Corporate Governance: Mandatory or Voluntary?

An academic paper just came to my attention by Najib Harabi, of the University of Applied Sciences of Northwestern Switzerland (November 2007) that poses an important question: What is the state of corporate governance as a major factor affecting the growth of the private sector in MENA countries?  Although Mr. Harabi doesn’t answer the question fully, he makes some assumptions that are worth evaluating.  With corporate governance gaining steam in the MENA region, it is a critical that we have good answers to such questions about how corporate governance can foster better investment climates.

The study looks at the World Bank assessment tool on corporate governance (ROSCs) used in Egypt, Jordan and Morocco, as well as a series of regional roundtables from 2003 to 2006 that were co-hosted by CIPE, the Global Corporate Governance Forum, the World Bank and others.     The introduction gives a full definition of corporate governance, according to the OECD principles, and then asserts that “mandatory governance rules (as required by stock exchanges, legislatures, courts or supervisory authorities) are necessary ….to overcome collection action problems…and second, to ensure that the interests of all constituencies are represented.”

This seems to suggest that mandatory regimes are the preferred—and only—mechanism to encourage the application of good corporate governance principles.   What it neglects is the important role that the private sector plays in initiating a framework for corporate governance that is not imposed or mandated by the government, but rather is voluntary.  The logic behind this is that companies will choose to apply corporate governance when they realize the economic benefit of doing so; this happens when see the results through increased access to external financing, lower cost of capital, better operational performance, and reduced risk of financial crisis. 

Governments may be able to mandate the letter of the law, but not the spirit behind corporate governance.  Cultural change is just as necessary as an improved legal framework to promote values such as transparency and openness.  In order for the principles of corporate governance to become firmly rooted, doesn’t it need to emerge as a genuine partnership between the private and public sector?

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