In all countries, the critical role of accurate information and disclosure means that thorough, reliable and prudent business and financial reporting are essential to encourage good corporate governance. It was the failure of corporations to disclose accurate information on credit lines, on business risks, and on highly leveraged investments that led to the Asian and Jamaican financial crises of the 1990s. These crises demonstrated to the world that investors and governments have to take corporate governance seriously.

The Asian crisis-as well as what has happened in post-Soviet Russia-also exposed another flaw in the way we've been thinking about economic development. How often have we heard it said that "the government should just get out of the way and let the market function?" Governments and international organisations critical That's a myth. Government is absolutely essential in setting up a sound framework for a market economy. Without binding rules and structures that govern all players, anarchy follows.

Business then becomes nothing but "casino capitalism" where investments become like bets: bets that people will keep their word and that companies tell the truth; bets that workers will be paid; and bets that debts will be honoured. In larger terms, corporate governance means setting up structures that allow a good deal of freedom within the rule of law. These arrangements then build a foundation for trust-one of the most important ingredients in running a business efficiently. Concern about weak or inadequate corporate governance isn't limited to developing economies.

It's a global phenomenon. For example, recent years have seen mounting concern in the US about whether "independent audits" are truly independent and unbiased, given that some accounting firms also do consulting work for some of their audit clients. The UK's Cadbury Commission and France's Vienot Commission, as well as the OECD have all issued more rigorous guidelines. In the United States, institutional investors have done an exceptional service by insisting that corporate governance standards be raised and that management be made to disclose far more information than was the case just a few years ago. Recognising the worldwide need for better corporate governance, there is now a global push in support for good corporate governance through world bank projects in Indonesia, Romania, Egypt, Russia, West Africa, and a number of other nations. In seven developing countries, including Jamaica, the Commonwealth Association for Corporate Governance (CACG) is focusing attention on training and certifying company directors. Amidst this, the private sector needs to create its vision of good corporate governance. Many governments and international organisations have already taken the lead in doing this without adequate input from the private sector.

The following are five points which supports the need for a national consensus for the way forward for a corporate governance framework for Jamaica: The question is not whether - but when - businesses that want to succeed in the new global economy will begin remaking corporate governance. The need is urgent, the time to act is now.

• The urgency emerges from a rapid convergence of standards, just as capital flows across the world now converge very quickly. How a business is run isn't a matter of local tradition or age-old practice any more. Family management is giving way to professional employees in many Latin American countries as reported by the World Bank. Domestic and international investors, creditors, multilateral institutions, and international organisations are clamouring for better corporate governance.
• Retooling corporate governance adequately won't happen by tightening a few procedures here, adding a few rules there, and hiring a press representative.
• It requires shaping institutions to achieve transparency, equity, accurate reporting, and free flows of information.
• The bad news is-to repeat-if business itself does not meet the challenge of transforming corporate governance, others will do it for them. Yet our enterprises, local stakeholders, and national needs will suffer if the urgency of this task is left to national governments or to the international financial institutions.
• Finally, the reward of good corporate governance is a thriving democratic society with a feisty civic culture that supports economic growth. It is worth some effort to get there. A recent survey by McKinsey and Company found that investors are willing to pay a premium for companies that demonstrate sound corporate governance systems. Although the downside of this study is that it reported the perception of investors rather than what investors actually do, it serves to stir the importance of corporate governance on the global front.

GLOBAL CONVERGENCE AND INTERNATIONAL CAPITAL FLOWS

The rapid pace of globalisation makes the need for reforming corporate governance very urgent. To participate fully in the world economy, most countries need to make enormous changes. In Latin America and the Caribbean, businesses must persuade investors and creditors that they can confidently invest in the region. This means displaying clearer relationships between participation and control, more transparency, consistent and detailed financial statements, as well as maintaining good relations with financial and markets analysts. As mentioned earlier, if you wait until the last minute to make these basic changes, others will make them, not by the people who know your businesses best: yourselves.

The call for local companies to become efficient and globally competitive is urgent. However, this will require a revolution in the way companies organise themselves. Admittedly, more and more companies in this region are rising to the challenge but there are still many more that are yet to respond to these calls. Promoting sound corporate governance ought to be placed very high among important trends that are reshaping businesses across the globe.

