Corporate governance – A global perspective
Few people have had a career as varied and itinerant as economist and corporate governance consultant Dr Grant Kirkpatrick. In interview with CSj, he shares some of the experience he has gained while rescuing banks in Japan, helping to launch a market economy from scratch in Poland and developing the OECD’s corporate governance principles into the most widely used benchmark for corporate governance standards across the globe.
Thanks for giving us this interview, can we start with some background about yourself – how did you first become involved in corporate governance?
‘Via a very circuitous route. After school and a term in the army, I ended up in a chartered accountant’s office in Adelaide, Australia. I didn’t go to university until quite late, I was already in my mid-20s. At that stage to be a chartered accountant in Australia you had to do economics but I started off studying politics, this was the Vietnam war period and people’s political sensitivities were somewhat different then. I later converted to economics as my interest was in development economics and in particular rural development. The majority of the world’s population at the time lived in rural villages but we didn’t know much about village economies and how they work, so I spent some time looking at that and working in an international labour office project in the pacific islands, Papua New Guinea and Indonesia looking at rural villages.
Then, by another accident of fate, I ended up teaching macro and development economics at Brunel University in the UK. From there I moved to Germany where I did my PhD. The OECD was starting to get into structural economic policy at the time and I was hired to bring a German-style approach to the issues. I arrived in Paris in 1988 and that started me off on an entirely different line. In 1989 I was called across to ‘the Chateau’ [OECD headquarters] to meet a delegation from Poland. They were planning to switch from the centrally-planned economy of the former communist government to a market economy and they wanted to make the switch in just one day – 1 January 1990.
So that started me on my work with transition economies in Eastern Europe. This was interesting because we had a clean sheet of paper – this simply hadn’t been done before! There is a link here to my later interest in corporate governance as the first thing we had to do in Poland (and then later in Hungary and Czechoslovakia) was to decide what we were going to do with all the companies. How should they be run? We couldn’t privatise them overnight, we didn’t even have enough businessmen to sit on boards.
I worked on a number of European transition economies but in 2003 I had the chance to move to the OECD’s corporate governance division. I’d already done some work on corporate governance while working with banks in Japan and East Germany. Their bad debts could be written off, but dealing with the bad debtors was much more difficult because you’ve got to start changing how those companies are run or you end up in the same trouble a year later. In Japan and Germany the question was how to make sure that this didn’t happen and that meant ensuring that the companies were upgrading fast enough to hold their position. So that’s how I got into the area of corporate governance.’
Incidentally… do you think Poland’s transition to a market economy worked?
‘It did. It’s interesting to compare two countries – Czechoslovakia, as it was then, and Poland. The Czech Republic also went for a big bang transition but they decided to distribute vouchers in the hope that everyone would become a shareholder. That led to a banking crisis since the vouchers were bought up very cheaply by a couple of funds. It was a real mess. In Poland they wanted to have real owners with a stake in the economy and they were the first Eastern European country to recover from the transition. By the end of 1990, Poland was growing again.’
China has taken a very different route towards a market economy – perhaps because of the negative example of Russia’s transition?
‘Russia also went for the voucher system and you had billionaires acquiring all these vouchers and converting them to real assets. The theory was that everybody would become a shareholder and would start demanding shareholder protections, but actually most people just sold up and shareholder protection and improvements to corporate governance didn’t start happening until it was far too late.’
You mentioned that you transferred to the OECD corporate governance division in 2003, is that when you started work on the OECD corporate governance principles?
‘Yes, the first set of principles were issued in 1999 but I was tasked with the first revision of the principles in 2004. The OECD had been getting feedback globally on the principles and invariably the response was that they were too Anglo-Saxon. In other words, they were written for companies with a diverse shareholder base whereas most companies globally were dominated by controlling shareholders. So we set about revising the principles and the set now in circulation I think addresses many of the issues of interest to countries around the world. They are much more oriented to the corporate governance challenges associated with the presence of controlling shareholders.’
Could we talk about some of those specific challenges? In particular, should controlling shareholders be excluded from voting independent directors onto the board?
‘That is certainly an issue. Will directors be “independent” if they have been voted in by the controlling shareholder? Different countries have taken different approaches to this. Italy, for example, has introduced a voting system for non-controlling shareholders to elect at least one director. Similarly in Israel, where there are about five families who control most of the economy, they have a system for non-interested shareholders to vote in at least one person to the board. Also, the major shareholder has fiduciary duties to other shareholders, even in subsidiaries. More importantly they now have a mechanism where they support minority shareholder actions. They’ve established a commercial court so the judges know what they are talking about and there is even a mechanism to pay some of the costs.
