Until a few years ago, Americans thought they had the best corporate governance system in the world. Sure, some executive salaries could be considered obscene. But you couldn't deny the companies' performances. And that compensation was at least spelled out in black and white for anyone to see. Then came Enron, Arthur Andersen, WorldCom, Tyco, and the dot-com bust, all revealing massive, and often illegal, misuse of financial statements.
American investors went into a swoon. Asians and Europeans helpfully reminded them that international accounting standards, while less rule-based than those in the U.S., forced auditors to use judgment that might have caught many of these abuses.
Then came a slew of international corporate scandals -- SK Corp. in South Korea; Tokyo Electric Power in Japan; Royal Ahold, Marconi, and Vivendi Universal in Europe. Everyone got muddied.
What's now under way is an effort to clean up corporate governance standards in many markets around the world. In the U.S., the Sarbanes-Oxley Act of 2002 is driving change through penalties and enforcement. In South Korea, a new reform government understands that higher standards are critical to winning broader support from pension funds, mutual funds, and other international institutional investors. In Japan, there's now an understanding that the Toyotas, Sonys, and other corporate icons need to lead the way for lesser-known names. And in Europe, there is increased government and boardroom pressure to crack down on balance-sheet abuses.
This week's International Special Report, "Opening Up the Boardroom," looks at changes in both Asia and Europe. Seoul Bureau Chief Moon Ihlwan, who has spent two decades covering international financial markets, says the Korean crackdown is the broadest ever. From Tokyo, Bureau Chief Brian Bremner sees a top-down reform happening -- although he notes that for the mass of Japanese companies, better governance probably won't come until bailouts and other government-backed financial support ends. Hong Kong Bureau Chief Mark Clifford profiles a tenacious shareholder activist who is gaining traction.
Thirteen correspondents contributed to the report, which was anchored by London-based financial writer and veteran boardroom watcher Kerry Capell. It comes after a series of BusinessWeek covers and stories about U.S. financial scandals, starting with "Accounting in Crisis" (Jan. 28, 2002). That was followed by "The Crisis in Corporate Governance" (May 6, 2002), and "Restoring Trust in Corporate America" (June 24, 2002).
Progress on global governance reform has been slow. But the need to woo overseas investors is changing the scene. As this trend accelerates, we'll be there to keep the score.
By Bob Dowling, Managing Editor, International