PBEC-APEC Joint Workshop On Corporate Governance
Ladies and Gentlemen. It is an honor and a pleasure to be with you today at the 33rd International General Meeting of PBEC, and not only because the meeting is being held in beautiful Hawaii. PBEC, which is more than two decades older than APEC, has long played a key role in bringing together representatives from business, academia, and government in trying to bring the economies of the Pacific closer together. APEC benefits from the thoughtful analyses and recommendations which come to APEC from PBEC from meetings such as these.
I welcome the opportunity today to participate in the PBEC-APEC Joint Workshop on Corporate Governance. It comes as no surprise that corporate governance is on the agenda. A two-day symposium, sponsored by APEC's Economic Committee, in Tokyo last December under the theme "The Future of Asia Pacific Economies" concluded that lax corporate governance in Asia had, indeed, been a major cause of the crisis, through over-investment, excessive conglomeration of businesses, and over-indebtedness. The failure of corporate governance systems to provide sufficient accountability to investors and regulators, many have argued, led to the imprudent financial and business practices which in the final analysis must take at least some of the blame for the financial crisis.
Many APEC economies have realised that development of better corporate governance systems should be a key component of the policy and structural reforms essential for a sustained recovery. There is now an appreciation that improving corporate governance practices is vital to:
- Restore investors' confidence and investment flows to the region; and
- Improve the competitiveness and performance of Asian firms, especially through increased efficiency in the allocation and use of investments.
In its broadest definition anything that contributes to an improvement in the accountability of the corporation and its efficiency can be described as an element of a corporate governance system. Just some of the specific elements of corporate governance include:
- the corporate regulatory and supervisory measures that governments put in place, - and the effective legal infrastructure that is required to ensure that these measures are enforceable;
- the market setting in which a corporation operates (in) - whether the corporation is driven to efficiency by having to compete in its market;
- the competitiveness of the financial market which the corporation depends on for credit and raising capital;
- the level of shareholders consciousness of their role in monitoring the management of the corporation; and
- the ability and commitment on the part of professionals such as corporate regulators, accountants, auditors and company directors to develop their capacity to carry out their functions in monitoring and managing companies as best as possible.
Recognizing the importance of the issue and the needs of its member economies APEC has put a high priority on its work on corporate governance. Like in much of its work, however, APEC's focus has been on exploring ways to be a catalyst of reform and to add value to its members own efforts in improving corporate governance, including by bringing together the work already being done in this area by other regional and international institutions.
The participants at the Tokyo Symposium, I have just mentioned, felt that the answer is not necessarily the adoption of corporate governance rules but rather the effective implementation of rules already in place. There was agreement that improving corporate governance should be seen as an ongoing structural reform process which will bring long-term benefits.
APEC Finance Ministers Process
While APEC's work on corporate governance has been carried out across a number of fora - reflecting the broad scope of the issue - APEC Finance Ministers, not surprisingly, have been the major contributor of ideas and initiatives. Specifically the work in the Finance Ministers process has included the following:
The APEC Initiative on Corporate Governance
Launched by Finance Ministers at their 1998 meeting in Kananaskis, Canada, this has been a long term and on-going project. Its first phase involved the preparation of the report "Strengthening Corporate Governance in the APEC Region" which contained a comprehensive analysis of the key corporate governance issues for the region and importantly a series of recommendations for APEC. The report was endorsed by Finance Ministers at their 1999 meeting in Langkawi, Malaysia.
Some of the recommendations of the report have already been implemented.
One initiative has been the commencement of a voluntary reporting process within the Finance Ministers meeting, whereby economies are encouraged to report on progress they have made in implementing corporate governance reform measures. This self-reporting process will provide an important role in keeping the momentum for reform.The report highlighted the importance of good accounting and disclosure standards to provide the necessary transparency for good corporate governance. In response APEC Finance Ministers have formed a Taskforce on Financial Statement Disclosure - as of March 2000 the draft terms of reference for the taskforce were being drawn up.
Prior to the finalisation of the report there were two other activities which contributed to the discussion on corporate governance in the APEC context:
- the symposium "Corporate Governance in APEC: Rebuilding Asian Growth" held in Sydney in November 1998 brought together business leaders, investors, corporate regulators, government officials and representatives from the World Bank and the ADB. The symposium was very useful in laying the foundation for APEC's work in the area of corporate governance
- the APEC Economic Governance Capacity Building Survey - an initiative of the Australian Government - published in October 1998 looked at what several of the crisis hit economies had done vis a vis improving economic and corporate governance and set out suggestions for additional capacity building activities. The survey has been a useful information tool both for domestic policy makers as well as a source of ideas for more international collaborative work.
The APEC Business Advisory Council is also working on corporate governance issues. At its recent meeting in February in Bangkok, one of its working groups explored the issue of corporate governance in the area of capacity building for Boards of Directors. It is likely that recommendations in the area of corporate governance will be included in its Report to APEC Economic Leaders which will be presented to the Leaders in Brunei in November.
