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History tells us that along with trade, management practices and standards also flow. But will WTO membership for China impact on the corporate governance of these companies will be an important point to explore. Xu Binglan reports in China Daily:

Academics at Beijing's University of International Business and Economics and Victoria University in Melbourne, Australia hope to redress the balance with a joint project entitled Corporate Governance in Post-WTO China.

Chinese companies and regulators first became aware of corporate governance in the mid-1990s, when some Chinese firms sought to meet requirements in order to get listed on overseas stock exchanges.

As China's economic policy makers and regulators decided to expose Chinese companies to international competition which will certainly become more intense as a result of China's joining of the WTO they see good corporate governance as being linked to the confidence of investors to invest in Chinese companies.

The regulators therefore attempted to align Chinese corporate governance practices more closely with international standards.

Academics participating in the project agree that China's joining of the WTO will serve as a catalyst for improving Chinese enterprises' corporate governance.

But this improvement will only be evolutionary, not revolutionary, they said.

Roman Tomasic of Victoria University said China joined the WTO when many business practices and related laws were converging in different parts of the world.

This convergence was often attributed to the effects of globalization and the growth of international financial and trading markets, he said.

It is common for firms to stick to a series of internationally accepted standards when they act globally, Tomasic said.

The principles of corporate governance issued by the Organization for Economic Co-operation and Development (OECD) are a good example of this type of global convergence.

Tomasic said that there are many respects in which Chinese corporate governance practices are becoming indistinguishable from foreign models that may sometimes be used in China.

The pace of change of China's economic and legal changes following WTO entry lends some support to the hope that corporate governance principles and practices will be embedded to a great extent in corporations, he said.

Chinese companies' adoption of corporate governance principles is likely to be accelerated by the forces of globalization and the listing of Chinese companies on a variety of exchanges in different parts of the world, he added.

But this global convergence does not mean the total unification of business practice laws.

This convergence may be superficial in some respects, and more deeply based in others, Tomasic said.

Many historical, cultural and political factors could prevent a full convergence or coalescence from occurring, he said. In addition, it is unrealistic to expect complete and inflexible compliance with its codes and principles.

"This has not happened in Australia or the United States and it is unrealistic to expect that it should occur in China," Tomasic said.

"In China, the existence of the Confucian and planned economy traditions have left deep impressions in the social fabric and on the economic landscape."

In fact, China has its version of codes.

Corporate governance codes issued by the China Securities Regulatory Commission are in the same spirit as the OECD principles.

Many difficulties will naturally be encountered when the rules are being implemented in a transitional economy like China.

However, self interest rather than social responsibility or punitive measures will ultimately drive the implementation of such codes and it is necessary to develop economic incentives to ensure that such codes are adopted and that they are meaningful, Tomasic said.

Independent directors

A study of the required introduction of independent directors by Chinese listed companies can serve as an example of the difficulties in the implementation of the codes.

The appointment of independent directors is one way in which corporate governance can be improved in China.

Listed companies are already obliged to hire independent directors, this means that they do not own shares in the companies they work for and do not have any other responsibility in the companies.

Their role is to consider the overall interests of the company and the shareholders, rather than any sectional interest.

In order to prevent those owning and controlling the corporation the directors and managers from acting for their own private benefit at the expense of the shareholders, independent directors were introduced as a means of providing "checks and balances" to the conduct of executive directors. In addition, it also prevents a situation where a majority of shareholders are able to dominate the decision-making process of the directors can abuse their power and position to the detriment of minority shareholders.

But implementation of the guidelines has not been easy.

Difficulties include a lack of qualified independent directors, an inability to introduce "external" directors to sit on the board of family companies and independent directors unable to perform their jobs properly.

In addition, as directors are not remunerated highly for the responsibilities they have and the fact the fine can be more than twice as high as their annual income, it is little wonder that people are reluctant to take up such positions.

A heavy monitoring burden is placed on the shoulders of these individuals who, at the end of the day, may be largely symbolic figures.

Margaret Wang, also from Victoria University, said the independent director system will only gradually become effective. To achieve this, independent directors' remuneration needs to be increased, more training should be provided for them, and some foreign independent directors may need to be fired.

Independent directors may look like symbolic figures today.

However, "we should not ignore symbols as they may point the way forward," Tomasic said.

(Source: China Daily 05/31/2004)

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The majority of local firms consider themselves as having complied with the general practices in corporate governance, according to results of a self-assessment survey conducted by the Securities and Exchange Commission (SEC) last year as per a report by Cynthia Rose A Garcia in TODAY.

