Spotlight Corporate governance and responsibility

CORPORATE GOVERNANCEOECD principles

The recent spate of US corporatefailures and breakdowns in truthfulaccounting has undermined people’s

faith in financial reporting, corporateleadership, and the integrity of markets theworld over. The fact that the wave ofscandals has come hot on the heels of acollapse in the high-tech bubble has a sharpironic flavour. Both events have their roots inthe heady days of stock market exuberance,when anything was possible, from creatingmultibillion dollar companies with littlemore than an idea, an investment angel anda lot of faith, to believing that markets wouldbuy any yarn a group of fast-talkingexecutives could spin, even if to cover upserious losses and illegal practices. Thecorporate scandals and the bursting bubblehave different causes though: on the onehand, illicit management decisions andcover-ups, and on the other, over-bloated

investment assessments followed by a sharpmarket correction that spelt the end forthousands of high-tech wannabes. Still, it isdifficult to disentangle the negative effectsthese two parallel developments have had onthe confidence of investors.

With the bursting of the high-tech bubble,share values were written down and venturecapitalists took a bruising, as did manyshareholders. That is the downside ofcommitting resources to investments with ahigh risk/high reward profile. But in the casesof corporate misbehaviour, the public,employees and pensioners were deliberatelymisled. They have now lost many billions ofdollars, and in some cases their life savings,while some insiders benefited. The trulyunfortunate part is that both events might intheir own way have been avoided (or at leastanticipated) if effective corporate governance

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Corporate governanceand responsibilityFoundations of market integrityBill Witherell, Head, OECD Directorate for Financial, Fiscal and Enterprise Affairs

Good governance goesbeyond common sense. It is a key part of the contractthat underpins economicgrowth in a market economyand public faith in thatsystem. The OECDPrinciples of CorporateGovernance and Guidelinesfor MultinationalEnterprises are twoessential instruments forensuring that this contract is honoured.

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7Observer No. 234 October 2002

and high levels of corporate responsibilityhad been respected.

The role of good governance and corporateresponsibility in helping to assure the well-functioning markets needed foreconomic growth and development cannotbe taken for granted. This idea has beenrepeated by government and business leadersthe world over, and most recently reaffirmedat summits from Doha to Johannesburg. Butwe are falling short: the systems may be there– the US had, on paper, one of the best – butevidently they have not worked. Fixing themwill require both private initiatives andstrong government action.

Good corporate governance – the rules andpractices that govern the relationship betweenthe managers and shareholders ofcorporations, as well as stakeholders likeemployees, pensioners and local communities– ensures transparency, fairness andaccountability. It is a prerequisite for theintegrity and credibility of market institutions.By building confidence and trust, goodgovernance allows the corporation to haveaccess to external finance and to make reliablecommitments to creditors, employees andshareholders. It is this contract that underpinseconomic growth in a market economy.

When this trust is undermined, lenders andinvestors lose their appetite for risk, andshareholders offload their equity, resulting inlost value and reduced availability of capital.This goes for every stage of the investmentprocess, affecting issues from propertyprotection and ownership registration, todisclosure and the distribution of authorityand responsibility among company organs.

Clearly, the importance of good corporategovernance goes far beyond the interests ofshareholders in an individual company.Indeed, the central corporate governanceprinciples of transparency and accountabilityare crucial to the integrity and legalcredibility of our market system. We alreadytrust corporations to create jobs, generate taxrevenues and provide markets with goodsand services. Increasingly we make use ofprivate sector institutions to manage oursavings and secure our retirement income.

Private participation in delivering theseservices has been proven to work, but it is

constantly under scrutiny and must remainso. Some private pension funds, forinstance, have recently been informing theirpensioners of the prospect of reducedpayments, due to falling stocks. If marketrisk and cycles were the only cause behindthese announcements, that would be fine.The stakeholder public would probably livewith that, and anyway, the market providesother instruments for customers to invest in,like property or long-term bonds. But to theextent that the market’s fall can be traced toscandals and breaches of trust, publicsupport wanes and the market becomesunworkable. The state’s reputation is also at stake.

This underscores a widespread public – andhence political – interest in reinforcingcorporate governance practices. Suchconcerns become even more important in

an international context where the fullbenefits of free capital flows will only berealised if there is a mutual understandingon the basic elements of good corporategovernance. These are the core concernsthat triggered and nurtured the discussionson corporate governance in OECDcountries, leading to the development of the OECD Principles of CorporateGovernance. These principles, that havereceived OECD ministerial backing, formthe basis of a true global standard incorporate governance.

In the light of recent developments, OECDministers have called for an assessment ofthese principles. The basic ideas enshrined inthe principles are not being questioned, butthere evidently is a need to provide furtherguidance, particularly with respect to

achieving effective implementation in thedynamic markets of the 21st century.

Corporate structures change fast, whilefinancial innovation and globalisation allpresent new challenges to maintaining good corporate governance. The recent high-profile cases of governance failure andcorporate misconduct have shown thatcorporate governance mechanisms sometimeshave not kept up with these developments.

