For a time, good corporate governance and socially responsible investment (SRI) had little to do with each other. The growing activism of institutional shareholders, however, has made SRI - along with what this author calls the economics of reputation, and the recognition that CSR must be encouraged - one of the drivers behind the widespread willingness to assume greater corporate social responsibility.
Two popular misconceptions abound about corporate governance, that it is about resolving the problems created by one or two "rotten apples" such as Enron and WorldCom, and that it is a legalistic subject of interest only to businessmen. Neither is correct. There is, in fact, increasing public concern about corporate governance around the world. For example, Korea's reforming Prime Minister, Roh Moo Hyun, took office in February 2003 pledging to put better corporate governance of the country's giant chaebol conglomerates high on his list of governmental priorities. Also, improving corporate governance is being discussed at the highest political levels in the European Union, Tokyo, and Hong Kong.
Nevertheless, it is probably correct to state that the subject has been given the greatest airing in the Anglo- Saxon word. This is hardly surprising, as the sudden and unexpected collapse of a large public company resulting from corruption or incompetence is surely the most prominent example of corporate governance failure. Such corporate failure, and the consequent public outcry it brings, is most evident in the United States, in the wake of the causes celebres referred to earlier.
The British financial press tends to take a rather complacent view of corporate governance in the UK, but recent years have seen a number of former FTSE 100 constituent members come upon hard times: British Energy; Cable & Wireless; Independent Insurance, Marconi; and Railtrack. It is true that Independent Insurance is the only member of this list that seems to have suffered from Enron-style corruption, with the rest the victims of weak management. However, the result for shareholders has been the same -- a decline, and in some cases, an evaporation, in the value of their shares. During 2001, the Australian business community and the political establishment was rocked by the sudden failure of three large companies: HIH, Ansett, and One.Tel. Australian regulators and business people subsequently criticized weak corporate governance as a key factor in the demise of these companies
Canadian business comes out relatively well in this dismal list, although we should not ignore the travails of Nortel Networks, whose market capitalization has fallen from over one third of the total market capitalization of the Toronto Stock Exchange to less than three percent, with thousands of job losses along the way.
However, there is growing public indignation over what many observers would call the real scandal of corporate governance -- the way executives of many large companies have abused their position to transfer significant amounts of shareholders' wealth to themselves. Not all large companies have of course behaved like this, but such "corporate malfeasance," to use Alan Greenspan's terminology, has left a residue of suspicion about business among the public and politicians alike. It may be worth recalling that at this level, concern about corporate governance is no more than an "agency problem" identified as such by Adam Smith as far back as 1776. Smith noted that a corporate system based upon limited companies separates the owners and managers of a business. It is a system that has worked well, on balance; but without effective checks and balances it can facilitate an Enron-type scandal.
Corporate governance first really emerged as a significant issue in its own right in the UK in the early 1990s, as a result of a number of corporate scandals, most noticeably in companies linked to the late Robert …