By Hyeji Kim
Any corporate compliance program needs a strong relationship between the board of directors and the compliance and ethics officer in order to be effective. In 2010, the Society of Corporate Compliance and Ethics (SCCE) and the Health Care Compliance Association (HCCA) conducted a study which showed that the relationship between the Chief Ethics and Compliance Officers (CECOs) and boards of directors was much weaker than it should be. In 2013, SCCE conducted the study again to see if there were any changes.
The recently published 2013 study, based on over 600 responses from compliance and ethic professionals in the SCCE and HCCA database, seems to be on a much brighter note with generally positive findings.
Markets thrive on transparency. (Photo: Wikimedia Commons)
Many of the world’s largest and fastest-growing companies now come from emerging markets. But according to a recent report, these companies lag behind their more established peers in transparency — a handicap that could prevent them from becoming true global leaders in their fields.
Looking at 100 large multinational companies from 16 emerging market countries, Transparency International found an average transparency score of just 3.6 out of 10. A 2012 report on the world’s largest companies using the same methodology found an average score of 4.7. And while only one in five of the emerging-market multinationals had a transparency score above 5.0, just under half of the largest companies did.
These results should be deeply concerning for the executives of these companies, their investors, and the governments and citizens of countries where they operate.
By Andrew Wilson and Marc Schleifer
Last month in Karachi, CIPE’s Deputy Director for Strategic Planning and Programs Andrew Wilson and Pakistan Country Director Moin Fudda took part in a conference organized by the Pakistan Institute for Corporate Governance, together with CIPE and the Association of Chartered Accountants, on the corporate governance implications of concentrated ownership in listed firms. Wilson was invited to give the keynote address and provide an international perspective at this event, which received coverage by the local press in Pakistan. To help spur discussion, we wanted to share Wilson’s remarks on the CIPE blog, since concentrated ownership is an issue that firms, shareholders and regulators grapple with worldwide.
Some of the basic theories of corporate governance start with an idealized picture of a firm with widely dispersed ownership, but in practice, the theoretical model of diffuse ownership faces problems. When a company is owned by numerous small shareholders, it can be difficult for them to get information about the firm’s operations, meaning that a great deal of the real control rests with management; the principal-agent problem arises and company performance can suffer, to the detriment of the owners (the shareholders). This would seem to argue in favor of a more concentrated ownership system, and in fact, around the world we see that diffuse ownership is indeed the exception, not the rule.
In most countries, the dominant organizational form is concentrated ownership, with control of most firms either in the hands of a family, a larger holding company, major institutional investors, or in some cases the state. This is true even in developed economies with robust capital markets and a high level of private ownership, where individual listed corporations are often part of a complex network of international or domestic holdings, which themselves in turn may or may not be listed. There are various reasons why this might be the case.
Surveys attempting to measure illegal or frowned-upon behavior are notoriously difficult to execute in a useful way. This is especially true when it comes to surveys asking global corporate leaders how well they are following anti-corruption laws.
On the one hand, such surveys can end up underestimating the problem when companies are reluctant to acknowledge behavior that can result in multimillion dollar fines. On the other hand, surveys can overestimate corruption issues or give a false sense of a growing problem simply because awareness is growing as more and more executive and managers undergo mandatory training on all the different ways to run afoul of U.S., UK and Canadian anti-corruption laws.
Such surveys become even more problematic when the organization conducting the survey stands to benefit from results that highlight whatever problem the organization is in the business of solving.
So, with all those caveats out of the way, it is worth noting that Ernst & Young’s 2013 Europe, Middle East, India and Africa Fraud Survey is quite useful, both for its scope and for its findings. The recently released survey is based on anonymous interviews, conducted in late 2012, with 3,459 people from companies in 36 countries. Interview subjects ranged from employees to board members, directors, and managers. The majority of the companies surveyed employed more than 1,500 workers. For sheer breadth, the survey is noteworthy. The results are, too.
With the commitment to strengthen democratic and market reforms in Pakistan, CIPE, with the support of its partners, continues to provide tools to serve as a catalyst for institutional reform for private sector and state owned enterprises. The 2012 Activities Report highlights the impact of CIPE programs and the achievements of our partners in Pakistan.
During its more than 30 years of strengthening democracy around the world, CIPE has learned time and again that sound corporate governance practices and principles improve economic performance and have a significant democratic dividend.
According to CIPE’s Corporate Governance Toolkit, “The shift to better private governance accelerates the move toward more democratic public governance.” By improving transparency, corporate governance reduces corruption and cronyism that inhibit the democratic process. Corporate governance principles strengthen the democratic values of fairness, accountability, responsibility, and transparency. In transitioning economies where state-owned enterprises dominate key industries, sound corporate governance practices can improve budget management and service delivery, thus building public trust in the government.
In Kyrgyzstan, state-owned companies play a significant role in the economy, especially in the banking, mining, and transportation sectors. According to the Index of Economic Freedom, government expenditure accounts for 38 percent of Kyrgyz domestic output. Cronyism and corruption within these companies presents a major obstacle to Kyrgyzstan’s market- economic transition. In many cases, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. The positions on boards of directors are frequently used as rewards for political support. This dynamic only reinforces a patronage system—the antithesis to democracy—resulting in poor economic performance and public service delivery.