The OECD principles already highlight thatan annual audit of accounts be conducted by“an independent auditor in order to providean external and objective assurance on theway in which financial statements have beenprepared and presented”. The principle isthere, but as we have seen recently, it was notalways heeded. Governments, securitymarket regulators and the private sector itselfare all taking steps to strengthen theimplementation of this principle.

Nor have company boards lived up to theirresponsibilities. For instance, the OECDprinciples recommend that the board“monitors and manages potential conflicts ofinterest of management, board members andshareholders, including misuse of corporateassets and abuse in related partytransactions”. There is obviously a gapbetween risk management practices bycorporations and investors and the existingtools for disclosing, accounting for andcontrolling risk. And monitoring is not easy,since the conflicts of interest that have beenidentified extend beyond the corporationsthemselves to financial analysts, ratingagencies and financial institutions. In otherwords, who can we trust? We need todevelop governance tools and incentivestructures that are more robust in the face ofrapid financial innovation, and proceduresthat leave no doubt as to the stakes involved.Accounting standards need to becomeprinciple-based, rather than being based onrules that invite evasion.

But while details and principles may bestrengthened on paper, they will serve littlepurpose without the political commitment toabide by them. The aim is to reinforce thecontracts of trust that drive our marketdemocracies; governments as custodiansmust take a lead in ensuring these contractsare not only understood, but honoured too.

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We need to develop governancetools and incentive structuresthat are more robust in the faceof rapid financial innovation,and procedures that leave nodoubt as to the stakes involved.Accounting standards need tobecome principle-based, ratherthan being based on rules thatinvite evasion.

Responsibility

Corporate managers’ responsibilities, ofcourse, are not limited to producing truthfulfinancial reporting, carrying out the corefunctions of conducting business andobeying the various applicable laws.Businesses also have to respond to theexpectations of the democratic societies inwhich they operate – expectations that oftenare not written down as formal law. Theterm “corporate responsibility” refers to theactions taken by businesses in response tosuch expectations in order to enhance themutually dependent relationship betweenbusiness and societies. Shareholders, in fact,expect their corporations to meet society’sdemands, consistent with maximising thevalue of the firm. Indeed, experience hasshown that companies that do so aregenerally the best performers in the longrun.The challenge of meeting these expectationshas become more complex in today’s globaleconomy, with firms typically operating in anumber of legal, regulatory, cultural andbusiness environments. Globalisation’sbenefits are well documented, but it hasraised legitimate public concerns, several ofwhich have been directed at multinationalenterprises as agents of the globalisationprocess. Multinational enterprises sometimesare perceived as taking the money andrunning, not doing enough to build up localeconomies, and so on. They are accused ofbeing party – in many cases, inadvertently –to serious problems such as corruption ofpublic officials, human rights and labourrights abuses and environmental damage.Companies have to address such concernswhen they arise. In fact, apart from ethicalconsiderations and the law, their host-country market valuations would suffer ifthey ignored them.In recent years, businesses have engaged involuntary initiatives to improve theirperformance in various areas of businessethics as well as legal compliance. They havedeveloped codes of conduct and managementsystems designed to help them comply withthese commitments. They have developedthem with the help of labour unions, non-governmental organisations and governments.

The recently updated OECD Guidelines forMultinational Enterprises complement andsupport these private initiatives for corporate

responsibility. These guidelines arerecommendations addressed by governmentsto multinational enterprises operating in orfrom adhering countries. Being from theOECD is somehow appropriate, given thatnearly all FDI that takes place in the worldoriginates and is financed in the OECD area.In fact, the MNE guidelines are the onlymultilaterally endorsed instrument forcorporate responsibility and reflect extensiveconsultation with countries outside theOECD, as well as business and civil society.They cover the full range of areas relevant tostandards of responsible business conductand so provide to corporations a mostvaluable international benchmark of society’sexpectations (see article, p.10).

Further improving the “fit” betweencorporations and the societies in which theyoperate is a key goal of the OECD. Thatmeans strengthening the governance

structures and practices within corporations,and their relationships with shareholders andother stakeholders. Good corporategovernance and corporate responsibility areno longer add-ons to markets; they areintegral to them. They are the basis on whichpublic-private partnerships can grow. TheOECD is determined to lead the way. ■

References● The OECD Principles of Corporate Governance

and the MNE Guidelines can be consultedonline at www.oecd.org, click corporategovernance.

● Fliess, B. and Gordon, K., “Better BusinessBehaviour”, in OECD Observer No. 229,November 2000. Article focuses on corporatecodes of conduct. See www.oecdobserver.org,search Fliess.

● Witherell, W. and Maher, M., “Responsiblecorporate behaviour for sustainabledevelopment”, in OECD ObserverNo. 226-227, Summer 2001. Seewww.oecdobserver.org, search Maher.