Effective corporate governance and best business practices maximise growth and minimise abuses of power such as insider trading, discrimination against minority shareholders, and poor accounting practices. Bad practices not only

defeat growth by driving away investors, but also bleed the corporate enterprise and squander its spirit. A very rapid convergence of forces that have been building for nearly two decades is also driving the urgency for improving corporate governance. For more than a decade, the international accounting bodies and national associations of accountants have been moving closer to an international set of accounting standards.

The WTO and IMF have pressed them and, more importantly, by their domestic corporate clients, to develop international standards that will help companies grow across borders. Most encouraging is the recent adoption of International Accounting Standards (IAS) by the Institute of Chartered Accountants of Jamaica (ICAJ). This took effect on July 1, 2002 and will see Jamaican companies responding to global compromise and a set of common accounting standards to ensure greater accountability and transparency.

The need is obvious. Before committing resources investors and institutions in Havana or Huntsville, Tokyo or Tripoli, Kingston or Kensington, want to be able to analyse and compare potential investments by the same standards of transparency, clarity and accuracy in financial statements. They want to have risk assessments. More and more, nationally based companies that seek global reach by attracting new capital are also listing their shares on the stock exchanges of other nations.

Grace, Kennedy & Company Ltd., Telebras of Brazil, the Mexican phone company and other Latin American communications firms are only a few examples. Being credible businesses that can withstand the scrutiny of international investors is more than just a matter of global marketing- it has become essential for local companies to grow and prosper. What's more, good corporate governance not merely fertilises healthy growth, it is a shield against widespread financial crisis. The Jamaican financial crisis of the 1990s underscored the urgency for businesses to transform the way they govern themselves.

One lesson learned from that crisis is that poor corporate governance can create huge liabilities for both individual companies and society. Foreign direct investment (FDI), part of the overall flow of private finance worldwide, has grown especially important in globalisation. Money flowing into stock markets and other short-term equity investments is significant, but recent experience during the Jamaican financial crisis and elsewhere shows that such flows can reverse quickly and easily, with devastating effect.

By contrast, FDI is the most important source of so-called "patient capital." Patient capital brings investment partners who are willing to support your enterprises and hold firm to their course of development through both high tides and calm seas. It also brings very important complementary benefits to recipients by transferring state-of-the-art technology, stimulating trade, and sharing management innovations. To meet these urgent demands of convergence and capital investments, corporate governance must be transformed, not just dressed up a bit.

OECD PRINCIPLES

Recognising the urgency of corporate governance reform The Organisation for Economic Co-operation and Development (OECD) in 1998 established a task force on corporate governance. The mission of this group of trading partner countries, other international organisations and the private sector, was to develop a set of non-binding principles to guide reforms. In summary, the OECD principles include the following elements:

• Protecting the rights of shareholders. This includes the right to secure ownership, full disclosure, voting rights, participation in decisions to sell or modify corporate assets including mergers and the issuance of new shares.
• Treating shareholders fairly. This means protecting minority shareholders' rights by preventing insiders, including managers and directors, from taking advantage of their privileged positions and information. Insider trading, for example, is prohibited. Directors are asked to disclose any material interests they may have in the company's transactions.
• Recognising the role of stakeholders as well as shareholders. Stakeholders are others who are directly concerned with the company: workers, suppliers, bondholders, banks, and local institutions affected by the company's activities.
• Ensuring disclosure and transparency. The OECD suggests provisions for disclosing and communicating key facts about the company, from financial details to the compensation and terms of its board of directors. Annual audits are also required, performed by outside auditors enforcing high standards.
• Clarifying responsibilities of the board of directors. The OECD guidelines offer much detail about a board's responsibilities for protecting the company, its shareholders and stakeholders: forming corporate strategy, assessing risk, setting executive compensation, evaluating performance, and so on.

Part II next week

• Vindel Kerr is a Ph.D. researcher on Corporate Governance at the Manchester Business School, England, and is an International Business Strategist. Contact: vkerrl@anngel.com.jm