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How the Private Sector can be Involved in the Development of Modern Business Standards

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Maassen, G.F. and van de Coevering, P. (2006). Reform Strategies for Boards of Directors in Emerging Markets. How the private sector can be involved in the development of modern business standards  - Working Paper Erasmus University Rotterdam School of Management.

Working Paper - December 2006. Presented at the Jordan Securities Commission, Amman Jordan - Contents of Codes and Consultation Mechanisms Conference – IFC/WB Global Corporate Governance Forum.

This article recognizes the important role of boards of directors in the implementation of modern corporate governance standards in emerging markets. As internal monitors of management, independent directors are uniquely positioned to protect the rights of shareholders.

In a properly functioning corporate governance system, independent directors have access to detailed information, are informed about a company’s strategic direction and are supported by effective internal control systems to guide and monitor management. Boards of directors and the systems in which they operate have their limitations, however.

Following high profile scandals in Western financial markets, trust in directors is low, the effectiveness of corporate governance systems is heavily debated, the unintended consequences of corporate governance reform are rarely understood and increasing responsibilities and personal liability make it difficult for companies to attract qualified directors.

Although new legislation and self-regulatory initiatives are essential for developing effective boards of directors, transplanting Western corporate governance systems to emerging markets requires a substantial understanding of a country’s history, culture and business practices.

The successful introduction of modern corporate governance standards calls for an in-depth understanding of standards and how they can be introduced to local markets most effectively. While coercive corporate governance reform strategies may be useful, participatory reform is more effective in markets with poor enforcement and low acceptance of new standards.

Although more legislation may be warranted to guide directors in their role as agents of investors and shareholders, this article concludes that the focus in private sector reform in emerging markets should shift from legislative development and legal transplantation to innovative forms of self-regulation, implementation and education.

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This paper has been presented at the International Corporate Governance Conference of the European Commission in Moscow on December 7, 2005, the OECD Regional Corporate Governance Round Table in South East Europe in Istanbul on February 17, 2006 and the ERIM Seminar on the Diffusion of Corporate Governace Beliefs in Rotterdam on March 19, 2010. The authors would like to thank participants of these conferences for their valuable comments.

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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.