Corporate GovernanceKevan Watts Chairman, Merrill Lynch International Inc.
Thank you, Bill.
As Bill said, I'm a philosophical person. So I thought I would begin to take this as I'm the first panelist who's trying to frame the discussion that will follow by identifying three observations around which I hope everyone can agree so that when there's area of disagreement emerged we have a sense of the context of those disagreements. I hope the dialogue with you and our audience will take our understanding to a different level.
My first observation is that in my view, good corporate governance is a necessary but no sufficient condition for corporate competitiveness. In other words, if you govern your company badly, you will not be competitive, if you govern it well, you will also need more conditions to be satisfied to be competitive, you need a good product, a good service, a good cost-base and so on. I hope everyone could agree with that proposition. Actually, there's even room to debate about the strength of this condition. Fitch, the rating agency 2 weeks ago produced a note on the European banks in which they made a weaker statement. They said that ratings are unlikely to be enhanced by the existence of sound governance practices, but the absence of such practices could have a negative affect on ratings. My view is stronger than that. I believe the absence of good governance will have a negative affect on ratings and competitiveness over anything out of in a short term. What evidence do we have that is so necessary but not sufficient condition? Well, the evidence is a little thin at the moment, there are some academic studies that have studied the performance of investment portfolios focused on companies that are viewed as of having good governance practices and they do tend to support the intuitive notion I've advanced. But those studies are few. Surveys of corporate executives in the west often produced negative result. Corporate executives typically view spending on governance negatively; they view it as a cost and not an investment. But that is perhaps not surprising given the many ways that are benefiting from a public good. Looking forward, I think we have the opportunity to see whether my first assertion is imperatively based because the Futiji Group and ISS are just launching a series of indexes based on global governance. These will track companies based on their governance standards, so over time I think we will accumulate some imperial data to support my intuition that good governance is necessary but not sufficient for competitiveness.
My second observation is that it's very important to keep a distinction between the principles of good governance and the particular rules introduced especially for listed companies in various jurisdictions in the world. Much of the controversy recently around governance relates to whether the rules in particular jurisdiction really promote the objectives of good governance. For example in the UK, in my own country, the Henz report on the role of non-executive directors on the board led to a quite impassion debate about the relationship between the Chairman and CEO, and both those individuals would be senior independent director, a very UK concept seed. Meanwhile, in the US, of course the very practice of separating the CEO and Chairman is not widely accepted. My own company, the Chairman and CEO is one and the same person, and that's very common in the US. So the detail rules applying the principles vary significantly between jurisdictions, and even between the Anglo-Saxon world of UK and US, and the acceptance of rules are often very grudging. Controversy also surrounds the cost of the rules, and a lot of focus recently has been on section 404 Sarbane-Oxley in the US. The cost of complying with that provision is very high, and of course here in Asia there have been a lot of debates about the cost of supporting those independent non-executives, and indeed the availability of supply of good non-executives. So I think there are many reasonable grounds for the debate about the cost effectiveness of particular rules and I suspect a lot of our composition today will turn on bad issue. But that should not be steered away the broad agreement on the principles of transparency, a decision-making reliability of financial data and the clear accountability to the stakeholders, the shareholders, the employees, the customers and the wider communities in which companies operate. I also feel that focusing on these distinctions between principles and rules will take some of the heat out of the sometimes emotional dialogue between the east and west on the subject of corporate governance. The detail western rules in the US and UK in particular run in continental Europe. Assume listed companies, widely disperse shareholdings, professional management, rather than entrepreneurial owner management. Change those assumptions; you need to change the rules.
This leads me to my third observation. Good governance is not just applicable to listed companies raising capital in public markets. Private or family owned companies need good governance to succeed. In a small private company with only one decision-maker- the owner, the entrepreneurs, there's still need for reliable and accurate financial data, and that decision-maker is much more likely to take good decisions if the people around he/she could challenge assumptions. You need an open-mind to run a company competitively. When you go public, good governance becomes much more complex because of the accountability to passive third party investors, and this is costly, and this is where there's a great room to debate about how to apply the principles. But the fundamental need is applicable to family companies as well as listed companies and the principles are easier to accept than the rules.
So my three observations which I hope will frame our discussion on good governance is necessary but not sufficient for competitiveness; secondly the principles are clear and very acceptable intuitively, but the detail rules for implementing are much harder to formulate and controversial; and good governance is needed whether you're public or private. The rules and techniques to apply the principles would vary in these two different situations.
Thank you.