While the survey showed that many companies are now conforming to increased transparency and disclosure practices, most still do not conform to numerous and equally important corporate governance practices, she says.

In a report, the SEC said the self-assessment survey results revealed the current state of good corporate governance among Philippine companies. Some 190 firms submitted corporate governance self-rating forms, which assessed a firm’s compliance with leading governance practices and principles, for the period January to June 2003.

“Local firms are inclined to comply with the best practices in corporate governance. The self-assessment showed 153 firms or over 80 percent of the respondents had ratings of over 4.00, i.e., the firms have adopted leading practices of good corporate governance in their manuals and have complied with minor deviations with these practices and principles,” it said.

The survey asked firms to rate their compliance between zero and five, with five as the highest score.

The SEC noted that most of the companies surveyed gave high marks for their compliance with disclosure and transparency, as well as shareholders’ benefits. Over 97 percent of the firms reported compliance ratings in the 4.51 to 5.00 range for disclosure and transparency.

However, local companies reported lower marks in complying with leading practices under the independent audit mechanism and organizational and procedural controls categories. The SEC cited 20 least-complied practices, such as developing a form for full business interest disclosure, establishing a procedure on executive remuneration packages, guidelines for directors on other corporate boards and developing a transparent financial management system.

“The SEC, together with its partner institutions, may have to review these specific good practices and principles so they can be made more understandable, applicable and doable for local firms,” it noted.

Other least-complied practices centered on audit mechanisms of the board. Many firms were found to have not been practicing the holding of audit committee meetings, review of audit recommendations, review and approval of audit plans.

On the other hand, local companies listed top 10 good corporate governance practices, such as setting up a mechanism to ensure stockholders’ rights, designation of a compliance officer and institutionalizing a process to ensure compliance with laws and rules.Good practices include understanding of management responsibilities, rotation of audit partner or firm every five years, explanation of significant variations in financial reports and policy to inform major and other shareholders.

“Most of these are basic or major policy statements to ensure good corporate governance practices and principles. Some local firms have adopted these practices even before their adoption in the manual of corporate governance,” the SEC said.

By sector, the survey showed construction and oil companies are leading in the adoption of and compliance with good corporate governance practices and principles. Construction firms reported an average 4.69 rating, while oil companies reported 4.67 rating. Banks also had a high 4.66 rating.

However, power and holding companies were found to have relatively lower overall compliance ratings. Holding firms reported a lower compliance rating of 4.24, while power companies had a 4.27 rating.

“Local firms in specific industries may need to focus on adoption of specific corporate governance practices…While [power and holding firms] have good compliance in other categories, these firms have relatively low compliance ratings in organizational and procedural controls,” the SEC said.

Last year, the SEC required registered firms to submit the self-rating forms. Among the 190 who submitted were listed companies such as San Miguel Corp., Ayala Corp., Benpres Holdings Corp., Philippine Long Distance Telephone Co., Globe Telecom, JG Summit, Equitable PCI, SM Prime Holdings, Manila Electric Company and Petron Corp.

The self-rating forms covered 99 leading practices and principles on good corporate governance. It detailed the roles and responsibilities of board of directors, management’s code of conduct, management strategy-setting and planning practices, organizational and procedural control mechanisms, independent audit mechanisms, and shareholders’ benefits and compliance system.

( Source: Today)

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THE imperatives for having a standard set of rules for corporate governance in today's regional and international contexts are strong. This is also the case about addressing the challenges that Bangladesh faces in adopting and adapting corporate governance principles and ideas. Concerted efforts by all concerned — investors, financiers, regulators, and the self-regularly bodies will be needed in order to ensure that our corporate governance practices do conform to the acceptable standards. Raising awareness among shareholders can here be an effective prod for actions. Without such actions coming in a synergy and not on a piecemeal basis, we can not look forward to any sustained growth of our capital market with investors' confidence being one of its key driving forces.

However, rules and regulations about corporate governance, whatever may be their transparency and relevance, in words and in terms of credibility, objectivity, disclosures and practices of professionalism, are only as good as their application. That is one key area where our track-record in almost every professional sphere is unfortunately not up to the mark. Our weaknesses in enforcement and application of laws, rules and regulations, professional codes and ethics are widely known. We need to improve the enforcement mechanism for this purpose.

Unfortunately, this is a reality in our country that the rules of the game in the realm of business for our much-vaunted goal of putting in place the conditions for a competitive market-oriented economy are more honoured by breach than by acceptance. Of course, ours' is not a unique case in this regard. Perhaps, many more countries are faced with similar, if not the same, problems. However, that does not provide an alibi for inactions on our part to change the situation.

