ambassador remarks

International Conference Globalisation Challenges and New Trends of Governance
November 20, 2007

Thank you for the opportunity to be here with you today. Congratulations to the Centre of European Studies, the School of Economics of Prague, and the Konrad Adenauer Stiftung for organizing this conference on these important and timely issues.

From what we have heard, and what the afternoon panels will explore further, the challenges are indeed imposing.  They are also interdisciplinary --- intersecting our work as researchers, academics, businessmen, politicians and diplomats.  The panel I am previewing is corporate governance.  Rarely has there been more focus in the business world than today on this theme. 

The columnist Tom Friedman put his finger on the phenomenon. We live in a transparent world, whether we like it or not.  When everyone has a blog, a MySpace entry, a YouTube video online, and a camera built into his cell phone, we have all unwittingly become instant publishers, newsmakers and documentarists. 

Friedman’s point is that in his ‘flat world’, everyone – anyone -- can watch, listen, and participate in the global discourse. Everything happens in real time, we are all protagonists and --by definition --public figures. This is an exciting taste of true democracy. At the same time, it also forces us to realize that traditional barriers are fast eroding. Technology and decentralization in decision-making have altered the playing field.

The real revolt in corporate governance began not with the Enron scandal but with the empowerment of private investors and the spread of free market principles to formerly closed societies. Today, there are more than 13 million households in India invested in capital markets. There are believed to be approximately 60 million active equity investors in China.  This surge of new shareholders around the globe creates opportunities to accumulate savings and wealth and to promote entrepreneurial ventures.  It also creates enhanced expectations of trust and financial predictability.

America has long been a nation of millions of small investors. From their homes and laptops, citizens make financial decisions based on real-time information and they expect truthful information on the companies they invest in.  It’s not just about balance sheets and profit and loss statements.  The scrutiny that is demanded goes hand in hand with the competitiveness that underlies today’s markets.  In a world of hyper-connectivity, success not just on what we do -- or our output figures -- but also on ‘how’ we do it.  That means building confidence and reliability. How we behave and how we interact with others – in the business context – is the essence of new corporate awareness.

The qualities we once thought of as ‘soft’ -– truth, integrity, openness, passion – are now the ‘hard’ currency of business operations. They are being integrated in mission statements, taught in business school, and form the essence of best business behavior. Dov Seidman, founder and C.E.O. of LRN, a business ethics company, in his book ‘How’ tells the story of a hospital in the U.S. that suffered from multiple customer complaints. When hospital leaders issued a directive to all doctors to apologize to patients for mistakes, the number of malpractice cases dropped and hospital business rose.

Sound simple?

The key ingredients of corporate governance are indeed simple. Adhering to them and enforcing them in the day to day life of a business is the hard part.  The OECD and the International Chamber of Commerce(ICC) describe the ingredients as follows –

1. An effective board of directors, properly  constituted  and held accountable for oversight and  company  leadership.

2. Disclosure and transparency. The quality and  reliability of information -- financial and non- financial -- provided by management to lenders,  shareholders and the public, forcing companies to  operate within legal bounds.

3. Basic shareholders' rights. Clear and published rules  on voting, participation at regular meetings,  transferability of shares, profit distribution and  company liabilities.
4. Accounting rules. Credible, concise, transparent,  easily comparable financial information about the  operations and budgets of companies.

5. Business modeling.  In many countries companies are  run mostly for the benefit of the shareholders, the  rightful owners. But there is another model, where  companies are run for the benefit of other significant  groupings as well -- such as customers, the general public or employees, the so-called stakeholder model,  and

6.  A regulatory framework.  Several governments have  already passed legislation dealing with various areas  of corporate governance. In general, most seem to  support such regulation in response to market crisis  or corporate fraud. But good corporate governance
must be viewed in longer and deeper terms.

In America today, at the forefront of the discussion about corporate governance are issues related to CEO compensation, corporate directors’ liabilities, shareholders’ rights and responsibilities. Companies that get these ‘hows’ wrong, that fail to rise with the transparency tide surrounding them, will suffer if not fail.

Corporate governance, then, requires a sea-tide transformation in order to promote stable and productive business environments. It starts with building a framework of rules and codes of conduct governing corporate relations and interactions –- between CEOs and boards of directors, between shareholders and managers, between employees and customers – but it doesn’t end there.