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End of an affair?An opinion poll in BusinessWeek magazine shows half of the US believing that what is goodfor business is not necessarily good for their country. Hardly surprising, you might think –except that the poll was carried out over two years ago, before the high-tech bubble burstand well before the recent corporate scandals. And the fact that the opinion poll was in oneof the US’s main pro-business magazines meant that the results simply had to be takenseriously.

They were also quite unexpected. The BusinessWeek poll was wide-ranging, withrespondents asked to agree or disagree with several given statements. The one that made theheadlines was simple: in general, what is good for business is good for most Americans.Some 47% of respondents agreed with that statement, but 49% disagreed. This was muchmore negative than the previous poll conducted in 1996, when just 28% felt their interestsand those of business were not necessarily the same. Another finding to ruffle corporateplumes in the 2000 survey was that 72% of respondents agreed that business had gained toomuch power over too many aspects of American life.

It was not all bad news for corporate America. Indeed, 68% of respondents agreed thatAmerican business should be given most of the credit for the prosperity that prevailedduring most of the 1990s. However, one question might make worse reading if the poll wasconducted today: when asked how much confidence they had in those running big business,only 19% had a lot of confidence, though as many as 58% had at least some.

Opinion polls have their limits, though the BusinessWeek survey at least suggests that,probably because of a backlash against globalisation as demonstrated at Seattle in 1999, thepublic image of corporate America was looking tarnished well before the scandals thaterupted at Andersen, Enron and elsewhere. These scandals appear to have transformed thatdisillusion into a crisis of confidence.

Is it the end of the affair between America’s public and its business world? Probably not,though a more demanding public will mean the relationship may never be quite the sameagain. There is a coincidental footnote to add to this story: the issue of BusinessWeek inwhich this rather astonishing opinion poll appeared was dated 11 September, 2000.

● “Business Week/Harris Poll: How Business Rates: By the Numbers” in BusinessWeek, 11September, 2000. See the full poll at: http://www.businessweek.com/2000/00_37/b3698004.htm

Globalisation has given rise to a kindof economic “culture shock” andinternational business is one of the

principal sufferers. Tens of thousands ofcompanies are trying to conduct business ina global mosaic of legal, regulatory, businessand social environments. Operating in all ofthese environments and responding to theirdiverse expectations of corporate behaviouris a formidable challenge, in particular aspublic (and market) pressure becomes more

intense. Many companies have takenpositive steps by introducing corporatecodes, embracing multilateral principles andso on, yet, according to participants at arecent roundtable on the OECD Guidelinesfor Multinational Enterprises there is muchmore to do.

Take a recent study of the results of auditsof 300 supplier establishments operating inpoorer countries that was financed and

published by a group of leading Frenchretailers. In the view of Neil Kearney ofInternational Textile, Garment and LeatherWorkers’ Federation “the details make grim reading” – children under 13hard at work, non-compliance withminimum wage laws, working weeks of “86hours or more”, “inadequate” occupationalhealth and safety conditions, “endemic”abuse of workers’ rights, including suppliersusing physical force to prevent workers


CORPORATE GOVERNANCEMNE guidel ines

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One of the OECD’s mainroles is to bringstakeholders together todiscuss key globalchallenges. Fewgatherings exemplifythis more than theroundtables held todiscuss progress onimplementation ofthe OECDGuidelines forMultinationalEnterprises.The mostrecent one washeld over thesummer.*

The supply chain: a key linkfor better governance

CORPORATE GOVERNANCEMNE guidel ines


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from exercising their right to organise.Other documents highlighted obstacles toorganising labour unions and the presenceof children in the supply chains of majoragrifood companies. These are probablyexceptional cases and most goodcorporations would not tolerate them, butwhere they exist, all would agree they mustbe taken seriously.

The OECD roundtable’s theme was supplychain management. It showed theadvantages and difficulties ofmultistakeholder cooperation. For while all participants, whether government,business, labour or civil society

groups, clearly cared about the problem,they had different views on how best to tackle it. Business generally arguesthat the key lies in better supply chain management to alleviate poverty and improve respect of human rights, others see tighter regulation andsurveillance as the only way to achieveprogress. Deborah White of Proctor andGamble said the business community was committed to finding answers, and while André Driessen from theConfederation of Netherlands Industriesand Employers underscored the business sector’s willingness to co-operate with unions, NGOs andgovernments to search for solutions,Stephen Canner of the US Council forInternational Business noted thatgovernments have to act too as “there arelimits to what companies can and cannotdo”. Others countered that whilegovernments clearly had an important jobto do, lack of government responsibility “is not an excuse for lack of corporateresponsibility”.

Can domestic law help? Yes, but it is notenough. Some countries like China, asSerena Lillywhite from Brotherhood of SaintLaurence, an NGO that inherited a smallbusiness, noted, set certain labour standards

and rules that matched those of manyOECD countries, but their enforcement was lacking. International declarations onlabour and human rights, and standards and principles such as those from theOECD help to fill that vacuum, as docorporate codes of conduct and otherprivate standards issued by labour unionsand NGOs.

