“If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere.” – Arthur Levitt (Former Chairman: US Securities Exchange Commission)
The above statement is based on the Board of Directors being independent of Investors. In a country where the investors are significantly involved in running companies, capital will flow into those investors’ pockets. Further, the country will attract special type of Investors, who love to talk governance and walk away with the capital. This is the new “talk and walk”?
May be Arthur Levitt was talking of USA like countries and not the rest of the countries in Africa, Asia or Eastern Europe. Some challenging questions that require an honest response are;
# How many Asian and East Asian countries are scrambling to invest in your country because of lax governance practices that override any good accounting and reporting rules? Isn’t there enough Chinese, Malaysian, Korean, etc investments.
# How many directors will justify the payment of bribes or an unofficial facilitation fee?
# How many CEO contracts will break many rules in the governance rule book?
# How many audit committees will argue with the auditors to justify wrong accounting and put them on a pedestal once they agree with their tails between the legs, calling them good advisors. They are the new Andersens! For example, MF Global ( which filed for bankruptcy in 2011) after misreporting, said that PwC incorrectly told MF Global it could account for debt investments made through repurchase-to- maturity transactions as sales, allowing the firm to immediately book the revenue rather than record it on the books as secured financings (Bloomberg.) This same fate will befall those who approve fraudulent reporting for business purposes!
# How many audit committee members try to argue with auditors to cover up issues reported in the management letter, rather than ordering the company to comply?
Unfortunately, many of these audit committee members are trained to comply on paper and don’t want to know or read better practices. Like Mervyn King (Chairman: King Report) said, “organisations need to practice qualitative corporate governance rather than quantitative governance thereby ensuring it is properly run.”