PARIS -- Call it the $100 billion question: can developing countries effectively adopt modern corporate governance practices?
Eager to avoid a recurrence of last year's financial crisis, when $100 billion in international capital was yanked from Asian markets, top officials at the World Bank and the Organization for Economic Cooperation and Development have put forward a major new initiative that encourages developing countries to adopt minimum standards of corporate governance.
The initiative is designed to provide a stable, lower-priced flow of international capital to developing markets by advocating standards that include improved disclosure, independence of corporate boards and enhanced rights for shareholders.
A memorandum of understanding signed June 21 by World Bank President James Wolfensohn and Secretary-General of the OECD Don Johnston creates a Global Corporate Governance Forum comprising major international agencies and professional and technical bodies representing regulators and standards-setters to discuss and coordinate efforts on a global scale.
Using a public-private partnership model, the memo also establishes a Private Sector Advisory Group chaired by corporate governance expert Ira Millstein and comprising business leaders from around the globe. The group will assist local business in understanding and adopting modern corporate-governance practices.
"My view is the key to attracting global capital is what this is all about. We are trying to create a world where capital flows into everywhere, but particularly where it is needed, into emerging markets," said Mr. Millstein, who also is senior partner of New York law firm Weil, Gotschal & Manges.
When companies are governed properly, they have better access to capital at cheaper rates, he added. "Without that, you have casino rates."
The initiative ties into the central missions of the two founding organizations: for the Washington-based World Bank, stable capital flows will help eliminate poverty; and the Paris-based OECD is focused on international cooperation to achieve economic and social progress.
The Asian catalyst
While efforts to disseminate Western-style corporate governance standards have been in the hopper for some time, last year's financial crunch brought the issue to the top of agenda.
During the peak of that crisis, U.K. Chancellor of the Exchequer Gordon Brown, speaking as chairman of the Group of Seven finance ministers, urged adoption of international corporate governance guidelines then being developed by the OECD, and their application to developing markets.
"I think the crisis we have seen in East Asia, followed by what we saw in Russia and, later, Latin America, convinced governments that they have to improve the system of corporate governance," said Magdi Iskander, director of the World Bank's Private Sector Development Department, who is the World Bank's point man on the initiative. Joanna Shelton, the OECD's deputy secretary general, is taking the lead for that organization.
In addition, Anne Simpson, formerly joint managing director of U.K. corporate governance adviser PIRC Ltd., London, has been hired to staff the project from the World Bank's Washington headquarters.
Mr. Iskander said the issue is not only to encourage stable international flow of funds, but also to increase domestic savings and ownership. "An even more important consideration is we would like to use this reform as a way to increase savings in the local community as a way to provide stable long-term financing, and also to have a broader share of growth in the country itself," he said.
Will it succeed?
The question is whether Western-style standards will be embraced by local countries, especially given resentment of deficit-reduction programs imposed by the World Bank as part of loan packages.
Peter Clapman, chief investment counsel for New York-based TIAA-CREF and who worked on development of the OECD guidelines, said the emerging market companies are competing for capital in a global market. To the extent that corporate governance practices are lacking, it will be tougher for them to obtain capital at a reasonable cost.
Success of the program will require a combination of local policy-makers pressing the issue and deciding foreign investment is important to local economies, he said.
Mr. Iskander said a program will be developed within each country, and solely on a voluntary basis, although it could emerge as part of World Bank loan programs. First, the forum will bring together government officials, business leaders, investors, bankers, regulators and others in local meetings to sensitize them on corporate governance issues.
The next step will be for individual countries to assess their own corporate governance practices. Then investors will be surveyed on their attitudes.
A program for action will then be created, looking at policies and institutions requiring change. This will include legal and regulatory reforms, training programs for directors, strengthening auditing practices and improving regulatory oversight.
Such a program has been started in Russia, where corporate governance abuses have been rife. Share dilution, asset-stripping and inadequate protection for creditors have hampered the ability of Russian companies to raise capital.
As a result, the OECD and World Bank set up a roundtable this spring to promote good corporate governance, generate discussion, identify ideas for further work and make policy recommendations with senior Russian governmental officials, businessmen and others.
Private sector role
While the World Bank and OECD will head up the governmental side, Mr. Millstein's private sector advisory group will bring in corporate executives and others who can relate to their local counterparts. Individuals who have agreed to participate include: Ratan Tata, an influential Indian business leader; Jonathan Charkham, a former adviser to the Bank of England; Yoh Kurasawa, chairman of the Industrial Bank of Japan; and John Biggs, chairman and chief executive officer of TIAA-CREF.
Mr. Millstein said he will recruit additional private-sector experts around the world, such as CEOs from developed countries. "If I can find the right kind of people who can go out and talk, private-sector people, they can be much greater ambassadors than a bunch of bureaucrats or academics," he said.
Other corporate-governance experts lauded the initiative.
Brad Pacheco, a spokesman for the California Public Employees' Retirement System, Sacramento, said: "I think it's a good thing for all investors, including CalPERS."
Added Carolyn Brancato, director of the Conference Board's global corporate research center in New York: "This can only help to raise the standards of governance." The Conference Board, which is developing its own program to work with private companies around the world on corporate governance issues, will work with the World Bank and the OECD, she noted.