[A-List] Singapore: the developmental state

["Michael Keaney" <michael.keaney@xxxxxx>]

Singapore's capitalism myth
By Gary LaMoshi
Asia Times, November 7 2002

HONG KONG - When people talk about Japan Inc or the US military-industrial
complex, they're referring to a metaphorical representation of a perceived
phenomenon. But when they talk about Singapore Inc, they mean Temasek
Holdings.

Temasek is the Singapore government's S$70 billion (US$40 billion)
investment vehicle with major stakes in Singapore's key sectors, in line
with its mission: "To contribute to Singapore's economic growth by nurturing
world-class companies through effective stewardship and commercially driven
[sic] strategic investments." Temasek's only shareholder is the Singapore
Ministry of Finance, from which it was spun off in 1974.

So when Temasek and the Singapore government disagree, as they do over
quarterly corporate reporting, it's news. Even bigger news, in this age of
deregulation, free-marketeer calls for bureaucrats to get out of the way of
capitalism, and knee-jerk condescension toward Singapore's nannyism: the
government is right on this matter.

Marx to Lenin to Lee
The Heritage Foundation, a leading US conservative think-tank, touts
Singapore as one of the world's two freest economies, but that's just a
myth. In fact, Singapore is the world's most successful socialist state.

More than 80 percent of Singapore's population lives in public housing,
sheltered from the harsh realities of the government-controlled property
market. While Singapore has the trappings of a democracy, the ruling
People's Action Party is living proof that the one-party state survives
outside the dustbin of history. Rather than the sharp-elbowed unabashed
capitalism of Wall Street, Singapore's economic philosophy more closely
mirrors that of another tropical island with a signature rum cocktail: Cuba.

Temasek is Exhibit A in Singapore's blatant, and largely profitable,
government intervention in the economy. Buying a computer? Temasek owns 70
percent of Chartered Semiconductor. Chatting on the phone? Temasek owns 67
percent of Singapore Telecom. Taking a vacation? Temasek owns 57 percent of
Singapore Airlines.

There's nothing wrong with any of that, other than the blatant lies about
unbridled capitalism. (Since when was veracity among Senior Minister Lee
Kuan Yew's vaunted Asian values, or the Heritage Foundation's?) In its
charter, Temasek adopts an ideal major investor's stance: "Temasek will
exercise its shareholder rights to influence the strategic directions of its
companies. But it does not involve itself in their day-to-day commercial
decisions." In another document, it elaborates, "Temasek's guiding
philosophy is to 'put the right people in charge, make sure that the
decision-making process is transparent, and then let them carry on with the
business'."

Information, please
Financial reports are the main way for Temasek and other investors to
exercise their rights and responsibilities, and the more timely and complete
the information the better. The Singapore government, in its drive to make
Singapore's capital markets a more attractive destination for overseas
investment, recognizes that and declared quarterly reporting mandatory
starting next year.

But in his keynote address to the Asian Business Dialogue on Corporate
Governance last Thursday, Temasek chairman S Dhanabalan slammed quarterly
reports, a world standard for nearly 70 years but still an anomaly in Asia.
"I am dismayed that we in Singapore have decided to impose this practice on
listed companies," Dhanabalan lamented. Decrying management and market focus
on quarterly earnings, he added, "We seem to have tilted in favor of traders
in stocks rather than investors in stocks."

Dhanabalan is also the chairman of government-controlled banking group DBS.
Two of those letters pretty much sum up the merits of his position. His
basic premise that quarterly reporting causes volatility is wrong, and the
thinking behind his argument shows that, despite differences with the
government on this issue, Dhanabalan hasn't strayed far from the
Singapore-think we all know and mock. But don't take my word for it; listen
to experts from opposite ends of the globe.

"It is lack of information, not too much information, that causes
short-termism," Deborah Pastor, director of shareholder advocacy website
eRaider.com, said from New York. "Annual disclosure, like pro forma
earnings, forces investors to guess how a company is doing. When investors
do not have fresh, reliable information, they have no choice but to trade on
rumor. Solid information leads to solid trading."

Five-year plan
"In finance and in weather, longer-range forecasts are inherently less
accurate than short-range forecasts, and a company is more likely to miss a
six-month forecast than a three-month forecast, so the market is in fact
much more vulnerable to shocks when data are only released twice yearly,"
said David Webb, editor of Hong Kong corporate governance watchdog
Webb-site.com.

"Taking [Dhanabalan's] argument to the extreme, perhaps companies should
only report every five years, in line with the supposed business cycle, to
avoid management behaving in a 'short-term fashion'," Webb suggested. "Then
minority shareholders would just have to speculate in the intervening years
about what is really going on inside their company. Clearly that does not
make for an efficient market."

Lack of information hardly makes for efficient investing either, so it seems
ridiculous for Temasek to oppose increased information. Webb, a former
investment banker, unraveled the mystery: "Controlling shareholders, through
their board seats, have access to corporate data on a real-time basis.
Within the limits of what is practical, there is no reason to withhold such
information from outside shareholders, as it creates information asymmetry
between shareholders."

In other words, Temasek gets its information and, naturally, uses it
responsibly, but Dhanabalan doesn't trust you to have it. That's a dose of
Singapore paternalism that's too strong for Singapore's government to spoon
up these days.

It's bad enough that investors who want to play the game in Asia have to buy
companies with controlling shareholders in markets that offer few
protections for minority interests, but a controlling shareholder that's
also the government poses special dangers. Dhanabalan spent the bulk of his
keynote address assuring investors that Singapore Inc leads the fight to
build shareholder value for all investors.

The character issue
"The character of Temasek derives from the character of the political
leadership in Singapore with the qualities of honesty, probity, meritocracy,
focus on the right rather than the popular decision and transparency being
the main features. Temasek has defined for itself a proactive stewardship
role. Being an involved, interested and informed owner, and with enough
clout, it can help prevent the types of excesses seen in the US."

However, the Temasek way can lead to some uniquely Singaporean excesses.
Dhanabalan ought to know, since he was in the middle of one last year.

To face overseas competitors at home and in the region better, Singapore's
government encouraged mergers among its banks. Small banks resisted the
call. Luckily for the government, Dhanabalan's DBS launched a lowball bid to
gobble up Overseas Union Bank (OUB), which failed to find a white knight.
United Overseas Bank (UOB) came to the rescue with a higher bid and promised
to merge the two banks' boards of directors. DBS was big enough already, and
the government was delighted to see second-place UOB grow.

Unfortunately, DBS's investment banker Goldman Sachs took its client's
takeover bid seriously. Its analysis of the bids lambasted the UOB offer and
its unwieldy merged board, saying "this combination is designed to keep
family control intact without regard for shareholder value". The government
considered Goldman's analysis a rude intrusion that threatened to scuttle
its preferred union. After a chat with a reportedly enraged Lee Kuan Yew,
DBS in effect abandoned its bid, published newspaper ads featuring a
retraction of the previously obscure Goldman report, and agreed to pay UOB
and OUB S$1 million each as a wedding present. Goldman chairman Henry
Paulson jetted in to kowtow to the banks and regulators and paid the hong
bao to the two banks, plus expenses to DBS.

In his speech last week, Dhanabalan assured, "There is no divergence between
Temasek's interests and those of other shareholders since its aim is to
ensure that TLCs [Temasek-linked companies] are well managed and create
value for the benefit of all shareholders." As long as those investors share
Temasek's stated mission "to contribute to Singapore's economic growth",
that is. Judging from Dhanabalan's words and deeds, when the mission
conflicts with the quest for shareholder value, it's easy to guess which
side gets the nod.