Sixt explains what he's learned from Enron

In the wake of the Enron debacle, what are the new challenges for the CFO?

The challenge is to maintain and continue to develop the trust that is so essential between the investing public and the management of the company. It becomes more difficult because there is more doubt around in the environment in general as a result of Enron and the other spectacular insolvencies we've seen in the last few months.

That's number one. Number two is a little more subtle. There will be a process of change as a result of this. I think there will be changes in the securities regulatory environment, changes in the disclosure environment, changes in the accounting environment, all of which affect us. Indeed we should be participating in the process of what are the right changes. We have to try and do that in a climate that doesn't reflect hysteria, but pondered and considered thinking. That is going to be a bit challenging.

The issue of trust means we have to manage an additional level of information, to support the comfort level. To give people comfort, they require a little more information now. So for example, when we announce our results I will spend time on the great contingent liability note, that was raised in Asian Wall Street Journal article. It's clearly not well enough understood, and therefore an area which has attracted concern in the investment community. I'll go through and explain a lot of information that has effectively been available before but we didn't explain because we didn't focus on note 26 of the financial statement six months ago - nor did anyone else.

Is there a premium on conservative management now?

I'm not sure that conservative is the right 'frame' to put on it. Since the tech-wreck and the internet bubble, we've had some high profile insolvencies and that is causing a pretty critical assessment across the board of the basis on which everyone makes investment decisions, from bank credit committees to fund managers to ordinary shareholders. In that context, particularly when we look at the flameouts, you are for the most part looking at new companies, or ones that went through real transformational management changes over a relatively short period of time, such as Enron or Marconi. They changed fundamentally. That's important, because I now think investors are attaching more importance to track record and longevity. To put it bluntly, before banks give you billions of dollars and equity markets give you tens of billions, they are demanding to see a track record that you have created value before. That's positive. I am not sure it means more conservative, but it does send you back to a more detailed consideration of who you are dealing with, how much do you know. So track record would be the way I frame it, rather than conservative.

The concept of the 'off balance sheet' item has come under scrutiny. How will Hutchison seek to alleviate concerns in this area?

This is one of those terms that is much more frequently used than it is understood. This is troublesome. The right debate should focus around abuses of what is not on the balance sheet, as opposed to simply what's not on the balance sheet. I return to ourselves to explain that difference.

In Hutchison's case, what's not in our financial statement or balance sheet, by way of being expressed as a liability, is anything that is a standalone liability - of associates or jointly-controlled entities - basically because those are companies in which we have a less than 50% interest, and by definition don't control. I feel that is perfectly appropriate. I don't see why we would treat as liabilities things like Hongkong Electric's debt, even though it is part of the Hutch universe that is interesting to our shareholders. I don't think it is a liability to our shareholders, so it's not on our balance sheet. Husky Energy is another example of that. What is in our balance sheet, and is in our contingent liabilities disclosure, is anything that is the debt of a subsidiary, regardless of recourse. A subsidiary is something we control. Then the assumption is we consolidate it. That's right because the odds are that in the event of a shortfall, you would supply the cash, so it is a liability of the shareholders.

That's just on the consolidated balance sheet. The remaining category is what's disclosed in the famous note 26. That was $10 billion last year and will be about $11 billion this year. That is simply the liabilities of associates and jointly-controlled entities which have either been guaranteed by Hutchison as parent or by any of the subsidiaries.

That is disclosed and is quite interesting because that is not necessarily disclosed in other accounting jurisdictions. That is a category where Hong Kong's disclosure is as good as any, but is probably better than several. That is appropriate, because even though we don't control them, by putting a guarantee, we make it a liability that can affect our shareholders. An example would be if we did a property development, where we generally put a guarantee for our share.

From what I've heard described in the press, the types of off balance sheet liabilities that were part of the issue at Enron, would be disclosed here in Hong Kong.

Those partnerships would be in that note?

They certainly should be. That's under the category of associates or jointly-controlled entities.
Anyway, the real issue is if you are talking about a liability that can eventually affect your shareholders directly, then regardless of what the accounting rules let you do, if you put it off your balance sheet and hide it, you are number one, deceiving yourself, and number two, you are deceiving your shareholders. What will be interesting is the standard of common sense that will in the future guide what auditors have to put onto a balance sheet and what they don't. That's where the study should be.

Should auditors have to make a statement about whether a company is a prudent user of derivatives, for example?

Derivatives are disclosed and should be disclosed. I don't think it is appropriate for auditors to make a judgement as to whether this much use is prudent or not. You would get to a point where, because it's a note disclosure as opposed to a balance sheet one, that if a derivative exposure was so great compared to the balance sheet then the auditor would almost be at the level where it was giving a caveated opinion anyway.

In general it's a judgement call. Do you or don't you hedge interest rates? I have strong views on all of these for all of our businesses, but there isn't one right answer, so disclosure rather than judgementalism is the right approach. Again, it comes down to extremes. In abusive situations, there ought to be a standard of judgement you expect from the auditors about unacceptable levels of risk.

If you could name one perception issue, which is the one you feel investors misunderstand about Hutchison today?

It's always the same for Hutchison. It's complexity. Of course, in this environment, it means we have to work very hard to improve the extent to which we are understood. I think we are making some progress on that and I hope this year's annual report will help. We've worked very hard on it and tried to segment better and detail better, and annotate better. We have made progress.
I'm not complaining, but I have to point out it is more difficult for us, because we're trying to achieve best practices with the equivalent of five very large corporations in five very different sectors. We're in communications, ports, property, retail and energy & infrastructure. We've got to solve the transparency issues in all these different sectors. I hope people will be a little bit patient, and also with me.

Are investors becoming more comfortable with conglomerates again?

I don't know about that. But I don't hear so much about conglomerate discounts.

Is Enron in any way positive for Asia?

It could be, for some of Asia. It goes back to what I was saying before about track record. In an environment where their tend to be a lot of family-controlled public companies, there are clearly governance and transparency issues, but they are different from the ones you get in markets where you have widely held ownership, that aligns a lot more power with management, independently of shareholders.

When you have large controlling shareholders the one thing you have is a fundamental value alignment, between that shareholder and the other shareholders. Management can't hijack the company to their own benefit. So those risks, and a lot of the recent insolvencies, have attributes of this, are less prevalent. You have other risks. You have to know the family's track record and how they deal with minority shareholders. But when you have people with an established track record, you have an element of inherent conservative alignment built in because the major shareholder has the same interest. Here, there is no question that KS Li would not reward Canning Fok or Frank Sixt for putting a liability off the balance sheet or hiding a loss. At the end of the day, he's a shareholder too, and it is his value. That introduces a somewhat more conservative bias, and in that sense at least makes the universe of Asian companies potentially a little more attractive, as people focus more on track record.

This forms part of a series of interviews with Asia's top CFOs that will appear in FinanceAsia magazine in April, discussing what Enron means for Asia.