Conference 4-6 July 2007, Trevor A Manuel, MP, Minister of Finance, South
Africa
4 July 2007
Master of Ceremonies
The ICGN Board, headed by Mark Anson
The ICGN Secretariat and its Executive Director Anne Simpson
The Head of the Conference Organising Committee Phil Armstrong
The Head of the South African Planning Committee Geoff Rothschild
We are honoured to have with us:
Charlie Maccreevy, EU Commissioner for the Internal Market and Services,
Ireland
Roel Campos, Commissioner Securities Exchange Commission, USA
Distinguished delegates
There was a time, long before it was thought useful or responsible to
connect the words 'corporate' and 'governance,' when it was understood that the
privilege of corporate identity has its roots in an act of government charter:
that it is the law that makes possible the separation of a corporation from its
shareholders or owners, and it is the law that defines the special privileges
and obligations of directors in their agency role between stockholders and
managers.
These special arrangements have provided a powerful engine of economic and
technological progress: simple proprietorships or partnerships could not have
mobilised the capital, or taken the industrial risks or combined resources on
the scale that has been possible in the modern corporation. But there have
always been risks of abuse or exploitation of these privileges, and so there
has always been a struggle against the veil of secrecy that protects corporate
decision-making. Indeed, modern company law and labour legislation are at least
in part about lifting this veil and imposing civilising standards in the
boardroom and the corporate workplace, precisely because the power of an
undisciplined charter is so great, and its obligations so easily corrupted.
Adam Hochschild's book, 'King Leopold's Ghost,' provides an eloquent
reminder of just how extreme the human horrors were that accompanied
exploitation of central Africa's ivory, rubber and mineral resources behind the
veil of an unconstrained corporate charter. He also reminds us of the courage
and persistent application of those who uncovered and opposed the pillaging and
rape of Africa's heritage and people, in newsletters that were distributed
through charitable organisations and in public petitions, Sunday sermons and
occasionally successful lawsuits, and through popular resistance and acts of
sabotage. The corporate extravagances that have captured headlines in more
recent times have perhaps more often involved financial treachery than human
brutality. But it is still the case, in the 21st century, that respected
corporations take advantage of exploitative labour conditions or weak
environmental standards in developing countries. And it is still the case, in
the 21st century, that human rights organisations, investigative journalists
and local anger play at least as prominent a role in exposing the abuse of
corporate power as do official multilateral agencies and national regulatory
bodies.
And so it is still the case, even with the great expansion of corporate
statutes and the codification internationally of rights and responsibilities
and obligations in more detail than any of us have patience for, that the law
is not enough.
The law is not enough, and we surely would not want to live in a world in
which we relied only on the law for the protection of human worth and the
integrity of social partnerships.
If the law is not enough, then compliance with the law is not enough, and we
have to put the spotlight also on what we understand by fiduciary
responsibility and corporate identity.
Indeed, it is possible that the law and its compound multipliers in the form
of regulatory agencies and their minutiae of instrumentalities try to do too
much, and so the resulting culture of technical compliance, often delegated to
secretarial officers, is counterproductive. It is not so much that the law is
inadequate, which it is, or even that every codification leads to a plethora of
innovative reactions which themselves require regulatory response � it is not
so much this ever-widening scope of the formal constraints, but it is the
complementary relaxation of discretionary judgment in the boardroom that is of
concern.
The problem of an undue burden of formal compliance is rightly on your
conference agenda, and your programme convenors have been so bold as to
question whether regulators are a help or a hindrance. There will be lively
discussion of this, I am sure: let me simply suggest that the answer depends at
least in part on how directors and managers respond to regulatory
interventions. If there is a tendency to react formalistically and dispense
with intelligent judgment in the face of regulatory challenges, instead of an
interactive engagement with the underlying issues, then there is every risk of
a descent into a bureaucratic gridlock.
Of parallel concern is the tendency to codify and quantify risks in
analytically demanding ways. Technical analysis of risks is a non-trivial
undertaking and may yield important insights. But all too often it leads to
elaborate and impenetrable reporting formats, excessive board paperwork and an
uncomfortable presumption that whoever compiles the reports must know what's
going on and is dealing with whatever it is that the graphs and numbers and
algebra are signalling.