Business representatives stressed their viewthat corporate responsibility in the supplychain could not extend to “taking on” othercompanies’ problems – in particular, theirlegal or regulatory responsibilities.Companies exist as discrete units for

reasons of economic efficiency and legalaccountability, they said. In any case, it isnot economically or logistically feasible forall enterprises to monitor and audit all their suppliers.

This position sparked a reaction. Carol Pier of Human Rights Watch argued thatwhen companies fail to use their influenceover their suppliers’ regarding respect oflabour rights, these companies are complicitin those human rights violations. Ineke Zeldenrust of the Clean ClothesCampaign was pragmatic in stressingresponsible supply chain management and the need to “break it down … and look at how it (supply chain management)can be operationalised.”

Monitoring the guidelines

Roundtables like this one on MNE supplychains are held annually at the OECD inconjunction with meetings of the NationalContact Points (NCPs). These have been setup in 37 countries to monitor theimplementation and efficacy of the MNEGuidelines and to promote awareness ofthem. Promoting the Guidelines isimportant, since standards and principles,however eloquent or tough to negotiate theymay be, are quite powerless unless as many

people as possible know about them. TheMNE Guidelines are now quite well knownby business, unions and civil society insome countries and are featured on manywebsites. But as reports from the NCPsshow, they are hardly known at all in othercountries.

Yet, if the MNE Guidelines succeed inwinning the confidence of business, tradeunions and NGOs, they could become oneof the most important global initiatives forglobal corporate responsibility there is,bolstering such instruments as the UNGlobal Compact. The OECD, as home tomost of the world’s multinationals, can andmust win that confidence.

The NCPs have already begun to bringmaterial on specific cases for investigation,of which there are now over 20. Theseinvolve consideration by adheringgovernments of issues that go to the core ofthe debate on globalisation, whether it bebehaviour of French companies (there weretwo) in Burma, a Canadian company’s“resettlement” problems in the Zambiancopper belt, occupational health and safetyand accident indemnities for Indonesianand Philippine sailors working for OECDbased maritime transport companies, aKorean-run production site in Guatemala oreven a UK retailer’s behaviour elsewhere inthe OECD.

No one has a monopoly on the answers, but it is only by knowing andunderstanding the problems face on, and working together to deal with them that corporate responsibility will improve.After all, whether the goal be sustainabledevelopment, poverty reduction, equitable rights or just plain decent ethics,better business behaviour is in everyone’sinterest. ■

The OECD Guidelines for MultinationalEnterprises can be consulted atwww.oecd.org/daf/investment. Detailedaccounts of the proceedings of thisroundtable are available on request [email protected] or [email protected].

* Views expressed by participants at the roundtableare not necessarily shared by the OECD or itsmember governments.

Companies exist as discrete units for reasons of economic efficiencyand legal accountability, business representatives said. It is noteconomically or logistically feasible for all enterprises to monitorand audit all their suppliers. This position sparked a reaction

After the accounting debacles ofEnron and WorldCom, thecredibility of large companies hit

rock bottom. In a bid to restoreconfidence, the US authorities nowrequire chief executives and chieffinancial officers of large listedcompanies to swear to the truth of theirfinancial statements. The chief executiveofficer (CEO) and chief financial officermay be charged with civil and criminaloffenses if any of their financialstatements are found to be false.

If only the problem were confined to the US, but it is not. The same kind of problem has arisen in Korea, whererecent accounting fraud in venturecompanies listed on the Korea Securities Dealers Automated Quotations index (Kosdaq), the Korean equivalent of the US Nasdaq,caused the index to plunge to a mere 53 on 19 September 2002 from a

high of 279 on 15 December 1999. The CEOs of 810 companies listed onthe Kosdaq have made voluntary pledges to ensure accurate accounting.Although these pledges are not legallybinding, the list of participatingcompanies will be publicly announcedand a company’s image risks beingseverely damaged if it fails to uphold itspromise.

Such events bring home the fact that asglobalisation proceeds at a fast pace,companies in different countries arebeing scrutinised in relation to the sameset of principles and guidelines. Tosurvive, it no longer matters whether acompany is an international or adomestic player. It still has to complywith what are internationally accepted asthe “right” principles of corporate ethicsand governance.

Companies are being made to act asresponsible citizens of this global society,and they could be severely sanctioned,not just by the market but by legislators,should they be seen to fall short of theirduty of making a good and honest profitfor shareholders and keeping clear,accurate and open accounts to prove it.

How can we promote ethical andresponsible business practices and thushelp make financially successfulcompanies in the process? And howshould the concepts of corporate ethicsand social responsibility in the 21stcentury knowledge society differ fromthose of the industrial era of the 20thcentury?

