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reliability of corporate disclosures, include provisions that impose crimi-
nal liability and personal financial liability on public company officers,
directors and counsel whose conduct runs afoul of the Act.
Although heralded as a cure-all for the spate of corporate scandals
that burst into public consciousness commencing with Enron™s implosion,
there is a perception that SOX, while replete with procedural mech-
anisms, has little substance.

However, as regards which system of corporate governance would work better in
general in emerging jurisdictions, having regard to sustainable risk management,
Part E “ Case Studies of Business Risks

various advisors have suggested that the corporate governance system in the US
may be better since laws can deter erring executives from exploiting corpor-
ation resources to their advantage by committing fraud on investors and society
at large. For the purpose of this debate the US corporate governance model
could serve the developing countries better as they provide clear cut laws to be
followed without any confusion with regard to what will be right and to what
extent the compliance of guidance is required. The legislative approach does
not give the liberty and flexibility to officers in power to use a self-regulatory
system to manipulate the rules to their advantage and exploit the corporate
resources for their own benefit by indulging in self-dealing. This is subject to
what is mentioned below in the South Asia case study.

Codes of ethics
Wherever an organisation is located the code of ethics should outline a
set of fundamental principles, although a company should avoid drafting
policies with too many aspirations, or avoid setting practically unworkable
standards. Code drafters are encouraged to think in terms of values, beliefs
and expectations; draft simply and concisely so as not to obscure fundamen-
tal points; use the active voice so as to convey ideas more clearly and with
fewer words; and generally make the code easy to read (see also Chapter 12).
This is most important in the context of sustainable risk management.
Multiple approaches can be taken in drafting codes of ethics and busi-
ness conduct to comply with the applicable SEC and stock exchange/mar-
ket requirements. A typical issuer may adopt up to three separate codes
solely to satisfy the SEC and stock exchange/market requirements:

* A code of ethics for the chief executive officer and principal financial
officers only, designed specifically to satisfy the SEC requirements
regarding a code of ethics for the designated officers;
* A code of ethics and business conduct applicable to all officers and
employees, meeting the applicable stock exchange/market require-
ments (as well as SEC requirements); and
* A code of ethics for non-employee directors only, considering the very
different role outside directors serve compared to employees (i.e. super-
visory rather than active involvement on a day-to-day basis in the com-
pany™s operations) and the resulting fact that much of what is in a
comprehensive code of conduct for employees may not be applicable to
the outside directors.

South Asia: key trends and issues
A number of overarching themes and critical factors for good corporate govern-
ance are of particular importance in developing practical policies in South Asia.
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 591

An analysis of developments in South Asia underlines the point that cor-
porate governance cannot be introduced in isolation from a range of other
reforms (macro-economic, micro-economic, accounting, legal, banking and
institutional) “ nor can these other reforms achieve all their objectives without
corporate governance initiatives. The experience of India and Pakistan high-
lights the problems and market distortions which have built up from decades of
varying government policies and from strong entrenched structures and inter-
ests of the private sector, and the complexity of picking apart the range of pol-
icies and targeting the reforms. Reform is a cumulative process, and one set of
reforms uncovers the need for other reforms, so the challenges lie in policy
management “ in conceptualising and implementing a road map of parallel and
sequential reforms which constitute a comprehensive programme. Experience
shows that this can be achieved, especially in vibrant democracies, but there is
also the bitter experience that liberalisation reforms without effective regula-
tory systems and agencies may have very high transitional costs (as India
learned after 1994).
A second theme, closely associated with the first, is the need to monitor
the trends in different sectors of the markets so as to try to avoid (or at least pre-
pare for) a situation where a combination of several negative trends, which
individually might be manageable, together form a crisis. Again, the India,
Pakistan and Sri Lanka experience shows the dangers of multiple ˜fault lines™ in
the financial and corporate sectors, such as the burden of non-performing
loans, dependency on formal and informal protection and on state develop-
ment finance institutions, structural imbalances between ownership and con-
trol and high agency costs, outmoded laws, and lack of inflow of investment
A third theme is the need for a range of players to improve corporate gov-
ernance, and the indication that a degree of ˜stick™ may be needed together with
the ˜carrots™ of increased investment and performance. It is noticeable that in
India the initiative for improved corporate governance came from the
Confederation of Indian Industry, who produced a voluntary code and which
they encouraged their members to follow and to demonstrate in highly
advanced model annual reports, again designed by the CII. These model reports
included sections of corporate social and environmental responsibility as well
as corporate governance, and set out rigorous points of detail such as the board
attendance record as well as the remuneration of individual board members.
However, only about 20 companies followed these guidelines, and it required
the intervention of the regulator (in the form of SEBI, the Securities Exchange
Board of India, and the Ministry of Company Affairs) to significantly widen the
application of corporate governance. Even then progress has been slow, and
both the Indian and Sri Lankan experience reveal the significance of ratings
agencies in demanding good corporate governance as well as financial manage-
ment systems for better credit ratings. Sri Lanka in particular shows the roles of
the regulators and credit agencies, combined with professional institutions
such as the chartered accountants, chartered company secretaries, institutes of
directors and chambers of commerce.
Part E “ Case Studies of Business Risks

