The New Old Rules

Businesses today have to contend with local and international environments that are inexorably and rapidly increasing in complexity and sophistication. Amidst this backdrop, a global CEO provided local executives with some basic guidelines on how to cope with the fast-changing, and sometimes volatile, world. David Eldon, chairman of The Hongkong and Shanghai Banking Corporation Ltd, spoke before the Makati Business Club on 20 August 2002 at the Shangri-La Hotel in Makati City to share some nuggets of wisdom that are as relevant today as they were four years ago. Following are excerpts from Eldon’s speech that was first published in the MBC publication WorldView (no. 18).

David Eldon

Polls show that many people no longer trust corporations or corporate executives, and an overwhelming number of people think new laws are needed to prevent corporate fraud in the future.

Against this backdrop of mistrust, it is not surprising that corporations in the U.S. are facing stricter regulations and tougher penalties. [The Enron and WorldCom scandals broke in 2002.—Ed.] Also not surprising is the fact that here in Asia we are seeing evidence of regulation contagion.

That said, I do not intend to dissect the merits of these rules, some of which have already been passed, others of which are still being written, and most of which vary by jurisdiction. Rather, I want to draw your attention to another set of rules—rules which apply to all businesses in all countries, rules which for the most part are unwritten.

The Unwritten Rules

Unwritten Rule No. 1: All businesses should be prepared for uncertainty mixed with periods of volatility.
Right now, there are anxieties over stock market gyrations and the toll these fluctuations are taking on investor and consumer confidence. There are questions about the long-term health of the global economy and whether the United States is indeed heading for a double-dip recession. There are concerns about Latin America’s economic woes and whether other emerging markets here in Asia are also at risk. In other words, no one knows really what tomorrow may bring.

I realise there is a certain amount of irony in highlighting the importance of this particular rule to this particular audience. After all, the Makati Business Club was established in the midst of some volatile times in the Philippines, and during the past 20 years, MBC members have demonstrated how businesses can work together to overcome daunting circumstances, economic or otherwise.

MBC was created, in the words of your founding chairman Don Enrique Zobel, “to defend the right of business to exist, independent of government intervention, for as long as business did not lose sight of its greater social responsibility.”

Unwritten Rule No. 2: Integrity is not an option, it’s a requirement.
In the United States right now, everyone is desperately seeking scapegoats. The politicians are blaming the accountants. The accountants are blaming the auditors. The auditors are blaming the companies. The companies are blaming rogue executives. Along the way, analysts, bankers, the media, investors, and even Alan Greenspan have been assigned varying portions of blame.

Here in Asia, it is tempting to sit back and watch events in corporate America with a certain sense of satisfaction. After all, many of the same shortcomings that Asia was lectured about five years ago—lax regulatory oversight, cosy relationships between business and government, and a lack of transparency—have now surfaced in the backyard of one of the most vocal lecturers.

However, I believe it is a mistake for Asia to think of the resulting negative sentiment towards business as a wake-up call solely for companies in the United States. While U.S. corporations are focusing on what it will take to restore public confidence, Asian corporations need to focus on what it will take to maintain investor confidence.

Unwritten Rule No. 3: Perceptions are reality.
During the Asian crisis, the consequences of being on the wrong side of the herd’s assumptions were painfully clear. Lest we forget that in the space of a year, the Philippines, South Korea, Indonesia, Malaysia, and Thailand saw net capital flows reverse by more than US$100 billion. Investors pulled their money out with little regard for the fundamentals of individual economies and with little regard for which companies remained viable and strong.

Since that time, there have been some positive steps towards building more robust economies in Asia. Regulatory supervision has been further strengthened. Current account balances have been built up. External debt has been reduced. Asian companies are increasingly tapping domestic bond markets for capital, reducing their dependency on bank loans, and making themselves less vulnerable to currency swings. And although much remains to be done, Asia has clearly made some progress.
Unwritten Rule No. 4: Maintain a proper perspective.

This is, of course, easy to say and difficult to do, particularly given the current climate. It has been said, however, that the great conceit of people in every age is to think that they are going through madness and chaos and to wrongly assume that things were quiet in the past.

Consider HSBC. Given our lengthy history in Asia, we have seen many parts of the region go through rough times. In fact, most of our main competitors today have had a relatively sheltered life in comparison. In China, for example, we maintained a continuous presence while many others were swept aside by events such as the end of the Qing dynasty, the founding of the Republic, the Second World War, and periods of civil war. Elsewhere in Asia, we have seen market crashes, recession, riots, bank failures, political turmoil.

Unwritten Rule No. 5: Avoid short term-ism.
Again let me use HSBC as an example. We have been described as a bank that is not “swayed by the fads of the moment.” An organisation that “sails sedately on, sights set firmly on the long term, pursuing its own strategy apparently regardless of what the rest of the world is up to.” The description is an accurate one. We do have a clear, long-term strategy. We also do not let short-term events influence our long-term thinking.

Conclusion

My conclusions today are straightforward. In an ideal world, the existence of rules and regulations would be enough to ensure compliance. The reality is—even in what is considered the best-regulated market in the world—spectacular failures and blatant breaches of the rules can and still do happen.

In an ideal world, all companies would operate with integrity. The reality is that most do. However, there will always be some individuals at some companies that do not.
In an ideal world, there would be a uniform approach to new regulations. The reality is that it is unrealistic to expect common rules or a common timeline. What works or is needed in one country may not work or even be needed elsewhere.

Lastly, in an ideal world, companies would be able to always work undistracted towards long-term goals. The reality is we live in a world that is inundated with short-term information and we do business in a world infatuated with short-term results.

One final point. I have avoided, quite purposely, using the word “new” when referring to the unwritten rules for businesses. The reason is simple, really. The unwritten rules I have mentioned are in fact old rules of doing business. The only thing that is “new” is the enthusiasm some companies—and for that matter many investors—are now showing for such rules.