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Aafreen Babar (62)
H O W T O P R O M O T E G O O D C O RP O RA T E GOVERNANCE
The proper governance of companies will become as crucial to the world economy as the proper governing of countries . strong corporate governanceproduces good social progress. The two go together. James Wolfensohn, 1999
WHAT I S CORPOR ATE GOVER NANCE?
Corporate Governance hit the news in 2001 and 2002 with the collapse of global corporations such as Enron, WorldCom, Global Crossing and the intern ational accountants, Andersen. These were blamed on a lack of business ethics, shady accountancy practices and weak regulators. They were a wake-up call for developed countries on corporate governance. Prior to this, commentators had focused on failings in developing countries - blaming the 1997-98 East Asian crisis on poor corporate governance, crony capitalism, poor management practice and lack of disclosure and transparency.
Corporate governance has come to encapsulate the blend of law, regulation and private-sector practice that enables companies to attract financial and human capital, to perform efficiently, and generate long-term economic value for their shareholders, whilst respecting the interests of stakeholders and society as a whole. Corporate governance needs to be addressed at mainly these two integral levels:
The country level. Various regulatory and enforcement mechanisms are important, such as the need for bankruptcy laws, property rights and an effective judiciary. A corporation cannot operate effectively if it is unable to rely on legislation and its enforcement. Good corporate governance therefore requires good political governance, and vice versa. The corporation. Corporate governance at the company level refers to the rules and regulations that shape its effective operation, as this is what eventually translates into the company s culture and defines the actions of all the stakeholders involved.
Complementary interaction between these two levels is vital to ensure the effective operation of the private sector, in a manner that is both accountable and transparent.
have been widely accepted as providing the broad framework for countries to use. these four pillars are key to ensuring equitable growth and a flourishing private sector. However. OECD PRINCIPLES OF C ORPORATE GOVERNANCE (1) The rights of the shareholder EXPLANATION A corporate governance framework should protect shareholders rights. (2) The equitable treatment of shareholders (3) The role of the stakeholders in corporate governance (4) Disclosure and transparency (5) The responsibilities of the board WHY CORPOR ATE GOVERNANCE MATTERS: TOWARDS THE MILLENNI UM DEVELOPMENT GOALS DFID (Dept. accountability. the OECD issued five Principles of Corporate Governance (see Table below). Good corporate governance increases the integrity and effectiveness of the private sector and helps markets to operate more effectively. ownership and governance.of responsibility. It is expected that countries should then adopt their own country-owned corporate governance frameworks taking account of their unique culture and regulatory and legislative systems. There is a need to ensure timely and accurate disclosure of all material matters regarding the corporation including financial aspects. performance. fairness and transparency (RAFT). The board is key to the strategic guidance of the company and the effective monitoring of the management. which damage trust in business. This matters for many reasons. It should be fully able to undertake its tasks and responsibilities and be fully accountable to shareholders. including: y Avoidance of business scandals. for Int l Development) has been working for some time to ensure that the public sector in developing countries is more accountable. the private sector is the main driver of a country s economic growth and it too needs to be accountable. which are non-binding. All shareholders should be treated equally.CORPORATE GOVERNANCE Aafreen Babar (62) In 1999. In conjunction with the OECD Principles. These principles. The World Bank argues that these frameworks should be based on four pillars . . Good corporate governance recognises that it is in the long-term interest of the corporation to respect the rights and interests of the stakeholders. including minority and foreign shareholders.
