Here, I must also point out that insofar as corporate governance is concerned, most securities commissions in developing countries find themselves handicapped because the social and commercial pressures to promote good governance just do not exist. In developed countries, these pressures have been known to come from three sources:
-- Mutual funds/pension funds ie institutional investors, seeking safeguards for their investments. Calpers in the United States was the progenitor of corporate governance norms and has remained a prominent proponent.
-- A strong shareholder movement - in some European countries such movements have forced management's to adhere to due process and other norms of governance; and
-- Professional activism which has also been responsible in some countries to promote improvements in corporate governance, as has happened in Britain where various professional bodies have been active advocates for better governance.
This kind of push for corporate governance is largely absent in developing countries. Further, we must also bear in mind that a conducive environment for corporate governance essentially comprises four elements:
-- a sound value structure ie a high moral plane;
-- a basic framework of laws and regulation;
-- a judicial system and an enforcement mechanism that actually works; and
-- separation of ownership from management.
Barring a few exceptions, here and there, most developing countries do not have more than two of these four elements in place. Hence, the ground is not fertile in these countries for corporate governance to develop firm and deep roots. Thus, so far, in developing countries, corporate governance is either confined to a few corporates or it is really superficial or it is not sustainable.
Despite these odds, securities commission have to persevere - not only do jurisdictions that have implemented the accepted norms of governance attract more capital but also it is one of the cardinal reasons for the existence of capital market regulators, namely, to ensure that there is due process and all stakeholders get a fair shake.
From my point of view, codifying and enforcing the principles and practices of good governance is only a small part of the story; it is infinitely more important to absorb the ethos and the spirit underlying good corporate governance.
It is immaterial whether or not one follows to the letter any codified set of corporate governance norms. It is, on the other hand, very important to put in place, within the circumstances of the enterprise, systems that are transparent, that call for due process, that enhance accountability to shareholders, that provide for adequate parameters to resolve conflict, and that provide for a fair return to all stakeholders.
However onerous this may seem, there is no doubt that the enterprise benefits remarkably if it adheres to the principles of good corporate governance in the shape of overall efficiency and better performance as well as satisfied stakeholders. And there is considerable empirical evidence that directly correlates the level of good governance achieved with capital inflows from international institutions, and indirectly with lower cost of capital, and higher share values.
I am also painfully aware that the Asian financial crisis of 1997 was to a lesser or larger degree - depends on how you see it - caused by a lack of adherence to acceptable governance practices among corporates in general and the financial sector in particular.
Certainly, over the last several years, there has been a lot of intellectual ferment in regard to corporate governance, and a number of strong legal and regulatory steps have taken place world-wide to enhance standards of corporate governance and to ensure better implementation of these standards.
There has been a proliferation of carefully devised codes of corporate governance, the OECD principles of corporate governance have been revised to take account of evolving realities, the accounting profession is now under far greater oversight and scrutiny than ever before following the spate of spectacular accounting-related governance scandals that came to light recently, and then there is the very potent, and somewhat heavy-handed, Sarbanes-Oxley Act of the United States, enacted in response to the recent dot.com and governance fiascos - a law which really constitutes a paradigm shift in corporate governance parameters.
And it is also noteworthy that various jurisdictions, like the EU, have either already adopted elements of the Sarbanes-Oxley Act or are in the process of doing so. However, so far there is not much evidence to indicate a change in the wind, and corporate governance failures continue to emerge in different jurisdictions with unacceptable frequency.
The fact of the matter is that corporate governance is a challenged subject. I do not know of any aspect of finance or management which is so difficult to implement in a substantive or genuine sense whatever be the nature and content of the legal and regulatory framework.
It seems to be the ultimate of form over substance! While the outward manifestation of a company might reflect full compliance with the best corporate governance norms, this may not in any way represent the true position.
When advanced,, countries suffer from this unsatisfactory state of affairs despite their highly developed traditions, institutions, and sophisticated regulatory enforcement, the situation of most developing countries cannot be better - it could be somewhat worse albeit I have not seen any empirical evidence to support this contention.
Now, the question is: why is sound corporate governance so clearly in the interest of corporates and yet so elusive in a substantive sense? The answer lies in the nature of the "public company": the fact that it necessarily embodies in its functioning the principal-agency relationship ie shareholders, with various levels of interest in the company and possibly their own distinct interests, being the principals, and management, with or without other interests, being the agent; and the fact that a company has stakeholders which are both "insiders" and "outsiders." The public company is, as we all know, a juristic person -- not a natural person -- that has to depend on others to look after its interests.
Adam Smith, the father of modern economics, believed that as a concept the public company was doomed to fail since the management of a company did not have any incentive to take care of the interests of widely dispersed shareholders. He would not have been surprised at all by Enron, Worldcom, Tyco, Parmalat, Adelphia, Adecco and others! He would probably have said "I told you so!"
It is interesting to note that most of the spectacular corporate governance failures of the recent past - including some of the ones I just mentioned - had certain common features:
FIRSTLY, THESE WERE VERY SUCCESSFUL BUSINESSES: Secondly, these companies were at the top in the then prevailing, best practice league insofar as implementation of corporate governance norms is concerned; and
-- Thirdly, these companies were at the cutting edge with respect to use of technology, financial derivatives, and intricate corporate structures.
All of this suggests to me that whereas one can appreciate the need for stronger laws and regulations, and stronger enforcement, which, indeed, has been the response in most jurisdictions, the real issue for us is whether our corporates have sincerity of intention, the right ethos, and a genuine propensity favourable for good governance.
It would be a mistake to simply ape measures that have been adopted in developed countries. In its essence, corporate governance has to relate to local circumstances. The challenge for capital markets regulators is to put in place incentive structures, checks and balances, and other measures so as to elicit a genuine response from corporate management's that ensures that the spirit of good corporate governance is duly implemented.
The situation of each country is different and measures taken to promote good corporate governance will have to be carefully crafted and customised. Given sincerity of purpose and perseverance, I am confident that the outcome in most instances will be favourable. That is all I have to say for the moment and I will now try to answer any questions you may have as best as I can.
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