Rigorous analysis has an important place in the corporate oversight chain,
but it should not be allowed to throw a blanket of obfuscation over the
ordinary monitoring and reporting functions. More information may bring
additional insights, but there are also risks associated with information
overload and unwarranted complexity. Simple, accessible styles of communication
are a pre-requisite for effective corporation governance, and not just in small
enterprises but most especially in large many-layered multi-objective
organisations.
The important point is that by keeping issues or options clear and
communicating effectively, there is a better prospect of an intelligent
discourse and real engagement with responsibilities and alternatives. On the
subject of information and how it is organised, generalisations are unhelpful:
every company, every project, every problem needs the light of a particular
window, its own illuminating lens. But we should also understand that as
accounting and analytical systems evolve further in complexity and detail, so
the burden of keeping pace or of catching up becomes that much more onerous for
small firms or for developing countries. Where straightforward systems can do
the job, they should be retained; the additional cost of complexity needs to be
carefully weighed against its benefits.
Complexity should not be confused with formalisation.
Allen Schick is an economist whose insights into budget systems and public
sector financial management have assisted so many countries through these
reforms over several decades. In a recent paper he presents a compelling
account of how formalisation of decision-making, over time, contributes to
steady improvements in the quality of public resource allocation. Formalisation
means the replacement of arbitrariness and accidental privilege with systematic
processes and laws of general application. But Schick is also alive to the risk
of developing countries trying to leapfrog over these institutional
developments by adopting modern infrastructure and systems all at once. He
warns, for example, against trying to implement full-blown accrual accounting
systems when the professional capacity needed is not in place. The consequence
of premature formalisation of complex requirements is that the modern parts of
these countries prosper while lagging communities or sectors are left further
behind.
If the templates put forward as formal models are unduly complex, then they
are unlikely to be effectively implemented and the results will be
unpredictable and arbitrary. Indeed, the institutional origins of fraud and
corruption are frequently to be found in failed attempts to implement
inappropriately complex management and control systems.
So when you give consideration, as you will, to the question: do investors
have a role in corruption? I would suggest that you also ask whether
inappropriate management information and governance systems also play some role
in this dynamic.
Let me return, by way of conclusion, where I began, which is the symbiotic
relationship between the law and the corporation. There is an obvious point to
make, which is that effective and healthy corporate governance arrangements are
needed as much in the public sector as they are in private business
enterprises. This is true and it bears emphasis, because questions of how to
measure and reward performance, how to manage conflicts of interest, how to
structure information for executive decision-making efficiently, how to
articulate and manage competing objectives and priorities, how to identify and
manage risks � these are problems of agency and accountability whether the
corporate proprietor is an array of private stockholders or a government acting
on behalf of its citizens.
But it is not the commonality but the different roles and responsibilities
that I want to leave with you. The idea of fiduciary responsibility of the
directors of a corporation � the idea that it is right and proper to act in the
particular interests of the corporate entity, without special regard to other
interests � is given intellectual force by the idea of competition, that the
market process sets limits to the abuse of power, subject to the common
constraints of the law. Corporations act in the interests of their
shareholders, while it is the responsibility of government to look after the
wider public interest, to provide an appropriate legal framework, to protect
the weak and the vulnerable, to attend to externalities and market failures �
to address, in other words, the 'other interests' that might otherwise trouble
the consciences of responsible directors.
This is a tidy bit of neoclassical theory, but on reflection it raises
troubling concerns. These days we know � think of climate change or avian flu �
that externalities cannot adequately be dealt with by individual countries'
sovereign laws. These days we know � think of tax laws and labour standards �
that investment decisions and global production can be driven by factors that
are very remote from the optimal resource allocation criteria of the
microeconomics textbook. These days we know � think of accounting practice �
that access to information is highly asymmetric and imperfectly regulated.
And so we need to understand that sound corporate governance is not enough.
We have shared interests � as citizens, as responsible inhabitants of an abused
planet earth, as partners in the challenge of creating a fairer world in which
opportunity and assets are more broadly held. These shared interests will not
be addressed by corporations acting in keeping with their narrow self-interest,
nor can they be addressed by governments acting alone, or even by governments
and public interest organisations acting in concern internationally. They also
require a broader concept of corporate responsibility than the idea of
governance that presently enjoys popular currency. And so this conference
provides an opportunity to reflect on the challenges and opportunities for
deepening governance and accountability, but also perhaps to explore beyond the
frontiers of corporate identity, because just as we exist, as human beings,
through others, so also the responsible corporation has its identity in part
through the values and commitments it shares with others.
Issued by: National Treasury
4 July 2007