If we want businesses to run, grow, flourish and prosper on the basis of competition, efficiency, entrepreneurial ability and skill rather than by connections, then we must put, on a priority basis, the basics right for creating enabling conditions for the purpose thereof. Otherwise, the syndrome of crony capitalism will become all too pervasive. We all know who pays the prize — political or otherwise — for systemic crony-capitalism.

The fundamental inputs for having a set of transparent rules and regulations for enforcing good corporate governance and a related code of behaviour are otherwise available now in Bangladesh. The strengthening of corporate governance does largely hinge on an effective legal system. Without a strong legal system in place, the mechanism will either function poorly, or fail to function at all. A strong legal system means, first of all, the presence of appropriate institutions that work for that matter, the related organs must be manned properly and adequately by persons of probity, integrity and skill in today's knowledge-driven global village.

Globally, corporate governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of businesses and corporations and the welfare of society, in general. However, the concept of corporate governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of the corporate entities. As a result, different people have come up with different definitions. Those basically reflect their special interests in the field.

The earliest definition of corporate governance, to recall here, came from Economist and Noble Laureate Milton Friedman. According to him, corporate governance is to conduct the business in accordance with owners' or shareholders' desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs. This definition is based on the economic concept of market value maximisation that underpins shareholder capitalism.
Apparently, in the present day context, Friedman's definition is narrower in scope. Over a period of time, the definition of corporate governance has been widened. It now encompasses the interests of not only the shareholders but also many stakeholders.

According to some experts, "corporate governance means doing everything better, to improve relations between companies and their shareholders; to improve the quality of outside directors; to encourage people to think long-term; to ensure that information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders."

According to some economists, corporate governance is a field in economics that investigates how businesses or corporations can be made more efficient by the use of institutional structures such contracts, organisational designs and legislation.

The seeds of modern corporate governance were probably sown by the Watergate scandal in the United States. As a result of subsequent investigations, US regulatory and legislative bodies were able to highlight control-failures that had allowed several major corporations to make illegal political contributions and to bribe government officials. That led to taking of some legal measures with specific provisions regarding the establishment, maintenance and review of systems of internal control. Subsequent developments in last few years that witnessed the collapse of Enron, Worldcom, etc., have led to see-saw changes in matters relating to corporate governance and auditing and accounting standards. Things are still unfolding in such areas. The latest available report suggests that private shareholders even in a developed country like the USA remain still sceptical about efforts there to improve corporate governance and want more to be done to restore their confidence. Such developments are not surprising in the midst of dynamics of today's fast-moving world.

In Bangladesh, time is ripe to make a beginning. The government can take the lead here. The issuance of an advisory circular covering corporate governance and auditing and accounting standards — and that too, of course, in consultation with various stakeholders — can be the pace-setter for good business practices.

It is relevant to point out here at this stage that the way the rest of the world looks at, or views Bangladesh has multiple aspects or dimensions — social, political, cultural and economic. There is no denying here that economic aspects of this international view do have implications for our efforts to attract investment, particularly from abroad. All high-performing developing countries have succeeded in attracting foreign direct investment (FDI). This fact cannot be glossed over.

In this context, the issues of corporate governance and accounting standards which embrace the issues of code of ethics and independence of professional accountants do have relevance to the attractiveness of Bangladesh, actual or potential, as a location for FDIs.

So far the economic view of the world community about Bangladesh is concerned, it is based partly on facts and empirical analysis and partly on perceptions. Perceptions are derived from a multiciplity of contacts and interactions that Bangladesh has with the rest of the world at different levels. Such levels include both inter-governmental and private ones, and embrace different spheres, both economic and non-economic. And perceptions derived from one sphere spill over to another and they are interrelated.

Here, the perception of international business is a relevant issue for all those who would like to see Bangladesh move forward in tandem with others. This is important because Bangladesh is increasingly integrating itself with the world economy. Certainly, we cannot opt out of the World Trade Organisation (WTO).

It has to be noted at this stage that perceptions are not immutable; they do change gradually over time. Our own efforts, driven by our own needs under the given circumstances, to change our situation for the better can change such perceptions. Corporate governance and auditing and accounting standards constitute, no doubt, one area where we need to make serious and determined efforts to exploit our advantages — whatever the same are — as an attractive location for doing businesses.
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This is an edited version of a presentation made by Moazzem Hossain to a seminar organised this week by the Institute of Chartered Accountants of Bangladesh . (Source: Financial Express, June 15, 2004)

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