In order to implement corporatecitizenship globally, it is essential to

Knowledge in a world of riskForging a global corporate citizenYoung Chul Kang, Managing Director, World Knowledge Forum Secretariat

Can we promote ethical and responsible businesspractices and makefinancially successfulcompanies in the process? Yes.


CORPORATE GOVERNANCEWorld Knowledge Forum

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A jubilee of human knowledge

The theme of the third World Knowledge Forum (WKF) is “Knowledge in a World ofRisk: A Compass towards New Prosperity”.“We like to define the World Knowledge Forum as a ‘jubilee of human knowledge’,” saysthe WKF website (www.WKForum.org). “Evolution,” it says, “refers to steady, predictablechange. Revolution – like a rugby ball in which we cannot predict the direction of the nextbounce – is all about disruption, discontinuity, instability, and unpredictable change.Could this be deemed as a threat? Or opportunity?”The World Knowledge Forum takes place in Seoul, Korea on 15-18 October. This year’sspeakers include OECD secretary-general, Donald Johnston; World Bank HumanDevelopment Network managing director, Mamphela Ramphele; and 2001 Nobeleconomics laureate, Joseph Stiglitz.Governance issues figure highly on this year’s agenda, in particular at the OECD’s plenarysession on “Sustainable Globalisation: Politics, Money and Trends”. Bill Witherell,director of the OECD Directorate for Financial Fiscal and Enterprise Affairs, and WilliamDavie of Schlumberger, are among the speakers.

● Visit www.WKForum.org

CORPORATE GOVERNANCEWorld Knowledge Forum

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stick to one global standard, especiallyin the field of management practices. Bythis, I mean that one should not fooloneself by practising double standards.In Korea, an international globallyrenowned brokerage firm was recentlysanctioned by the authorities for leakingan internal report on SamsungElectronics to its customers prior topublication. This “accident” could havebeen avoided if the company hadadhered to the core operating principlesthat it abides by in other markets. Thesebrokers may try to defend themselves byarguing that this is a common practiceamong some Korean analysts, but it isthis sort of act that may hinder thedevelopment of a global standard ofcorporate citizenship. It also givesammunition to the anti-globalisationactivists.

Some corporate leaders of multinationalcompanies based in developingcountries may argue that they would beunable to compete with domestic firmsif they had to follow the strict code ofethics set by their headquarters. Clausesstrictly prohibiting kick-backs, briberyor undue profits from abusing insiderinformation make it difficult for theirbusiness to survive, they say. However,one can cite several model practices

from all over the world that demonstratethe execution of global managementstandards. Johnson & Johnson is apharmaceutical company that now runsimmensely successful operations inKorea while following to the letter thesevere code of ethics imposed by its US

headquarters. Johnson & Johnson’smanagement have steered clear ofuntoward practices and still manage torun a successful business.

Codes of ethics or corporate citizenshipmust be observed wherever a firm doesbusiness anywhere in the world. Corporate governance is a key element of this equation, and may help us to more quickly reach the goal of globalcorporate citizenship, where we can besure that all companies operate to the same standards wherever they are doing business. ■

To implement corporatecitizenship globally, it isessential to stick to oneglobal standard, especially inthe field of managementpractices.

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Global corporate citizen

CORPORATE GOVERNANCEResponsible accounting


The current crisis in confidence overcorporate financial reports raisesquestions that go well beyond a

company’s financial sustainability. Businessfailures provide a vivid reminder of howfundamental corporate activity is to the livesand livelihoods of people and communitiesworldwide. As shareholders, institutionalinvestors, trade unions and policymakerstake stock of the social repercussions of theEnron and WorldCom affairs, and with theUN World Summit on SustainableDevelopment (WSSD) still fresh in ourminds, it is time for governments to addressthe limits of financial reporting.

By most assessments, there were two mainelements underlying the events that haveprompted widespread calls for a higherethic of corporate responsibility. The firstwas a failure of accounting systems. Thesecond was a breakdown of corporategovernance. Business collapses in recentmonths were in part attributable to pooraudits of required information. But, equallyimportant, they resulted from a fundamentalreality of financial reporting: even soundnumbers that comply fully with requiredstandards do not deliver all thatshareholders and others need to know toassess the true health of a corporation.

As they currently stand, financial reportsmeet certain narrow technical requirementsand provide a glimpse of past performance– last quarter’s earnings or last year’srevenues. But what about the future? Whereis the information on the firm’s capacity to

innovate, train and enrich its human capital,enhance its reputation, strengthen brands,alliances and partnerships? And what aboutmeasures of public trust and the quality ofgovernance?

All these intangible assets, if reported at all,appear in non-comparable and inconsistentform. This is the reality, even though themarkets clearly signal the growingimportance of such intangibles as criticalunderpinnings of value in the marketplace.

The long-term sustainability of corporationsrests on a complex balance of factors. Whilefinancial viability is clearly vital, so too areelements such as the ability to adapt in a

changing market; to maintain official andpublic trust; to attract and inspire aworkforce; and to retain and expand thesupport of local communities and the clientbase.

