Corporate Governance: An Antidote to Corruption

There are few topics that are more central to the international business and development agendas than that of corporate governancea means whereby society can be sure that large corporations are well-run institutions to which investors and lenders can confidently commit their funds. Corporate governance is a critical focal point in creating safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in a democratic society. These values include accountability, transparency, rule of law, fairness, responsibility, and ownership rights.

A series of recent events has placed corporate governance issues as a top concern for both the international business community and international financial institutions. Several high profile scandals in Russia and the Asian crisis have brought governance concerns to the fore in developing countries and transitional economies. Further, national business communities are learning and re-learning the lesson that there is no substitute for getting basic business and management systems in place in order to be competitive internationally and to attract investment.

Concerns over corporate governance systems are not limited to developing countries. Even in the advanced industrial societies, there is a global trend toward strengthening accountability and responsibility on the part of enterprises. For example, in recent years the Cadbury Commission in the United Kingdom, the Vienot Commission in France, and the Organization of Economic Cooperation and Development (OECD) have each issued new guidelines. In all of these cases, the underlying concerns center around ways to accomplish the core values of corporate governance, and address the following key elements:

• Boards of Directors
  
  
• Audit committees
  
  
• Internal structure
  
  
• Management control

However, a much broader perspective on corporate governance goes beyond the narrow view of interrelations between owners and managers of capital. To a greater extent, corporate governance results from a set of institutions (laws, regulations, contracts, and norms) that create self-governing firms as the central element of a competitive market economy. The key point here, is that the public and private sectors have to work together to develop a set of rules that are binding on all and which establish the ways in which companies have to govern themselves.

Does Corporate Governance Matter?

As countries build up strong systems of corporate governance, major benefits to society can be seen. Even in countries where most firms are not actively traded on stock markets, adopting standards for transparency in dealing with investors and creditors is a major benefit to all in that it helps to prevent systemic banking crises. Taking the next step and adopting bankruptcy procedures also helps to ensure that there are methods for dealing with business failures that are fair to all stakeholders, including workers as well as owners and creditors. Without adequate bankruptcy procedures, especially enforcement systems, there is little to prevent insiders from stripping the remaining value out of an insolvent firm to their own benefit.

Recent research has also shown that countries with stronger protections for minority shareholders also have much larger and more liquid capital markets. Comparisons of countries that base their laws on different legal traditions show that those with weak systems tend to result in most companies being controlled by dominant investors rather than a widely dispersed ownership structure. Hence, for countries that are trying to attract financial capital, corporate governance matters a great deal in terms of bolstering the confidence and commitment of potential investors.

Corruption

Corruption is now an acknowledged barrier to development. No continent has gone unscathed and countries undergoing democratic and economic transition are hardest hit. Simply put, corruption wastes resources, acts as an extra tax on transactions, creates inefficiencies within the market and undermines public confidence in democracy. As recognition of the need to combat corruption grows, so does the need for information exchange among the increasing number of institutions involved in combating corruption. Combating corruption is, of course, important in its own right since left unchecked, it has a corrosive effect on democracy and the general well being of a nation. In addition, combating corruption can serve as a tool for bringing about broader economic reforms and creating a level playing field on which business operates. These additional benefits can become an important part of the effort to mobilize support for anti-corruption programs. As society begins to realize that corruption harms everyone through lost jobs and lower incomes, it becomes easier to arouse public support for anti-corruption measures.

Corruption in terms of public-private sector transactions can be broadly defined as abuse of a public office for personal gain. For example, most would agree that bribing a civil servant is corruption. However, hiring relatives (nepotism), giving contracts to supporters (cronyism), abusing privileged information to buy or sell stock (insider trading), and other such practices are viewed differently around the world. Following the Asian and Russian financial crises, the trend seems to be in the direction of a more inclusive definition of corruption rather than strictly limiting it to bribes. One of the major breeding grounds for corruption can be found in the area of governmental applications of laws and regulations including, but not limited to, labor law, tax rules, customs and currency regulations, and health and safety laws. You cannot get at the root causes of corruption by merely weeding out corrupt individuals, be they public procurement officers, politicians, or business people. Corruption thrives in markets where legal systems are ambiguous, the rule of law is not embedded within cultural norms, and where laws and the judiciary allow employees opportunities to exert discretionary authority throughout various levels of government.

Corporate Governance as a Tool for Combating Corruption

Corporate governance is directly related to the topic of combating corruption. In many societies this is not a subject that is easy to deal with, both because of political sensitivities as well as legal inconsistencies. Yet corruption has to be dealt with in order to secure a position in the global economy and to secure the benefits of economic growth. The recent signing of the OECD anti-bribery convention is the beginning, not the end, of a concerted global anti-corruption campaign. Efforts to improve corporate governance, especially in the provision of transparency in corporate transactions, in accounting and auditing procedures, in purchasing, and in all of the myriad individual business transactions is a large scale effort. Sound corporate governance mechanisms target the supply side of corruption the private sector. Thus, the private sector needs to become engaged in building effective anti-corruption strategies.

The Center for International Private Enterprise (CIPE) has recently conducted a survey investigating corporate governance and anti-corruption perceptions among its network of think tanks, business associations and policy development institutes around the world. The findings buttress the direct link between corporate governance and anti-corruption initiatives. While many realize corruption is a problem in their countries, certain constituencies may not be allies in fighting the problem since they will lose if anti-corruption measures are put in place. Those surveyed highlighted corporate governance mechanisms accounting standards, financial market and ownership regulations, independent judiciary, privatization and public sector restructuring as key tools in combating corruption.

CIPE has concentrated its efforts on establishing linkages between corporate governance and anti-corruption. Realizing that corporate governance ultimately depends upon public-private sector cooperation to create a competitive market system, CIPE is working to highlight why corporate governance is of direct concern to countries focusing on democratic development, and especially on corruption/rule of law issues.