The history of corporate governance has been repeatedly punctuated by a series of high-profile cases of corporate mismanagement from Siemens in Germany and UBS, a banking giant, in Switzerland to IBM in Argentina and Samsung in South Korea. These crises explicitly demonstrate what happens when essential attributes like transparency, accountability and integrity in corporate governance are absent or wilfully abused. Financial crisis in East Asia, Russia and Brazil including other countries in 1998 also showed that systematic failure of investor protection mechanisms, combined with weak capital market regulation, leads to failures of confidence. Insufficient financial disclosure and capital market regulation, lack of minority shareholder protection and failure of board and controlling shareholder accountability spurred lending and investing practices based on relationships rather than on a prudent risks assessment.
The collapse of world financial markets in September 2008 ignited a debate on what caused global economic meltdown. Poor corporate governance, as many policymakers believed, was one of the causative factors. It allowed transparency, accountability and integrity of companies to be compromised and for abuses to go unchecked, particularly in corruption matters. Thus, many analysts perceive the 2008 financial debacle to be a moral crisis. They believe that a meltdown largely caused by an integrity deficit is much more than a financial crisis. This necessitates that every technical answer to such a crisis needs to be grounded on strong ethical principles of transparency, accountability and integrity from the start.
Corporate governance, a phrase that not long ago meant little to all but a handful of scholars and shareholders, has now become a staple of discussion in corporate closets, meeting halls, academic discourse and policy circles across the world. Economists, corporate tycoons, opinion makers and policy analysts have started acknowledging potential macro-economic ramifications of weak corporate governance system and its domino effect in the globalized financial regime.
REGULATORY REFORMS
In developing and transition countries alone, companies pay bribes of over $40 billion annually to corrupt politicians and government officials. When corruption allows reckless companies to flout regulations, consequences can be disastrous. Empirical evidence shows overall impact of anti-corruption initiatives is reduced and growth of companies is undermined in absence of good corporate governance systems. Sound corporate culture helps secure investor confidence, enhance access to capital markets, promote growth and strengthen economies. By providing clear rules of the game and checks and balances, corporate governance system lowers company´s costs and increases economic output.
Recent spate of corruption scandals and corporate fraud has brought forth the need to fundamentally rethink functioning of the corporate and financial sector in Nepal. An alarming "integrity deficit" in corporate governance is one of the root causes of the current situation.
Although corporate governance frameworks differ from country to country based on the legal, regulatory and institutional environment, they have a common aim: To define clearly the rights, responsibilities and behaviors that are required of a company’s owners for the business to operate successfully. More stringent domestic laws and international conventions such as the 1999 OECD Anti-Bribery Convention and the United Nations Convention against Corruption (UNCAC) are pressurizing companies to either develop new anti-bribery policies or review existing ones. The high-profile corporate scandals of recent years have made companies increasingly aware that corrupt practices pose serious and costly risks to their reputation and sustainability. This understanding, coupled with growing public expectation of accountability and probity in the corporate sector, are putting added pressure on companies to adopt more ethical business practices.
Many US companies in the aftermath of the 2008 financial crisis made great strides in ensuring their independence from chief executive officers (CEO) and management with a cap on executive compensation. President Barack Obama introduced Dodd–Frank Wall Street Reform and Consumer Protection Act in July, 2010 calling for reforms in the regulatory system. A study showed that the average American large-company CEO makes on average 225 percent more than the average large-company CEO in the other 13 largest industrial countries. Similarly, a parliamentary panel on new Companies Bill in India also suggested capping salaries of chief executives and shareholders be given a say in managerial remunerations.
In response to urgency for regulatory initiative, Nepal Rastra Bank (NRB) also capped perks and benefits for chief executives of banks and financial institutions (BFIs). Bankers, however, did not take it positively. The BFIs are now facing liquidity crunch as they have invested around Rs 110 billion in realty sector. Many believe if BFIs´ current crisis is a by-product of bad corporate governance, central bank should not help them injecting tax-paid money. Undeniably, all of us know that central bank´s weak monitoring and supervision in the past led to current crisis in the banking sector.
In the last few months, Gurkha Development Bank (GDB), Nepal Share Market Finance (NSMF), People´s Finance Limited and Capital Merchant Banking closed down their operations and could not repay depositors. The NRB had to freeze bank accounts and property of executive chairman of NSMF on suspicion of irregularities while issuing loans worth Rs 1 billion. Likewise, former chairman of GDB Dambar Bahadur Tamang was arrested for irregularities in releasing various loans. Similarly, Department of Revenue Investigation is preparing to file cases against illegal businesses of Unity Life International that illegally collected some NRs 3.8 billion. Very recently, Jhalak Subedi, chief of Credit Department of Muktinath Development Bank in Pokhara was nabbed for his alleged involvement in the fake land ownership bank loan racket, masterminded by Santosh Paudel, which swindled about Rs 70 million from nine BFIs.
Recent spate of corruption scandals and corporate fraud has brought forth the need to fundamentally rethink functioning of the corporate and financial sector in Nepal. An alarming "integrity deficit" in corporate governance is one of the root causes of the current situation. As an exigency, to prevent any similar problems in future and spur sustainable financial growth, this integrity deficit must be addressed with stronger regulatory frameworks.
CORPORATE INTEGRITY
The concept of integrity in companies refers to a holistic approach of doing business that involves the management, employees and shareholders in adopting actions and standards that provide for an effective defense against corruption and abuses. Ethical leadership, anti-corruption compliance systems and regulatory oversight are principal components of corporate integrity. But additional incentives, checks and balances are necessary to make these components more effective and provide defense against corrupt tendencies. Companies with anti-corruption programs and ethical guidelines are less likely to fall victim to corruption and lose business. Strong corporate integrity systems pay ‘integrity dividends’ by preventing corruption that can lead to lost business opportunities, corporate fraud, higher costs, a damaged reputation and low staff morale. Positive impacts of corporate integrity systems fuel higher investment, greater productivity and higher economic growth.
A first component relies on companies adopting global ethical standards such as UNCAC that bind businesses and employees to share business principles and practices. Governance framework, a second component, goes a step further by establishing internal structures, processes and control mechanisms to prevent management or staff misusing their positions and power within the company for personal gain. A company’s top staff such as directors, chief financial and executive officers must act with integrity encouraging standards such as executive remuneration, levels of board oversight, financial transparency and whistleblower protection. Corrupt behavior from a top leadership can create a trickle-down effect. In a study on corporate fraud globally, 25 percent involve senior managers whose actions severely damage staff morale in one out of every three cases.
Regulation and oversight by government, a third component, helps formalize and enforce such policies and practices. Yet effective regulation requires resources and political will too. In the case of public enforcement of securities regulations, South Africa spends four times the amount of France relative to its GDP. A comprehensive regulatory framework is a prerequisite for creating a transparent, accountable and effective private sector. Corruption risks often thrive where regulations are weak. Thus, the government, as a primary rule maker and enforcer, needs to ensure effective regulation of markets, protection of citizens and enforcement of laws. Ultimately, inadequate or unstable regulatory framework for private sector only facilitates marginalization of stakeholder rights, distortion of markets and rise in corrupt practices.
pbhattarai2001@gmail.com
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