Prior to the 1997 Asian financial crisis, it seemed as though corporate governance was largely an Anglo-American concern. The Asian crisis was attributed by many observers to the lack of accountability of major corporate groups in the crisis countries and the resultant debilitating effects on the national economies of their over-investment, over-indebtedness and lack of profitability. In their assistance to the crisis countries, the International Monetary Fund, World Bank and Asian Development Bank insisted that corporate governance be accorded a high priority on the agenda for recovery and reform. The Organisation for Economic Cooperation and Development (OECD) Principles of Corporate Governance were adopted in 1999, giving global legitimacy to a set of standards which transcended any single country, legal system or legal tradition. Yet it was English and American institutional investors, businesspeople, politicians and academics who were most active in calling for improved corporate governance, and English and American companies which were put forward as the corporate models to be emulated.
But then, starting in 2001, a tidal wave of corporate scandals began to engulf the American corporate scene. The collapse of Enron and Worldcom, the closure of leading accounting firm Arthur Anderson and widespread examples of accounting fraud, criminal conduct and greed among leading corporate executives shook confidence in corporate America and revealed fundamental flaws in the functioning of the American system of corporate governance. It had been thought that the prevalence of independent directors on corporate boards, the extensive use of board audit committees, high levels of legally mandated disclosure, vigilant regulators at the Securities and Exchange Commission, strong independent gatekeepers in the auditing, legal and investment banking communities, activist institutional investors, a legal environment where disgruntled shareholders were not reluctant to challenge corporate behaviour in the courts, an informed and vigorous financial press, and deep trading markets would prevent abuses. They did not. While subsequent scandals overseas served as a reminder that such failings were not distinctly American, there were many who thought that the momentum for corporate governance reform outside the United States would abate, as the principal proponent of reform was humbled and the principal models for emulation dramatically demonstrated to be flawed.
The principal reform legislation in the United States in response to the scandals, the Sarbanes-Oxley Act of 2002, passed Congress into law in considerable haste and was labelled even by longstanding advocates of corporate governance reform as containing many provisions which were out of step with prevalent thinking about best practices. Critics outside the United States considered Sarbanes-Oxley a rush to judgement and initially saw little in the legislation which had relevance to Europe, Asia or Latin America.
Yet as 2004 unfolds, these concerns for the pace of corporate governance reform seem unfounded. The momentum of corporate governance reform has quickened and initiatives for reform, learning from American experience, touch almost every country in which shares are publicly traded. In response to extensive Commercial Code amendments in Japan, some of its leading companies have adopted a corporate governance system relying heavily on independent directors and a proactive board, in a significant departure from the prevailing pattern of management-dominated governance. Korea has recently authorised securities law class action lawsuits. China is beginning to experiment with shareholder group litigation, while independent directors are required on the boards of all listed companies and Chinese accounting rules are being brought into line with international standards. Institutes of directors have recently been formed in a number of countries, and professional training for independent directors is becoming widely available. The investigative and enforcement powers of securities regulators are being strengthened by legislative reforms, enhanced budgetary resources and greater international cooperation among such regulators. Surprisingly, the `radical reforms' of Sarbanes-Oxley are being seriously considered beyond American shores, and its reforms selectively adapted.
The reasons for this quickening are severalfold. Economic liberalisation in many countries is helping to reduce domination of the economy by a small number of oligarchs or by the state: banks are reducing their shareholdings of affiliated industrial companies and the state is privatising businesses previously conducted in the public sector, both to improve their efficiency and competitiveness and to help the state by using privatisation proceeds to meet budgetary deficits. With such liberalisation, there is greater reliance on the stock markets, as banks and the state sell their shares into the markets. Globalisation has also increased the role of foreign investors in local share markets around the world, particularly that of foreign institutional investors, who are among the most committed to ensuring high standards of corporate governance in the companies and countries where they invest. Similarly, with globalisation, the largest companies at home are often listed on the New York or London exchanges and subject to their rules; in various ways this tends over time to feed back into, and influence, home market standards. And, ultimately, given the size of the American capital markets, their global character (as the markets in which shares of the largest American companies doing business globally trade, and in which shares of many of the largest non-American companies doing business globally also trade), and the five decades-long influence on other countries of the American model of securities regulation, American experience is almost always considered and often modified to meet local conditions, but seldom ignored or totally rejected.
Barry Metzger is a senior partner of Coudert Brothers LLP, based in its New York office, and previously served as General Counsel of the Asian Development Bank. This article is based on Mr. Metzger's introduction to the Global Corporate Governance Guide 2004: Best Practice in the Boardroom, published by Globe White Page Ltd. in London.