For decades, U.S. executives and powerful fund managers have lectured the Europeans and Japanese about the need to run their corporations according to the transparent U.S. model. Now come the Enron and Arthur Andersen scandals, together with less sordid disclosures about questionable accounting practices at dot-coms, telecoms, and even blue chips such as General Electric (GE ) and IBM (IBM ). Shareholder deception, supine boards, and Special Purpose Entities seem to have rendered the U.S. corporate governance model a Swiss cheese of loopholes.
With the benchmark looking so rotten, will reform around the world stop dead in its tracks? Don't count on it. If anything, the trend to adopt U.S.-style accountability standards is stronger--one result of globalization and the stampede to U.S. markets by investors looking for decent returns. "People are not suddenly saying the U.S. system is all bad and we should be like the Japanese," says Marco Becht, a German economist and executive director of the European Corporate Governance Institute in Brussels. "Enron is helpful in making people realize that even more improvements are needed."
But rather than a convergence to the U.S. model, Becht and others see multiple modes of corporate governance developing around the world. "Just as you don't expect all countries to adopt the U.S. Constitution, you are going to have different corporate governance systems," says Becht. Already, British reforms look quite different from American ones. British boards of directors, for example, cannot use "poison pill" defenses to block hostile takeovers. And that is just one element of a formal code of governance adopted by the British in early 2000. Curiously, the U.S. is one of the few industrialized countries without such a rule book.
Just about everywhere, the battle cry is for more transparency in accounting and greater checks and balances between management and boards of directors. And U.S. scandals are not the only driver of change. Both Europe and Asia have their own crop of homegrown disasters. In Europe, the clubby, incestuous world of Switzerland Inc. was rocked by the collapse of Swissair in October, 2001, while mighty financial institutions such as UBS and Zurich Financial Services have been reeling from a series of mishaps that critics relate directly to the unchecked power of their executives and their indifference to shareholder rights. Scandinavian corporate practices have been under the microscope ever since it was disclosed that Swiss-Swedish engineering giant ABB secretly granted former Chairman and CEO Percy Barnevik an $89 million golden handshake. And in Germany, a series of corporate collapses--most recently the implosion of the Kirch media empire--is finally shaking up outdated German practices.
Indeed, the changes afoot in Germany promise to transform the face of Rhineland-style capitalism, with its tradition of once-a-year earnings reports and interlocking board memberships. Under proposals submitted in February by a government committee led by Gerhard Cromme, former CEO of ThyssenKrupp, listed companies would adopt a wide range of reforms, including abolition of separate share classes, publication of management salaries, and disclosure of inside trading by board members. While most of the Cromme Commission's provisions are voluntary, commission member Peer M. Schatz, CFO of Qiagen, a Dutch biotech company listed on Frankfurt's Neuer Markt, says all German companies will be affected. "The market will ultimately have much more leverage than any legal body," says Schatz. "To be in noncompliance when you said you would comply leads to the worst punishment possible, namely loss of credibility."
In Japan--long notorious for corporate abuse of shareholders, cozy ties between banks and companies, and opaque accounting--things are also moving, albeit slowly. The Justice Ministry is pushing legislation that would amend the commercial code by allowing appointment of independent members of boards of directors--a real innovation, since most Japanese corporations have boards composed almost solely of senior executives. The new code also allows companies to let shareholders vote online, an innovation Sony Corp. (SNE ), Hitachi Ltd. (HIT ), and 50 others say they'll adopt during this year's annual meeting season. Still, a recent survey by communications group Dentsu Inc. of 1,000 international investors who trade Japanese equities found that corporate transparency is perceived to be far worse in Japan than in Europe and the U.S.
Next door in South Korea, reform has been spurred by the July, 1999, collapse of Daewoo Group, whose founder and chairman, Kim Woo Choong, now in hiding to avoid prosecution on fraud charges, had allegedly engaged in accounting so creative that it falsely inflated the value of the conglomerate by $30 billion. That shock led to a recent overhaul of Korean commercial codes, which now require, among other things, that large listed companies fill at least half of their board seats with outside directors. The codes also allow any individual or group with a combined holding of just 0.01% of outstanding shares to sue management over any perceived irregularities.
Other emerging markets are making important strides. Take Russia, once one of the world's murkiest corporate swamps. At energy giant Gazprom, Russia's largest company with sales of $20 billion in 2001, a new team led by CEO Alexei Miller is undertaking a series of reforms, including establishment of a board-level audit committee. With its accountant, PricewaterhouseCoopers, being sued for lax auditing, Gazprom is holding an unusual tender to choose an auditor by competitive bid. "Corporate governance at Gazprom is definitely improving--it isn't just window dressing," says Stephen O'Sullivan, head of research at Moscow brokerage United Financial Group.
Of course, the new strictures, in Russia and elsewhere, will not stop those determined to deceive and defraud, any more than they did in the U.S. The Cromme Commission's rules, says Schatz, "won't prevent outright criminal activity. If you rob a bank, you don't ask which rules you're not complying with." But to inspire better behavior, you first need actual rules to enforce. Those rules are falling into place.
By John Rossant in Paris, with Jack Ewing in Frankfurt, Brian Bremner in Tokyo, and bureaus reports