So each country is edging their way towards a solution. Of course, we should bear in mind that minority shareholders are sometimes institutions, such as pension funds, with more resources, more clout and more information than retail investors. In Chile, for example, they’ve got six big pension funds which can invest in up to 10% of the shareholding in companies. They can get together and vote in their own guys so that provides a counterbalance – the owner still runs the company but there is a counterbalance.
Another thing to bear in mind is that a lot of this is going to be culturally-based. I remember asking independent directors in Belgium whether they would ever block proposals by the controlling family which elected them to the board. Their reaction was interesting. They said that Belgium is a very, very moral place and if they voted for something which was later exposed as malpractice they may as well leave the country. They cited the case of a CEO who was pilloried in the newspapers because of an outrageous remuneration contract – he had to leave the country. In other countries this might not apply. In Italy, for example, it might just have been seen as a demonstration of his manliness!’
Do you think the OECD corporate governance principles are encouraging a global convergence in governance standards?
‘The world has changed since the establishment of the G20. For example, over the last few years I have spent more time in Saudi Arabia, Indonesia, India and China than I have in OECD countries. These countries, by virtue of being in the G20, have joined the Financial Stability Board (FSB). They have to accept the basic standards of the FSB when they join the G20 and among those standards are the OECD principles of corporate governance. So they have formally accepted these basic principles and can be assessed against them.
The OECD view is that they therefore should be part of the committee that oversees the development of the principles to ensure political legitimacy and they have been integrated into the committee’s work. For China this process has been very effective – it has been involved, for example, in the OECD’s Regional Corporate Governance Roundtables in Asia and recently did a self-assessment against the corporate governance principles. They went through each principle and identified the rules or regulations addressing those issues. The principles therefore have effectively been taken as their reference point for governance.
The other countries (with one exception I will not mention) have also really taken this up and have participated. In many ways I think the fact that China has moved very quickly on this has helped other countries get a move on, which has been quite useful.’
What is your view generally about corporate governance in mainland China? For example, its relatively slow transition to a market economy, in contrast to the big bang approach adopted in Russia and Eastern Europe, has led to some governance anomalies such as party appointees to boards.
‘One of the interesting things about China is that it requires us to adjust our ways of thinking about many corporate governance issues. First of all, we’re not used to having the party around and having to deal with the party makes many of us distinctly uncomfortable. However, we should be careful about drawing a black and white picture – there are a number of European companies where corporate governance issues are very closely related to the ruling party.
China, though, is extraordinary in the sense that it has a clear cut direction it is going in. It wants to be, and will be, a major financial and commercial power in the world. It wants to have a major blue chip market in Shanghai and the China Securities Regulatory Commission (CSRC) has said a number of times that it wants to see 55 Chinese blue chips companies in the world in 10-15 years time – there are about five or so at the moment. China’s view is that – if this transition requires good corporate governance then so be it. This should be contrasted with Russia. The interesting thing is that China wants Chinese companies to be important in the world economy. They talk about M&A often, although the ‘mergers’ part of that probably less so. They want Chinese companies to go out there and purchase other companies. They’re not always going to be able to do that with cash and so will have to do it with their own equity. They therefore need to persuade people to hold that equity. That raises questions about RMB transferability and convertibility, but that is where they are going.
China’s first expedition into the world economy was China National Offshore Oil Corporation (CNOOC) trying to take over a Californian company called Unocal Corporation but they were immediately confronted with a challenge – they were asked “what’s your cost of capital?” They would not accept the state subsidising a company to buy the US company. China has been quite quick at realising that this is a problem for their ambitions so now when a Chinese company turns up in Australia buying a coal mine, for instance, they declare their cost of capital and produce the evidence. So they have adapted and changed.
But you raise the issue of party appointees to boards and, certainly, that gets a bit hard to deal with. You would be less than pleased to wake up one morning to find that the party has moved your CEO to be the CEO of another, potentially rival, company. However, once again, that scenario is not unknown in the West too. It happens in market economies.’
Can we come back to yourself – you have just left the OECD, what‘s next for you?
‘I would like to do two things: teaching and consulting. Actually, I think you need to do some consulting otherwise you don’t know what’s going on, that’s the academic in the tower scenario. So if you’re going to be teaching or lecturing in corporate governance it’s vital to be out there in the economy.’
More information on the work of the OECD, including its Asian Corporate Governance Roundtables, is available at www.oecd.org.