CORPORATE GOVERNANCE y Value placed on good corporate governance by institutional investors. y Growing involvement of the private sector in service delivery. In sum. An example of a breakthrough: Novo Mercado. Aafreen Babar (62) y Need for systems to prevent and deter corruption in developing countries. the Brazilian stock exchange. y The survey suggested that institutional investors would be willing to pay more for shares in companies that exhibited high governance standards. Bovespa. Suggested premiums for companies averaged 12-14% in North America and Western Europe. McKinsey 2002 Survey The McKinsey Survey. surveyed institutional investors managing $2 trillion of capital. with support from the international community. y A third of investors stated they would avoid countries with poor corporate governance. An overwhelming majority stressed the importance of good corporate governance in their investing decisions. this innovative move of the public and private sector. y Recognition of the importance of harnessing domestic savings for economic growth. The new market. took the unparalleled step of setting up an alternative market in April 2001. y The risk of financial crisis and contagion. Whilst it is still early days. require companies that list on it to comply with minimum corporate governance practice. which were curtailing the Brazilian market s ability to attract capital. it aims to ensure that management is more accountable to shareholders. y The deregulation and integration of capital markets. Through its minimal corporate governance criteria on voting rights. . the Novo Mercado . commissioned by the Global Corporate Governance Forum in 2002. demonstrates that corporate governance is recognised by investors. 20-25% in Asia and Latin America. good systems of corporate governance are required by developing countries in order to bolster overall trust in the private sector and to make the most efficient use of available capital. Brazil In reaction to concerns about corruption and poor corporate governance. and over 30% in Eastern Europe and Africa. improved disclosure requirements and the requirement to comply with international accounting standards.
To achieve reform it is often necessary to find a national champion to drive it forward. Statutory vs voluntary: the role of regulation in corporate governance. Other countries have taken different views. the OECD Principles were used as a starting point in writing the King Code II of South Africa and the Kenyan Corporate Governance Code. DFID needs to work in partnership with the private sector in order to facilitate better understanding of corporate governance and to harness its enthusiasm for reform. which may be from the private or public sector. Imagine forcing a company of 10 employees to have 2 nonexecutive directors on the board! Corporate governance must therefore have a tiered nature depending on the size and value of the company in order to balance burden against benefit. Consensus building. See also the NEPAD Business Group below. Corporate governance structures should be adapted to the unique characteristics of a country. but can be used to inform a country s own code. For example.There may be a need to build greater understanding of the implications of corporate governance for developing countries. such as the Global Corporate Governance Forum (GCGF) (see below) or the Commonwealth Association of Corporate Governance (CACG) or regional bodies such as the Pan African Consultative Forum on Corporate Governance. Potential platforms for engaging the private sector in the debate are local commercial or professional membership organisations. the relevant regulatory bodies. which have often led the development of codes of corporate governance. Institutional capacity constraints: one rule for all? Corporate governance cannot be applied broad brush to all companies.The private sector is integral to corporate governance reform. Although the OECD principles are voluntary. A useful starting point may be to propose the writing of a code of corporate governance. the stock exchange. This can be done through linking with international bodies involved in corporate governance. . The OECD principles are voluntary. there is a debate on whether country codes should be voluntary or statutory. The UK s Combined Code on corporate governance provides for voluntary compliance but statutory disclosure for departure from the provisions of the code (comply or disclose). such as India (where the code is mandatory).CORPORATE GOVERNANCE Aafreen Babar (62) ISSUES TO BE AWAR E OF WHEN SUPPOR TI NG COR POR ATE GOV ERNANCE R EFORM Identify a National Champion. which are codes owned by the private sectors of the countries concerned. Possible candidates include the Ministry of Finance. One size does not fit all. and the central bank or private sector leaders. Mobilising the private sector.
Corruption interface. and for greater recognition of international accounting and auditing standards. The FIRST Initiative The FIRST Initiative is a US$51 million multi-donor project. In the post-Enron / Worldcom world. Accounting and Auditing.CORPORATE GOVERNANCE Aafreen Babar (62) Corporate Social Responsibility (CSR). by focusing on the private sector s desire to operate efficiently. (See How To Note on Approaching Corporate Social Responsibility).Corporate governance provides the basis to protect shareholders. to treat stakeholders fairly. Whilst these debates are ongoing. . In other words. which provides technical assistance grants to recipients in developing and transition countries for capacity building and policy development in financial sector regulation. CSR is concerned with responsibility to the company's wider stakeholders. FIRST is aimed at supporting the 12 Key Standards for Sound Financial Systems recognised by the Financial Stability Forum. there are calls to reform the accounting and auditing professions. environmental and economic value to the society in which they operate through their core activities. and to provide a framework in which bribery is made more difficult. supervision and development. supported by DFID.CSR is an important complement to corporate governance. accounting and auditing. There are also calls for greater regulation of the professions. and ensure transparency and accountability of managers. which include corporate governance. CSR looks at the way companies can add social. Corporate governance therefore works to underpin government regulations. the FIRST Initiative can provide technical assistance in the upgrading of financial sector architecture (see box below).
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