If ENRON and WORLDCOM were wake-up calls for America after a period of corporate excess, this decade continues to be marked by challenges and some important successes.  The Sarbanes-Oxley Act of 2002 paved the way for a comprehensive overhaul of corporate behavior from the boardroom to shareholders to the  auditing function.

The act includes important reforms in three areas:

• First, (accountability) creating the Public Company Accounting Oversight Board to help monitor and improve the performance of accounting firms, and the self-regulation of such firms;
• Second, (reporting) mandating new practices for fuller and more frequent financial reporting; and
• Third, (enforcement) enforcing existing financial disclosure laws more aggressively, which has resulted in over 350 corporate executives being convicted or penalized and prevented from serving as officers of public companies again.

In tandem with Sarbanes-Oxley, the White House’s Corporate Fraud Task Force focuses on enhanced criminal enforcement through the Department of Justice’s interagency mandate that extends to state and local levels.

I don’t want to leave you with the notion that all corporate America is rotten. ENRON and TYCO are two of several dozen investigations into abuse and breach of trust by business executives. This is less than one-tenth of one percent of the 20,000-plus public corporations in the United States.  For every ENRON, there are thousands of companies pursuing high corporate governance standards and realizing that the short-term ‘pain’ of complying with more stringent scrutiny leads to long-term ‘gain’ in terms of corporate image, a more productive workforce, and profitability. Great companies understood this even before the wave of scandals and new rules. 

The CEO of Whole Foods, the fastest-growing supermarket retail chain in America, John MacKay, has seen his investment of 45,000 dollars rise to over 5 billion dollars in 20 years.  The secret to his success has transparency and engagement written all over it. "The enlightened corporation should try to create value for all of its constituencies," he states, by which he means customers, employees, managers, investors, communities and the environment. Using only biodegradable materials for packaging in his stores has accounted for a market share increase of 10 percent, he estimates, because caring for the environment is a proven boost to business trust and, by the way, sales.  His ‘5 percent days’ when 5 percent of all store sales nationwide is donated to nonprofit organizations is not only charitable but also a way to attract new customers from those NGOs’ membership and mailing lists. Good practices consistently infuse Whole Foods with a new and evolving cultural ethic.

America has championed corporate ethics and new codes of conduct around the world realizing, as Tom Friedman implies, that a level playing field is important for developed and developing nations alike.  Today, more than 1,500 foreign companies file reports with the SEC and represent nearly 10 percent of all reporting companies. Some of these companies' shares are among the most actively traded on U.S. markets.

Lawmakers and regulators globally are working to improve corporate governance, auditor oversight, and other aspects of the financial reporting process. The fundamental issue for everyone involved in financial markets, regardless of company or country, must be to maintain high standards that foster trust and confidence. Investors can—and do—move capital around the globe with a few keystrokes on a computer. Capital will flee environments that are unstable or unpredictable—whether that's a function of lax government controls, weak corporate governance, ineffective accounting standards, or a lack of transparency. 

The need to engender this trust in Central and Eastern European markets was at the center of the ICC’s Corporate Governance Roundtable in Prague earlier this year.  It was also an important part of our Embassy-sponsored conference in cooperation with the Czech Senate in September called Transparency and Ethics: Toward an Accountable Society.  We looked at challenges in government, business, the NGO sector and the media-as-watchdog in terms of strengthening transparency safeguards throughout society.  A better informed public, more accountability, clearer and enforceable laws and codes of conduct, were some of the principles examined. 

What did we learn?

First, that old habits die hard. Second, that transparency is a win-win solution, a virtuous circle: accountability engenders trust > trust builds efficiency > economic transactions and democratic practices are strengthened in the process. Third, leadership must come from the top. And businessmen, like government leaders, have a duty beyond their narrow constituencies.

John MacKay put it best: “Like medicine, law, and education, business has a noble purpose: to provide goods and services that improve customers’ lives, to provide jobs and meaningful work for employees, to create wealth and prosperity for investors, and to be a responsible and caring citizen.” Like many other visionary CEOs, MacKay sees customer satisfaction and social responsibility as vital parts of a good business strategy.

In conclusion, then, we see the importance of fostering corporate governance at home and abroad as a means and not an end in itself.  The stricter rules holding companies to account must not be framed as impediments to growth or freer trade; they are motivators of a new corporate culture that inspires and demands the best management principles and is responsive to an increasingly competitive global marketplace. 

Thank you.