But financial accounts rarely assess the fullenvironmental impact of a company’sactivities or products. Nor do they weigh uphow its human resources policies mayinfluence the workforce, or how publicopinion about its social and human rightsrecord may affect consumer attitudes to itsproducts. This is starting to change, as many corporations seek ways ofmeasuring their so-called “eco-efficiency”performance. They are doing this by using

Improving corporatebehaviour is vital tosustainable development.The Global ReportingInitiative can help show the way.

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Redefining corporate disclosureAllen L. White, Acting Chief Executive, Global Reporting Initiative


CORPORATE GOVERNANCEResponsible accounting

“sustainability reports” as an adjunct to theirfinancial statements.

The concept of “triple bottom line”reporting, such as that offered by the GlobalReporting Initiative (GRI) – an assessmentof a corporation’s performance in relation toprofit, people and the planet – isincreasingly welcomed by financial analystsand investors because it helps them makebetter judgements about the true value andprospects of a company across a broaderrange of assets. Moreover, it enablesmanagement to anticipate and exploitopportunities to strengthen the firm’smarket competitiveness and boost companytransparency.

Whether firms like it or not, a company’snon-financial performance can directlyaffect its financial health too. The linkbetween human rights or environment andshare value is already well-documented.Four of the world’s major stock markets –New York, London, Hong Kong andJohannesburg – have implemented or areproposing changes to disclosure rules thatwill require information on corporategovernance, environmental liabilities,HIV/AIDs programmes, and human capitalissues from basic working conditions to

policies on child labour. This developmentsignals a growing recognition that non-financial information linked to sustainabilityperformance is an essential ingredient inforecasting and securing a company’sfinancial prospects.

Fortunately, a variety of tools are nowavailable to make possible an ever-closeralignment between enhanced financialreporting, sustainability reporting andprinciples of corporate governance. Withthe release of its 2002 Sustainable ReportingGuidelines, the GRI provides a flexiblemechanism for such enhanced reporting,offering a detailed methodology forperformance disclosure. The GRI guidelinescan be seen as complementing other

instruments, like the OECD Guidelines onMultinational Enterprises and its principlesof corporate governance, which guide goodbusiness practice. The GRI guidelines havebeen developed since 1997 in a consultativeprocess involving thousands ofrepresentatives from the business,accountancy, labour and NGO sectorsaround the world. They provide a ready-to-use, consistent and comparableframework designed to reinforce traditionalfinancial reporting.

What kind of information do new GRI-based reports contain? Companies thatuse the guidelines will report on a broadarray of issues, including corporategovernance; financial flows from thecompany to the community where itoperates, including taxes, payments,salaries, etc.; materials and energy use; andcarbon emission and biodiversity. Thereports will also cover labour practices andhuman rights; bribery and corruptionpolicies; and product stewardship (how thecompany handles its responsibility for thewhole product life cycle and supply chain).

Knowing, for example, how muchgreenhouse gas a company is producing isimportant not only for the environment, but

also for shareholders, especially if suchemissions are taxed or subject to carbontrading. In the same vein, corporategovernance is no longer an arcane issuerelevant only to boards of directors. It isfundamental to the very survival of the firmand to the well-being of its workers,suppliers and communities.

The fact that GRI guidelines are now usedby more than 150 companies worldwide,including ABB, General Motors,Royal/Dutch Shell, Eskom, Rabobank, SouthAfrican Breweries, Nissan and Ford,underlines the growing recognition of thisreality. As the business case for sustainabilityreporting is further articulated andunderstood, the number of companies

issuing GRI reports is likely to reachthousands within a few years.

Sustainability cannot be reached without therobust and focused input of a healthybusiness sector, working in closecollaboration with governments and the restof civil society. At the Bali preparatorymeeting for the WSSD in June 2002,ministers specifically agreed, in the draft Planof Implementation for the summit, on theneed to enhance corporate environmentaland social responsibility and accountability,“taking into account such initiatives as ...theGlobal Reporting Initiative guidelines onsustainability reporting...”.

As was evident in Johannesburg, there is anear-global consensus that companiesshould go beyond financial philanthropyand apply their expertise and technology tosolve social problems.

Judging from media reports and publicopinion polls, the level of public trust incorporations is at an all-time low. Thedisruption and loss to workers, investorsand communities associated with the recentcorporate failures have taken a severe toll oneconomies and societies. Not only is there aclear sense that corporations have aresponsibility to provide a full and moreaccurate account of their financial situation,but also that they must make more earnestefforts towards sustainability if they are towin back public support. This is clear fromwidespread calls by major NGOs for aninternational, legally binding mechanism tohold transnational corporations accountablefor their behaviour.

Governments must make every effort toassist businesses to meet these challenges.The GRI Sustainable Reporting Guidelinescan play a vital role. ■

References● Environics International survey:

www.environicsinternational.com● GRI and the 2002 Sustainability Reporting

Guidelines: www.globalreporting.org● UNEP (2002), Industry as a Partner for

Sustainable Development – 10 Years After Rio:The UNEP Assessment.