Next Steps
At their meeting to be held in Brunei in September 2000 Finance Ministers will consider a forward work program, including the implementation of proposals contained in the "Strengthening Corporate Governance" report.
Capacity Building - Developing Skills
An important component of corporate governance is the ability of professionals such as accountants, company directors, auditors, corporate regulators and those in the judicial sector to carry out their function. Recognising this, the Finance Ministers have implemented various initiatives aimed at developing the skills of such professionals in the region. The most ambitious of these has been the APEC Financial Regulators Training Initiative, a program of training development for bank supervisors and financial market regulators of APEC economies. The program, which has a secretariat based at the ADB in Manila, is focused on improving training processes for these key regulatory sectors. Importantly the work in this Initiative avoids duplication of other training initiatives by international and regional financial institutions. There is now support for the development of more such programs for key sectors in the corporate governance system.
Development of bond and equity markets in the region
The over-reliance on debt financing by the private sector in the region was a major contributory factor of the financial crisis. Debt financing often does not encourage corporations to be as efficient as they could be. In order to make the region's corporate sector more efficient, competitive and resilient to future external shocks, APEC Finance Ministers have been looking at ways to encourage the development of deep and liquid domestic bond markets. To date the publication of a "Compendium of Sound Practices" and information sharing, including through the internet, has given member economies a foundation on which to develop bond markets. Finance Ministers have agreed that more work should be done in this area.
Other APEC Fora
Activities of other APEC fora also have very important implications for corporate governance. These include:
- APEC's work on competition and regulatory reform, building on the "APEC Principles to Enhance Competition and Regulatory Reform" which were agreed to in Auckland
- APEC's work to strengthen market infrastructure, in particular in the area of legal infrastructure development (including proposals put forward at the recent SOM in Bandar Seri Begawan by Japan)
- APEC's ECOTECH projects in support of institutional and capacity-building in the area of "strengthening markets".
Renewed Commitment in Auckland and at the First APEC Senior Officials Meeting
At their summit in Auckland in September 1999 APEC Leaders made a strong commitment to the reform of corporate governance in the region. In their statement, the Auckland Challenge, Leaders stated that they would work to strengthen markets, including by "Providing greater transparency and predictability in corporate and public sector governance". They also tasked their Finance Ministers to take forward the corporate governance agenda, including by "Developing and applying agreed corporate governance principles". At the recent Senior Officials Meeting held in Brunei, marking the start of Brunei's tenure as chair, support for corporate governance related activities was again reiterated, including its importance in the overall theme for APEC 2000:
"Delivering to the Community", and in particular the sub theme "Building Stronger Foundations".
The strong commitment from Leaders and Ministers augurs well for the future of APEC's work in this very relevant area. Most importantly APEC must now look towards the implementation of some of the good proposals that have already been put on the table.
I want to thank you again for giving me a chance to talk to you briefly about corporate governance and bring you up to date about how APEC is working on improving corporate governance regimes in the APEC region. I look forward to seeing the recommendations that come out of this workshop and the results from the PBEC meeting as a whole. As I said earlier, we in APEC value the contributions which PBEC has made, and undoubtedly will continue to make, to economic growth and development in the Pacific region.
Questions and Answers
1. In listening to your discussion of APEC's on-going work on corporate governance, I wonder whether any businesspeople are concerned about the official process doing, in a sense, too much on corporate governance. I guess the main fear would be officials imposing too many restrictions on corporations in the wake of the financial crisis. Can you comment?
Ans.: Personally, I would not be too worried that such developments might come out of what APEC is doing. Business provides input to what APEC does at all levels, from the Leaders down to the working group level. Thanks to this and the fact that APEC works on a consensus basis, it would be highly unlikely for APEC to endorse steps in the area of corporate governance which would not be supported by most businesses themselves.
2. Is there a concern that, now that most economies are recovering well from the 1997-98 crisis, the push for reform might slow?
Ans.: I think it is important to note that some of the calls for progress in corporate governance are coming from the businesses themselves. I think many businesspeople realize that weak systems of corporate governance pose a danger both to weak and to strong businesses. Improving corporate governance is to the benefit of all: the economies, the shareholders, the consumers, and the workers who stand to lose their jobs when companies fail.
Throughout the region, there is widespread interest in doing everything possible to prevent such crises from recurring. Improving corporate governance is not only one way to do that, it is also a way to improve the efficiency of the economies themselves. In a real sense, the crisis merely exposed a serious structural problem in the system which always needed fixing. Not only APEC, but the economies themselves, realize that reforming the system should not be delayed. Investors, both domestic and foreign, will demand these changes before bringing back their capital.
3. Shouldn't corporate governance be something that businesses and business organizations work out themselves?
As I mentioned earlier, APEC's view at this point is that there is a need to enforce governance systems already in place, not to propose new layers of regulation. APEC officials are also looking to themselves to improve their own skills in enhancing governance. The variety of projects under the Finance Ministers Process address that very need. The projects accept that, in these days of high technology, e-commerce, and cutting edge financial instruments, the officials who monitor these sectors need training so they can carry out their jobs effectively and handle the new challenges they face in today's rapidly changing world.