"With the Internet erasing geographical borders for investors, corporations are searching the world for the cheapest labor-- ..." BUSINESS WEEK ONLINE April 14, 2000 STREET WISE by Margaret Popper Globalization Threatens Workers, Thrills Investors It's creating new opportunities, which will only get better as U.S-style accounting standards spread worldwide The global economy may be the bane of the average American factory worker, but for the average American investor, it's great. While U.S. companies are shopping for cheap labor move jobs overseas (see BW 4/24/00, Cover Story, "Backlash"), foreign companies looking for (comparatively) cheap capital bring investment opportunities to the U.S. In 1990, 434 foreign companies had registered with the U.S. Securities & Exchange Commission (SEC) to sell securities or have their securities sold in the U.S. By 1995, that number had hit 744, and by the end of last year 1,200 foreign companies had registered with the SEC. U.S. investors seem thrilled by the chance to buy into these companies. At the end of 1998, net assets in U.S. mutual funds that invested in Japanese equities totaled $3.1 billion. Ten months later, that total had reached $8.25 billion. "That's partly due to appreciation," concedes Hap Bryant, an analyst at Morningstar, the mutual-fund research firm. "But it's mostly due to increased interest." With technology rolling out globally, the Internet erasing borders, and corporations searching the world for the cheapest labor or the ripest markets, it's only logical that the capital markets should follow suit. And nowadays, the biggest barriers to truly global capital markets are tumbling with the finality of the Berlin Wall. MORE CHOICE, LESS RISK. Securities regulators everywhere are working in concert to create accounting and disclosure standards that will be understandable across borders. Public markets such as Germany's Neuer Markt and France's Nouveau Marché are springing up to increase the total amount of publicly traded capital. And an increasing number of managers around the globe have to boost shareholder value or face the specter of hostile takeovers, á la Mannesmann/Vodafone. For investors, this increasing transparency across markets means more choice, more liquidity, less risk. For most of modern history, it has been impossible for investors to compare the performance of companies in different countries because they used different accounting methods. Indeed, Europeans managed to hold out against U.S. accounting rules far longer than they did against McDonald's. But now it looks like U.S. generally accepted accounting principles (known as GAAP) will become the latest form of American cultural imperialism. Already, some companies listed on the Neuer Markt use GAAP to do their accounts. For reasons of national pride, the countries within the European Union haven't yet officially adopted GAAP as their new accounting standard -- that would be giving in to the Anglo-Saxon invasion. But the International Organization of Securities Commissions (IOSCo), of which the U.S. SEC is the largest and most influential member, has been working on creating an alternative set of rules that could easily be reconciled to GAAP and would meet cross-border registration and disclosure requirements. IOSCo's members include nearly all of the world's securities commissions, including the key players from Tokyo to London to New York. INDEPENDENT. The thrust of IOSCo's efforts has been to strengthen the status of the International Accounting Standards Committee (IASC), a global version of the Financial Accounting Standards Board (FASB) -- the body that creates GAAP rules in the U.S. Unlike the IASC, the FASB is an independent industry association that can issue additions and changes to U.S. standard accounting practices. The SEC has veto power over FASB rulings, but if it doesn't exercise this power, what FASB says goes, in financial reporting circles. The idea is that the FASB can't be held hostage to political pressure. So far, the European Commission has opposed creating a global body with such independence. But IOSCo isn't willing to accept the EC's stance. In December, it sent back to the drawing board plans for restructuring the IASC because those plans didn't give it political independence. "In Europe, there is a cultural bias that says political representation is more important than technical expertise. That is so foreign to us," says Carrie Bloomer, a project manager in the international activities division of the FASB, who wrote a negative opinion on the IASC's December plan. TIME TO RELENT? In the end, the IASC resubmitted its proposal to create a structure much more like the FASB's. IOSCo, the SEC in a separate study, and the FASB approved the second IASC plan. Now, it's up to the EU to give thumbs up or down -- with the decision probably depending on how many foreign governments jump on the bandwagon. Industry watchers are confident that the EU will have to relent, not just because the entire rest of the world wants standardization but also because of pressure from European corporations that don't want to waste the money keeping two sets of books. The securities world isn't waiting on the EU. To further pressure it to accept an international accounting standard, IOSCo has created a set of core standards, which the SEC has released for industry comment in the U.S. It has asked for opinions on the accounting standards themselves and also on the auditing, record-keeping, and educational programs that will be needed to support the standards. If this sounds like much ado about nothing, don't be fooled. Standardization of accounting practices is one of the keys to seamless capital markets. Investors have to be able to compare apples to apples when making their investment decisions. That's impossible if you compare a company using GAAP accounting to a company using German accounting. The more everybody has access to the same information, the more efficiently the markets operate. JUST MAKING NICE. Capital-hungry corporations abroad are doing all they can to push standardization forward and using U.S.-style public relations that involve a lot of hand-holding by top management. "Recently, Samsung Electronics came to present to us, because we run a Korea Fund," observes William Holzer, president of Scudder Global Fund. "At the end, I asked them for the red herring [a document that describes a new issue of stocks or bonds]. They never come to us unless they're selling a new issue, but they said they didn't have one. They were just visiting to 'cement shareholder relations.'" John Lee, Scudder's Korea portfolio manager, is working with a Korean university to teach Korean companies about developing their shareholder relations. Even within the EU's borders, the market seems to be taking the matter of investor information into its own hands. "The Neuer Markt has companies report quarterly, not semi-annually, as German companies used to do," says Federico Laffan, director of international equities at Credit Suisse Asset Management & Warburg Pincus. As a co-manager of the Warburg Pincus Global Post-Venture Commitment fund, he sees globalization and liberalization of capital markets as an irreversible trend. Originally, the fund, which invests in companies that have had venture-capital investment within the last 10 years, was split into a domestic and an international piece. "We saw the demand for global product and merged the two funds," says Laffan. "We found it had a truly global theme that could be pursued internationally." The Global Post-Venture fund is only one example of a shift toward investing in companies by industry rather than by geography. In sectors such as technology, companies are now being assessed on their competitiveness within the sector, not only within their region of the world. "You limit your opportunities if you stick to the U.S.," says Morningstar's Bryant. "With a U.S.-only portfolio, you'd miss the biggest cell-phone maker -- Nokia -- some of the biggest drug companies, and the biggest banks." Now that you can understand the financials of international companies, there's no reason to lose out. Globalization is the investor's friend. By Margaret Popper in New York Copyright 2000 The McGraw-Hill Companies 04/14/00 00:41