● Massie, R. (2001), “Reporting onsustainability: a global initiative”, in OECDObserver No. 226/227, Summer 2001,www.oecdobserver.org, under sustainabledevelopment.

Non-financial information linked to sustainability performance is an essential ingredient in forecasting and securing a company’sfinancial prospects.

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CORPORATE GOVERNANCEBusiness v iew


Ten years ago at the Rio Summit, 50 business leaders pledged acommitment to sustainable

development. That was the start of theWorld Business Council for SustainableDevelopment (WBCSD). Since then, wehave trebled in size and hugely amplifiedthe voice of business in widespreaddialogue.

Business is good for sustainabledevelopment, and sustainable developmentis good for business. It should be at theheart of business thinking and governmentpolicymaking.

What does that mean? Well, it means toughchoices and new thinking. For instance,you choose to work by a set of declared

Better governance forsustainable business*

Philip Watts, chairman of thecommittee of managing directors,Royal Dutch/Shell group andchairman of the World BusinessCouncil for SustainableDevelopment

Sustainable development isnot against businessinterests. In fact, businesscan profit from it.

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CORPORATE GOVERNANCEBusiness v iew

principles and to stick to them whatever thecircumstances.

You say “no bribery of any kind”. You makesure it’s clear to everyone that you mean itand if anyone goes against it you ask themto leave. If you can’t win business withoutbribes you go without. If necessary youleave the country or you get out of jointventures – even if there are short-termfinancial hits.

You set environmental standards and keepto them. If you have an important projectthat is likely to fail those standards, you tellyour people “no go” unless they find waysto get the environmental element in line.You’ll be amazed at the innovation achallenge like that can unleash. If they can’tdo it, you leave it.

You put people and communities in theframe. If you are working in a developingcountry and your staff take it for grantedthey will use the usual internationalcontractors, tell them to think again. Makeit the norm to find local firms, build localcapacities.

I can hear you thinking “that’s the best wayto lose business, to lose out to competition,that I’ve heard in a long time.” Not so, inthe long run. Once people know you won’tbribe, once you make eco-efficiency

standard practice, once you have developedlocal, more cost-effective, contractors, yourcompetitive edge will be enhanced.

Care for the environment and social justiceshould be an integral part of the economicdevelopment that funds progress.Demonstrating this in action helps us meetsocieties’ expectations, and that is anincreasingly important part of ourcommercial challenge. Being seen to sharesocieties’ concerns attracts and motivatespeople to join and stay with a company.Equally, it boosts that company’s reputation

with a range of interested parties who willoften be opinion leaders.

In my view there is no doubt that economic,social and environmental improvement isbest nurtured in open, competitiveinternational markets where governmentsset stable and pragmatic frameworks forbusiness investment. However, the benefitsof markets must be extended furthertowards the world’s poor.

Briefly, one of the keys to sustainableprogress in developing countries is foreigndirect investment (FDI). But only about 5%of FDI goes to the 40 least developedcountries. If that investment is to increase,especially in Africa, there must be anemphasis on establishing good governance,stable regulatory systems, pragmaticeconomic policies and accountabilitymechanisms.

But investment alone is not the answer.Linked to it is the challenge of developingAfrica’s human and natural resources to theAfrican peoples’ advantage with minimumadverse impact. We need partnerships forprogress between business, governmentsand civil society here, and we need themurgently. For me, it’s just as urgent forbusiness to take on board the essentials forpursuing sustainable development. Let mehighlight a few of them.

We have to learn to change. We need tostimulate innovation that allows us to createwealth in ways that reflect changingconcerns and deep-seated values. Weshould be taking on eco-efficiency as amanagement strategy – seeing how we cancreate more value with less impact in termsof energy and material. And we should beinforming consumers about theenvironmental and social effects of thechoices we offer them.

We have to demonstrate action to remaincredible. That’s why the WBCSD isdeveloping initiatives on sustainablemobility and sustainable livelihoods. Andwhy we are partners in a project to makethis summit “climate-neutral”.

Sustainable development isn’t an easyoption. We need to support each other, to share problems, experiences and

ideas. That’s the aim of two recentpublications.

The first sets out the WBCSD’s blueprint for action. It’s called “Walking the Talk” and it illustrates the argument with 64 case studies. Ten years after Rio we knowwe are on a tough journey of continuouslearning. WBCSD members see action to build a sustainable future as part of their commercial responsibilities. But

we can pursue that most effectively in partnership with governments, political leaders, NGOs and internationalbodies.

The second comes from Shell and it’s acollection of sustainable development casestudies from around the world – fromworking for biodiversity in Gabon topioneering cleaner fuel in Thailand, fromcommunity development in Nigeria toreducing gas flaring in operations there. It iscalled “There is no Alternative”.

