Better Governance and Increased Competitiveness

12.06.2005

Do boards of directors have a much more important role to play in developing economies than they do in developed ones? “Yes!” says a new article by McKinsey Quarterly (subscription only). The reason is straightforward – weak institutions. In developing economies, external institutions – such as judiciary and corporate governance regulations – are weak, and strong boards have a potential of becoming an internal governance mechanism – “the most robust line of defense” against corporate misconduct. The article identifies several problems that threaten the effectiveness of boards in developing economies and they include shortage of experienced directors, inadequate supply of information, and underdeveloped legal regimes.

How, then, do you create strong and effective boards of directors? Russian Institute of Directors (RID) is a worthy model to look at. RID’s programs rest on the belief that effective boards of directors are a must if corporate governance is to take root in a country. Among its many activities, the organization supports the development of professional standards and codes of ethics, conducts training programs for directors, and has created the Russian network of board executives.

Although RID has been instrumental in improving the quality of board members in Russia, its programs accomplish much more than building effective boards and improving corporate governance – they increase the competitiveness of Russian firms and, thus, the Russian economy. In a big scheme of things, RID was able to address the Soviet legacy of the Russian private sector – a lack of professionals who have the knowledge of how to govern companies in a new, global economic environment. And it was able to combine the “knowledge” aspect of effective boards with the “rules of conduct” aspect of it to develop a model program benefits of which stretch far beyond individual companies.