Sunday, October 2, 2011

Who Is Setting the Example for Corporate Reform?

Despite the efforts of national governments and international organisations to improve corporate governance in emerging markets, the response of the companies themselves has been underwhelming. Many companies ignore the initiatives - which primarily involve reform of boards of directors - or just pay lip service to them. Little attention is paid to the directors' qualifications, even when reforms are mandated, as they are in South Korea, where 25 to 50 per cent of a company's directors (depending on its size and sector) must now come from the outside. Could the problem be that the would-be reformers are focusing on the wrong reforms? (p.89).

Paul Coombes and Mark Watson mention that “over half (55 per cent) of the respondents in a recent McKinsey survey of private equity investors said that reform of the institutional context – reform driven by governments, local stock exchanges, and regulatory watchdogs - was at least as important as reform of companies. Within the institutional context, the two main concerns were weak enforcement of legal rights and the management of the economy,” (p.91).

What’s particularly interesting about this 2001 article is that they state that “the corporate-governance model usually prescribed is the one that prevails in the United States and the United Kingdom. Its emphasis on shareholder value reflects the environment in those two countries, where a very large, dispersed class of investors, with no prior connection to the companies listed on the public exchanges, insists on boards that are similarly independent. These investors also demand a high level of financial and business disclosure,” (p.90).

Yet we see ten years later that the governance models of the United States and the United Kingdom have not stood up to the test – and maybe it was assumptions like these that have let first world organisations and their external analysts, become over-confident about their ‘real’ operational control. In fact contrary to the article some emerging markets were enforcing credit controls prior to the global crisis – showing strong leadership, which though never spoken about, made these emerging markets much stronger than their first world counter parts.

It’s as if the first world economies really didn’t believe they could be affected by a ‘global crisis’ in such a catastrophic way, compared to their ‘lowly’ counter-parts around the world - proving once again that arrogance is the worst predictor of future success.

Going beyond the mistakes of some of the top organisations and their respective analysts – another question that seems to have been cleverly avoided is; ‘how have first world countries managed their success or rather failure?’ If a CEO or CFO allowed their organisations to accumulate a tenth (or even less) of the debt some first world countries have amassed – they would not only be fired but criminal charges would swiftly follow.

I reckon we’d all be reasonably ‘successful’ to the outside world, if every time we mismanaged our finances, we could simply borrow more – wow, what a life that would be. People are often critical of family or friends who mismanage their finances and ‘over-extend’ themselves – going for expensive cars or holidays when they can’t afford them. Yet not only is no one, seemingly, being held accountable for the debt crisis in these first world countries – worse still, without a care in the world, they will spend billions of dollars (or pounds) on wars around the globe – while their people back home are suffering.

What example does this set for the next generation when it comes to financial control – I can hear sons and daughters in the not so distant future arguing that they might be in debt, but would still like mum and dad to bail them out, considering they’ve managed their finances better than the US, Greece, Ireland, Portugal, Italy and numerous other countries.

So where are the leaders of the future who are going to put organisations and countries back on a ‘real’ sustainable path of growth and success, rising above the game playing both with their respective organisations or the lives of their citizens?


Coombes, P. and Watson, M. (2001). Corporate Reform in the Developing World. The McKinsey Quarterly, No. 4, p. 89-92.

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