By definition, coercive reform strategies and shock therapies are less desirable for the introduction of new corporate governance standards. In emerging markets, they may not work. The acceptance of corporate governance reform initiatives is often low at the outset of new programs, and courts and regulators are not sufficiently developed to enforce new standards. To induce change in business practices and culture, both in the West and developing countries, additional demand-driven instruments are needed such as educational programs and self-regulatory initiatives that accompany legislative reform programs (see also Illustration 3).
Illustration 3: Corporate Governance Reform Strategies
A priority in implementing corporate governance legislation in emerging markets is to ensure that the private sector is involved in the process of standard setting. It seems logical to have directors and managers participate in public debates and consultations on legislation that will directly affect them. Involvement of the private sector in drafting processes nevertheless has been minimal in emerging markets. Laws are often drafted in isolation by law professors with limited private sector experience. Open consultations, regulatory impact assessments and public debates are rare.
6.1 Self-Regulation of Directors
While it may not always be feasible to have the private sector involved in legislative reform, self-regulatory initiatives seems to be an alternative to more legislation when risks and impact of non-compliance with standards are low on society (Maassen et al., 2004). Although a majority of developed markets have initiated self-regulatory corporate governance initiatives, they are relatively new. The first initiatives were taken in the UK with the Cadbury Code in 1992. A majority of initiatives were launched after the mid 1990s.
Codes of conduct that are embraced by the private sector are less common in emerging markets. An estimate based on the European Corporate Governance Institute’s repository of corporate governance codes shows that some 15 developing countries have developed a voluntary code or are currently working on one. Self-regulation may be less popular in emerging markets because their financial markets are less organized through associations and stock exchanges and have fewer resources. A demand driven reform strategy as self-regulations also only works when the private sector is aware of the benefits of setting greater standards in lowering operational risks and in attracting investors. But, whenever feasible, by building upon an inclusive process of consultations and debates, corporate governance codes can be a useful addition to legislation for enhancing corporate governance practices, to raise standards and to drive reform efforts at the national level in emerging markets (World Bank, 2005b).
6.2 Director Accreditation as a Form of Self-Regulation
Director accreditation is an example of self-regulation that can be successfully applied in emerging markets at relatively low costs. The Thai Institute of Directors Association, for example, offers certification and director accreditation for directors of listed companies. The participants who pass the program receive a certificate certified by the Stock Exchange and the Securities and Exchange Commission of Thailand.
An innovative form of self-regulation that combines directors education with norm setting initiatives is being used by the National Association of Corporate Directors (NACD). This Directors’ Institute in the US requires participants to sign a code of conduct to affirm the value of continuing education as part of directors’ fiduciary duties. Participants who sign the code of conduct pledge to maintain their certificate of director education by completing eight hours of continuing education annually.
Case 2: Purpose Statement for Director Accreditation in New Zealand
“The purpose of Director Accreditation is to enhance corporate governance standards in New Zealand by providing a register of directors who can show evidence of their professional status in terms of their knowledge and experience. It will allow accredited members of the Institute to demonstrate a commitment to professional standards and provide shareholders and stakeholders with reassurance that boards are knowledgeable, experienced and committed to their profession. Accreditation is not intended to be a certification of the competence of a member. This assessment can only be made of individuals on a case by case basis, but Director Accreditation will set an expectation of behaviour and standard of conduct.”
6.3 Director Training and Development
Although drafting more legislation may be warranted to continue the development of corporate governance standards in emerging markets, educational programs and capacity building efforts are equally important. Along with programs that raise the awareness of shareholders’ rights through the media and the development of NGOs, a number of technical assistance instruments can be employed to build incentives for directors to professionalize.
Whether organized through a dedicated institute of directors, universities or through local business service providers, on-line or in the classroom, the need for corporate governance training is greater than ever. Lacking formal training in business ethics, legislation, regulations and international standards, new generations of directors require continuous training efforts. A vast majority of donor driven educational programs have at their best improved the business elites’ awareness of corporate governance standards. They were not designed to change values over long periods of time that traditionally have driven business cultures in emerging markets. Intensive, long term institutionalized educational programs are needed to ensure that directors, who typically resist training for a variety of reasons, have incentives to adhere to new standards.
But formal training is not enough. Directors need the kind of sophistication and experience that only come from on-the-job training (Paredes, 2005). An innovative approach to achieve this goal would be the development of programs in which Western directors and their colleagues in developing countries team up in peer-to-peer consultation and mentoring programs. An example of such program is administered by the Center for Business Ethics and Corporate Governance in St. Petersburg, Russia.
 See www.ecgi.org for an overview of corporate governance codes.
 The Corporate Governance Forum of the World Bank recently launched a toolkit for the development of corporate governance codes in developing countries. The toolkit is available at www.gcgf.org
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