ethics, and capacities are required. In East Asia and in other emerging economies, financial crises and scandals show that there is much to be done. This has become a high-priority area for the reform of the financial and corporate infrastructure. Reforms rely, on the one hand, on the adop- tion of international standards and, on the other hand, on the strengthen- ing and capacity building of the accounting profession. In most countries the availability and quality of accountants proves to be the stronger con- straint on the implementation of sound practices.
In recognition of the link between public and private sector gover- nance, several countries have gone a step farther and have used the development of internal controls in the private sector to support an anticorruption drive at the national level.1 In Italy, for example, the anticorruption drive, “Mani Pulite” (“Clean Hands”), pushed for bet- ter corporate governance with a focus on transparency and disclosure and on internal company systems. Mandatory requirements were included in the Legge Draghi/Codice di Autodisciplina legislation of 1994.2
Korea has followed a similar path. An anticorruption act passed in 2001 stresses the responsibilities of all components of society, and article 5 states, “Private enterprise shall establish a sound order of trade as well as business ethics, and take steps necessary to prevent any corruption.” This reflects an ongoing trend in the Korean private sector, led by the Federa- tion of Korean Industries, to improve corporate governance (see box 6.2 in chapter 6).
Since the Asian financial crisis of 1997, Korea, Malaysia, and Thailand have taken steps to bring their accounting standards into line with those set by the International Accounting Standards Board (see box 5.3). A key target of those reforms is the accounting profession, which is compara- tively underdeveloped in East Asia both in quantity and in quality. Over- sight mechanisms have been reviewed and implemented by strengthening professional accountancy bodies (as in Thailand), introduc- ing regulations, and improving the enforcement of the regulations (Nabi and Nowroozi 2002).3
OECD, the World Bank, and the Asian Development Bank are actively supporting reforms in this area.
Link between Corporate and Public Governance Agendas
The connection between public and private governance is widely recog- nized, especially since the financial crises of the late 1990s revealed the
Box 5.3. Capacity Building: The Korean Institute of Certified Public Accountants
The 1997 Asian financial crisis and its aftermath have underscored the need for auditing standards and practices that are transparent and con- sistent with international standards and practices.
Prior to the crisis, the Korean Institute of Certified Public Accoun- tants (KICPA) was a not very active professional organization. Its role was fully revisited after 1999 with an emphasis on capacity building.
Its main purpose is to improve the skills and knowledge of 3,000 active practitioners in the proper application of the international accounting standards adopted in 1999. Its activities include (a) development of practical interpretations of the Korean Auditing Standards and trans- lation into Korean of international technical pronouncements in audit- ing; (b) development of educational materials for continuing professional education for practitioners; (c) workshops to promote best practices in audit; and (d) seminars to enhance understanding of the respective roles of the audit committee, the internal audit, and external auditors; and (e) best practices and interrelationships between the var- ious intervening bodies . This initiative was supported by the World Bank and by a grant from the ASEM Trust Fund.
Box 5.4. OECD Principles of Corporate Governance
The 1999 OECD principles of corporate governance target five key areas:
• The rights of shareholders
• Equitable treatment of shareholders
• The role of stakeholders in corporate governance
• Disclosure and transparency
• The responsibilities of the company’s board.
pervasive effects of combined failures in both (Backman 1999). Country by country, the quality of corporate governance appears to be highly cor- related with the prevalence of corruption in the country at large.
Academics, analysts, and financial institutions are issuing a growing number of tentative ratings of the quality of corporate governance at the country level. Not surprisingly these ratings are closely aligned with rat- ings of countrywide corruption (box 5.5).
This connection is consistently emphasized by policymakers and by international institutions such as the World Bank, the OECD, and the Asian Development Bank, to the point where making a contribution to the fight against corruption is a rationale for the corporate governance agenda. This is clearly reflected in the priorities of the Global Corporate Governance Forum, an advocacy organization sponsored by the OECD, the World Bank, and bilateral development institutions (see <www.gcgf.org>). The same view is promoted by NGOs, both regional (notably, the institutes of
Box 5.5. Corporate Governance and Countrywide Corruption
Crédit Lyonnais Securities Asia (CLSA) rated 25 main emerging markets, mostly in Asia and Latin America. The results are shown in the figure. The rat- ing, on a 1–10 scale, weighs five factors: rules and regulations, quality of enforcement, political environment, adoption of international accounting and auditing practices, and mechanisms for promoting good corporate governance.
Source: Crédit Lyonnais Securities Asia, Emerging Markets (April 2001).
