Public accountability now expected of corporations and development aid

Eric Teo Chu Cheow, Singapore Institute for International Affairs, Pacific Basin Economic Council, Singapore

Thanks to the debates over globalization and the negative publicity over the power firm Enron, its auditor Arthur Andersen, and now the telecommunications firm Global Crossing and Merrill Lynch brokerage, corporate governance has captured the headlines. The war cry is that capitalism should be stringently checked and subjected to some forms of control as well.

There are clearly intrinsic links between the market, investor community and good public governance, as well as between the market, small or individual shareholders and good corporate governance. Also equally important is perhaps the fact that the recent Monterrey Consensus following the UN conference in Monterrey, Mexico, appears to be "pitted" against the more liberal and U.S.-inspired "Washington Consensus."

The Monterrey Conference of late March has highlighted the inextricable link between the crucial role of the private sector in the international strategy of financing development in developing countries (provided concepts of good public governance are adopted by these same countries) and a critical need for good corporate governance (which must be strictly applied to this same "contributing" private sector too).

The Monterrey Consensus has successfully linked key global issues in a powerful and logical way in the post-Sept. 11 and post-Enron context. Developmental aid is "de-politicized" today, as the Cold War Western-Soviet division has collapsed; today's aid would thus be based more on merit than ideology. September 11 and the anti-globalization clamor have driven home the message that developed nations could no longer live in security, if poverty is not alleviated and social inequities are not quickly reduced. Tearing down trade barriers is imperative, but not sufficient.

Development aid must flow effectively to developing countries to create a more stable and safer world for all. But this aid should also be tied more stringently to anti-corruption clean- ups, democratic reforms, transparency, accountability, domestic private enterprise stimulation within good corporate governance frameworks, and a special focus by developing nations on education, human resource development and health services.

Public and private sectors must also now actively involve themselves in the institutional and capacity-building in the developing world.

Another important implication of the Monterrey Consensus is its implicit "effect" on the Washington Consensus. The prime role of markets and the corporate world, within the context of the "new liberalism" (as embodied in the Washington Consensus), appears to have been "dampened" and should thus be revisited.

The Monterrey Consensus has highlighted the need to rehabilitate the "public economy", a term first advocated by Joseph Stiglitz, the former World Bank Chief Economist. The role of the state in economic intervention and "participatory inclusion" is back in vogue; new political and social contracts need to be re-negotiated within developing countries.

In the anti-globalization climate and the Enron-Arthur Andersen fiasco, markets and his business do not necessarily rule the day alone anymore. It is thus only logical that the role of the State be rehabilitated to develop the economy in a more responsible way, perhaps even helping to enforce corporate governance in their countries.

Two points are hence important to emphasize. Firstly, good public governance could be part of this developmental aid package, which includes institutional and capacity-building. And secondly, there are no doubts that good (public) governance would now be probably considered as the most important criterion for development aid to flow into a country, besides the respect for human rights and democracy.

Not only are developed countries and their governments more selective for and attentive to good governance, but private investors and the market are also focusing on this aspect as well, before committing the much needed developmental funds. This is hence the first intrinsic link today between the market, investor community and good public governance.

Although according to the Monterrey Consensus, big "clean" corporate businesses are now strongly encouraged to be closely associated with development, there is also a new exigency from the public that the corporate sector must itself strictly embrace good corporate governance, accountability and transparency.

They are also asked to adopt the 1997 Guidelines of the Organization of Economic Cooperation and Development, which restrict and "limit" corruption, thus the linkage between good public and corporate governance. In short, the rampant power and abuse of markets as well as corporate abuse should also be stringently subjected to some forms of control. This is the second intrinsic link between the public (in its role as small shareholders/investors), the market and good corporate governance, in the context of a"post-Washington Consensus Consensus"

People's power could therefore be expected ultimately to scrutinize and check both the public and corporate sectors' integrity and governance practices more closely. Monterrey has hence helped focus on the corporate sector's crucial role in international developmental strategies, but only if this corporate sector would fully embrace good corporate governance in the country where it is operating.

An essential part of this "check" would be through civil society, NGOs and consumer groups; but most critically for the corporate world has been the rise of small shareholders in the stock market as their rights are being increasingly strengthened. Good governance has become both a public and corporate exigency by the rising civil society. In fact, both the governments and the corporate world will now have to measure up to popular expectations in a very clear way.

The market and the investor community (and especially individual investors and small shareholders) are beginning to view both public and corporate governance seriously. This fact remains that because of this renewed importance accorded to both public and corporate governance, companies would now find it progressively harder to bribe their way through corrupt governments and systems.

Otherwise, they would be punished by the market and abandoned by their shareholders (as the cases in corporate America and its stock market has amply shown), who are having a commanding say, thanks to the spread of good corporate governance ethics and shareholders rights.

One of the results of the Asian Crisis has been the progressive shift away from a duopole nexus of the Asian political economy (based on big government and big business) to a more tripolar nexus, based on governments, civil society and the private sector (and not necessarily big business anymore).

Civil society can now check good public governance, through active NGO activities, as well good corporate governance, and through the stock market, as private individual shareholders.