented to address the lack of credibility in Korean corporate structure.
Roderick Hills knows these issues well. A chairman of the U.S. Securities and Exchange Commission in the 1970s, he is considered one of the architects of the modern auditing system in the United States.
Mr. Hills and his wife, former U.S. trade representative Carla Hills ― herself a well-known figure in Korea, though for different reasons ― were in Seoul last week for the formal opening of the Hills Governance Center at Yonsei University.
The center is the first university-affiliated research center in Korea founded by a foreigner. And the subject to which it is dedicated ― corporate governance ― is exactly the issue that lies behind the “Korea discount.”
“Better laws and more law enforcement are not sufficient for rooting out corruption,” Mr. Hills said. “It is better to understand the circumstances from which corruption springs.”
Mr. Hills, 73, has broad experience in dealing with corporate corruption. Last year, he testified before a U.S. Senate committee to make recommendations on changing the auditing system in the wake of the Enron false-accounting scandal, which shook the U.S. corporate world.
At that hearing, he reported that, besides his SEC experience, he had been a member on 14 corporate audit committees ― whose job is to ensure that a corporation’s financial situation is accurately reported ― and said he had participated in the firing of eight chief executive officers.
“Accidentally or not, I ran into corruption during much of my life, so I wanted to establish a foundation committed to studying governance,” he said at a reception at Yonsei.
As SEC chairman, Mr. Hills was instrumental in three major changes to the landscape of U.S. corporate governance. These were the installation of tough internal financial controllers; the authorization of external auditors, and, most critically, the creation of independent audit committees.
Under the joint auspices of Yonsei University, the World Bank and the Hills Program on Governance of the Center for Strategic and International Studies (CSIS), a think tank based in Washington, D.C., the Hills Governance Center was founded to further the study of corporate governance. Its tasks include analyzing both good and bad corporate practices, as well as coming up with model corporate structures to suit Korea.
The Yonsei center is the second of seven the Hills Program intends to launch in Asia. The first was in Manila; others are planned for Tokyo and Singapore, among other major cities.
Would better corporate governance have prevented the current campaign funding scandals involving SK Group and other jaebeols?
“My reading of the issue is that much of the corruption stems from lack of transparency, but I do not know enough about the matter to make judgments,” Mr. Hills said last week. “In the case of Enron and Worldcom [in the U.S.], the flaw rests in the accounting system, which is quite antiquated. I was irritated, upset and sad to see that happen, but with the passing of the recent Sarbanes-Oxley Act, the accounting rules have become tougher.”
Doesn’t corruption prevail around the world? “Corruption persists around the world, not prevails,” he said. “But I believe corporate governance has greatly improved in the past 26 years. We see flaws in the system still, but there have also been signifcant changes.
“We have begun a process that puts responsibility on independent auditors, and by far that is the greatest achievement,” he said. “The alternative was more government rules, but the more rules you have, the more corruption there is.”
What does he think of Korea in this respect? “The capital market is not that developed and the tradition of transparency has been weak, which is not unusual in Asia,” he said. “Overall, there has just not been enough focus on corporate governance. But I am encouraged by the attention shown to our endeavor. Korea is a tremendously vital economy with extraordinary potential.”
Mr. Hills has been married for 45 years to Carla Hills, who in the late 1980s and early 1990s was a U.S. trade representative during the Uruguay Round of trade negotiations, which led to the establishment of the World Trade Organization. In Korea at the time, she became almost synonymous with Western pressure on Korea to open its markets.
“I was not aware of such a perception, but I did know that our policies were not the politically popular thing at home,” Mrs. Hills said last week. “But Korea has achieved opening its markets bit by bit to become globally competitive.”
by Choi Jie-ho