Hong Kong (China) Singapore
Indonesia
Philippines
Taiwan (China) Malaysia
Korea, Rep. of Cambodia
0 1 2 3 4 5 6 7 8
0 2 4 6 8 10
Transparency International Corruption Perceptions Index
Corporate governance score
Best Best
Corporate Governance and Corruption Ratings, Selected Economies, East Asia
Worst
Thailand
corporate directors established in some Asian countries) and global, such as Transparency International and the Center for International Private Enterprise (see Sullivan 2001).
Indeed, both public and corporate governance reforms rely, loosely speaking, on the same set of principles and values: transparency, fairness, and accountability. They target groups of people that are most often closely related (business and government elites). For listed companies, internal controls are the nuts and bolts of good governance. And the requirements for transparency and disclosure that are fundamental to sound financial markets and responsible private sector development directly support anticorruption efforts through compliance programs.
Regulatory reforms and capacity building in accounting have direct rele- vance for the implementation of the corporate governance agenda when it comes to transparency and disclosure.
At the Company Level, a Less Than Straightforward Relationship between Governance and Business Ethics
Strictly, corporate governance focuses on the publicly held corporation and the relationship between management and shareholders, with a strong practical emphasis on the role of the board and the protection of minority shareholders. These concerns of corporate governance are only remotely related to the design and management of systems to deal with fraud or resist extortion.
Corporate governance reforms target only the tip of the corporate ice- berg—that is, publicly held companies. Furthermore, the design and implementation of ethics and compliance programs is clearly a manager- ial responsibility. But the research reported here proves unambiguously that company programs can be implemented under any form of owner- ship (widely or closely held publicly owned corporations, privately held corporations, and family-owned businesses). It also shows that internal controls are not directly the consequence of the management-shareholder relationship and are universal in scope and principles.
Ideally, a culture of compliance and smooth corporate governance should go hand in hand at the company level, but this is not always the case. Within the past few years, companies with respected and exem- plary compliance and ethics systems have been embroiled in major cor- porate governance controversies, particularly with regard to the compensation and retirement benefits of current or former executives.
Another illustration of this difference in perspective can be found at the country level in Korea, where the public and private agendas are backed by different constituencies. The Federation of Korean Industries has developed an effective initiative to promote compliance programs in
large corporations, while at the same time, shareholder activists who are active in urging the corporate governance agenda are targeting the same organizations.4
The Role of the Board in Listed and Nonlisted Corporations
Despite the important differences in focus and audience, ethics and com- pliance are usually strongly linked with some good corporate governance practices. This is especially true for governance principles that are inde- pendent of the ownership structure—in particular, the duties and respon- sibility of the board.
Boards and their committees are increasingly involved in promoting ethics and monitoring compliance worldwide, as noted in chapter 4.
Among the companies surveyed by the Conference Board, only 21 percent of the boards were involved in drafting ethics codes in 1987, but 78 per- cent were playing such a role by 1999.
In Japan corporate governance improvements, especially at the board level, have gone hand in hand with the development of integrity systems.
During the 1990s, in many large corporations the role of the board was reasserted, with the visible result being drastic reduction of board size for the sake of effectiveness. At the same time, ethics became an area of board involvement. In most instances programs have been developed under board supervision and, in a few cases (notably, that of Sumitomo), with significant leadership by a board member.
In this context proper director education is considered key, especially by a number of leaders in East Asia, to the promotion not only of sound corporate governance but also of corporate ethics. Institutes of corporate directors are the crucial organizations. Their role is to bring more profes- sionalism into directorship, focusing both on trust and duties and on eth- ical standards. In countries such as the United States, the United Kingdom, and Australia institutes of this kind have existed for decades.
The services they provide include:
• Research and independent policy advice to government
• Education and professional development
• Information services
• Networking (exchange of views and sharing of experiences among professionals).
Such institutes have been established in most emerging economies in East Asia and have created an active network for exchanging informa- tion, carrying out regional research, and harmonizing training content (see box 5.6; see also box 6.11 in chapter 6).
The quality of corporate governance in affiliates is critical to the effective- ness of a company’s anticorruption strategy, particularly in the common case of minority joint ventures. This is an obvious concern for a large oil, mining, or utilities corporation (see chapter 4 and case studies in part II for specific examples), but it is also a challenge for companies with intra- Asian investments, especially if their headquarters are in countries with little or no corruption. As a Singaporean businessperson observed, it is important “to continually push the limits” but at the same time to be real- istic about the prospects for improvement, especially when the prevalent business culture does not traditionally rely on codified ethics and gover- nance standards.
Finally, listed companies experience more pressure to adopt sound internal systems. Increasingly, corporate governance–related codes and guidelines applicable to listed companies in emerging economies refer to compliance systems or, more generally, to business ethics (box 5.7).