A fourth theme is the critical importance of the company and contract laws
and the efficacy of the legal system. It is notable that most of the SAARC
countries have developed special commercial courts of one sort or another to
handle commercial disputes, but the reports all generate a sense of gloom when
it comes to the efficacy of the law, and of the need to modernise bankruptcy and
liquidation proceedings.
This is linked with the fifth theme, which is the critical importance of the
traditional family ownership and control structures, and the concern that cor-
porate governance is observed more in form than substance. In Pakistan, the
family control system and the prevalence of the pyramid structures of control
is a major factor (higher than countries in South East Asia), while in India there
is a contrast between the costs of the conventional model of the separation of
ownership and control, and the model of interlinked ownership and
control which characterises Asian companies. The way forward may lie in a
new focus on ˜growing the pie™ even if it involves dilution in share ownership,
so that families can increase and diversify their wealth by becoming investors
in other companies instead of concentrating only on control of their own
A sixth theme is the significance of corporate governance for other types of
enterprises such as the state-owned enterprises (SOEs), which still loom very
large across South Asia. In India, for example, SOEs account for 34% of India™s
corporate paid-up capital. In other countries there is also a need for good cor-
porate governance practices for medium enterprises and for non-governmental
organisations, which often form important trading enterprises as well as crucial
social development agencies.
These realities would compel a sense of caution about expectations of
rapid improvement, but given the expanding body of experience and expertise
in this area it is reasonable to expect progress.

An approach to corporate governance
An approach to corporate governance by the Commonwealth Business Council
(CBC) has been developed through the CBC™s Working Group on Corporate
Governance, which is chaired by Mr James Smith, chairman of Shell UK. The
Working Group has consulted widely with businesses and put forward a set of
principles and recommendations to Commonwealth finance ministers at their
meeting in September 2006. The approach set out below is drawn from
that work.
At its core, corporate governance is about creating value from the quality of
decision making and leads to better business performance. This in turn can
increase the attractiveness of a business for investments. In those developing
Commonwealth countries where the regulatory environment or institutional
capacity is still developing, a specific policy framework for investment,
through a whole of government approach, can encourage a focus on corporate
governance as a basis for business performance.
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 593

A good corporate governance framework has the potential for these benefits:

Enhancing overall performance;
Preparing a small enterprise for growth, and so helping to secure new busi-
ness opportunities when they arise;
Increasing attractiveness to investors and lenders, which enables faster
Increasing the company™s ability to identify and mitigate risks, manage crises
and respond to changing market trends; and
Increasing market confidence as a whole.

The CBC Business Principles govern how a company conducts itself and are
based on the firm belief that application of good principles is fundamental to
business success. They consist of core values, responsibilities to stakeholders
and a set of principles for how a company conducts its affairs. All companies
and entities “ no matter their size “ should adhere to these business principles.
The principles apply not just to private sector entities but are relevant also to
public bodies and in the voluntary sector.
The CBC Business Principles are established under three headings:

Core values;
Responsibilities to stakeholders; and

It needs to be emphasised that leadership is key to driving these principles.
A proper mechanism for people to internalise core values is necessary and needs
to be reflected through, for example, role modelling of behaviours by current or
potential senior managers. One way of embedding the principles is through
stronger links between talent management and leadership development.

Core values
* Honesty, integrity, fairness and openness, respect for people, clearly
stated and followed in practice;
* A commitment to contribute to sustainable development. This
requires balancing short- and long-term interests, integrating economic,
environmental and social considerations into business decision
* Transparency: being actively involved in structure, process and
disclosure; establishing and maintaining communication with key
* Tackling corruption: adopting agreed codes; being persistent in enfor-
cing them internally and in external dealings; and
* Human rights: recognising the implications for the business of respect
for human rights; having a policy and acting on it.
Part E “ Case Studies of Business Risks

Responsibilities to stakeholders
Recognising five areas of responsibility, it is the duty of management, through
an accountable board, to discharge these inseparable responsibilities.
To shareholders:

* Protect shareholders™ investments and provide a competitive long-term
* Conduct operations in accordance with internationally accepted prin-
ciples of good corporate governance; and
* Provide timely, regular and reliable information on activities, structure,
financial situation and performance.

To customers:
* Provide products and services that consistently offer value in terms of
price and quality and which are safe for their intended use; and
* Listen to customers™ views and continually strive to improve the com-
pany™s performance.
To employees:

* Respect the human rights of employees. Provide good and safe working
* Provide competitive terms and conditions;
* Ensure a workplace free of harassment;
* Invest in the development and best use of the talents of employees;
* Create an inclusive work environment where every employee has an
equal opportunity to develop his or her skills and talents and encourage
* Understand and value cultural differences;
* Encourage the involvement of employees in the planning and direction
of their work. Provide them with channels to report concerns; and
* Recognise that commercial success depends on the full commitment of
all employees.

To those with whom a company does business:

* Establish mutually beneficial relationships with contractors, suppliers
and in joint ventures; and
* Promote the application of these business principles or equivalent prin-
ciples in such relations. The ability to promote these principles effect-
ively will be an important factor in the decision to enter into or remain
in such relationships.
To society:

* Conduct business as a responsible corporate member of society, in
accordance with internationally accepted norms;
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