Sunday, August 25, 2013

Do Economies Need More Than Just 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?

This raises some interesting questions, where for example some may argue that corporate reform is required in first world countries, let alone emerging markets; where Board structure has been debated for years and yet actual change is taking a lot longer than it should. But as mentioned below, many first world countries may also need to look at political reform, where ‘governments’ need to change their priorities from ‘selfish re-election’ policies to actually putting their country’s development first.

Paul Coombes and Mark Watson mention that “over half 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 on from this article that the governance models of the United States and the United Kingdom have not responded to the advice and rhetoric; and where some emerging markets actually responded quicker to institutional problems, for example, enforcing credit controls prior to the global crisis – in the process showing strong and intelligent leadership, which though rarely spoken about in ‘the West’, made these emerging markets much stronger than their first world counter parts.

It’s as if some first world governments and their industry advisors, were so caught up in their own invincibility, that they 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.

Like it or not, financial control is a basic requirement of an economic system and the global economic crisis still holds many unanswered questions, including how first world countries managed their failure during this time and what can be learnt by it? Governments and industry leaders seem to have a magical power to be able to sweep embarrassing mistakes under a very large carpet – often arguing that it’s better for the ‘countries’ economic standing to ‘forget and move on.’ But without proper analysis and review there is a real danger that lessons will never actually be learnt.

Unfortunately embracing proper and good governance is still lacking within politics and industry on a global scale. Board composition is just one part of this important ‘equation’ which still needs a lot of attention – but pressure must be put on governments to focus beyond their tenure and to focus on sustainable national growth – where the stakeholders of a nation aren’t just its citizens today but are the generations to come.

The selfish pursuit of short term power and fame in politics and industry has done enough damage to the economies of too many countries already, including the US, Greece, Ireland, Portugal, Spain, 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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