We need more initiatives like thepartnership in China with the UnitedNations Development Programme (UNDP)on the West-East gas project. This projectwill be built by a joint venture with Chineseand international involvement.

The UNDP has carried out a survey tobetter understand the likely social impactson people who live along the route of the pipeline. It will be part of thedecision-making process. That kind ofindependent consultation gives invaluableinput and helps avoid future, often costly,problems. ■

* This is an extract from a speech given during theBusiness Day at the World Summit on SustainableDevelopment in Johannesburg, 1 September 2002. Mr Watts has also participated in the OECD RoundTable on Sustainable Development. More by Mr Watts can be found at www.shell.com

If you can’t win businesswithout bribes you go without. Ifnecessary you leave the countryor you get out of joint ventures –even if there are short-termfinancial hits.

We need partnerships forprogress between business,governments and civil society,and we need them urgently.

Spotlight


CORPORATE GOVERNANCEFamily f i rms

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Corporate governance has become anindustry – and a growth one at that.Conferences spring up like

mushrooms after rain. Technical assistancemoney gets spread around like so muchfertiliser, and acres of rain forest end up asexpert papers on “new and improved”corporate-governance frameworks.Policymakers and investor groups seem tolove it. But do the real decision-makers –business owners and managers – actually needor want corporate governance, and, if not,why should we expect them to buy into it?

Most corporate governance expertsconcentrate their attention on divergent

incentives of managers and shareholders.Disclosure rules are intended to stopmanagers from inflating companyperformance. Boards of directors areestablished to guide managers’ businessstrategy, to monitor their reporting systemsand to ensure that managers do not overpayor entrench themselves at shareholderexpense. In general, the corporate-governanceworld pictures owners and managers assitting on opposite sides of the table.

But what happens when the owner is themanager? This situation is more widespread– and more relevant to large companies –than many might think. Family-run

businesses account for more than 85% of allfirms in OECD countries. Such businessesmake up 30-40% of the 500 largestcompanies in the United States. The 30 OECD member countries contain at least244 family-run firms with annual revenuesof more than US$1 billion, not countinggiants like Microsoft or Berkshire Hathawaythat are still managed by their foundinggeneration. OECD family-run businesseswith annual revenues of several milliondollars probably number in the tens ofthousands.

In a family-run firm, a single person orgroup enjoys a controlling interest and can

Family-run firms tend to believe that principles of good corporate governance do notreally concern them. This is a mistaken view. The question is how to convince them.

When corporate governanceis a family affairRobert Zafft, OECD Directorate for Financial, Fiscal and Enterprise Affairs


CORPORATE GOVERNANCEFamily f i rms

appoint family members as managers, orcan unilaterally appoint, monitor,compensate and fire third-party managers.This situation may threaten minorityshareholders with exploitation, but offersthe controlling family the best of bothworlds: it can run the business as it sees fitand gamble, at least partly, with otherpeople’s money. As a consequence, if thepurpose of corporate governance is toconstrain managers and controlshareholders, one may well ask whether afamily-run firm would ever really want it.

The answer to this question is “yes”, but notnecessarily for the reason most commonlygiven: better access to capital. One oftenhears the argument that, when investorsrefuse to put their money in companies withbad governance, the cost of capital for suchcompanies goes up, making themuncompetitive. Eventually, so the argumentgoes, the owners/managers of such

companies must either mend their ways orgo out of business.

But firms can obtain external financing in anumber of ways besides issuing shares to thepublic, such as reinvesting profits, borrowingmoney or selling shares through privateplacements.

In such cases, providers of non-public sourcesof capital (banks, pension funds, insurancecompanies, venture capitalists, private-equityinvestors, etc.) expect to look out forthemselves. They will want to secure theirloans with company assets, to be able toaccelerate repayment of loans if the company’sperformance falters, and to review books andrecords directly. They will seek directassurances from the company’s auditor andofficers, or personal guarantees from thecompany’s owners. They will demand the rightto approve major transactions or money

transfers. For these capital providers, typicalcorporate-governance practices, such as boardreview of transactions between managementand the company, board committees, non-executive directors, or separate CEO/boardchairmen, hold little interest.

Data on family-run firms raise additionalquestions about the access-to-capitalargument. Of those 244 OECD family-runfirms with revenues of US$1 billion or more(“large firms”), only half are publicly traded.At the same time, the average ages ofpublicly traded and privately held largefirms are about the same, suggesting thatlarge private firms have been able to accesssufficient capital without inevitably“evolving” into publicly traded firms.

This observation is bolstered by Europeandata showing that the average companyoperates for 40 years before going public,and that when such a company does gopublic, nearly 60% of the money raisedfrom its initial public offerings goes into thepockets of family shareholders rather thaninto the business. In many cases, therefore,wealth diversification or liquidity may be agreater issue for family-run businesses thanfinancing operations.

Studies indicate that the stronger a country’scorporate governance, the more robust itscapital markets and the higher its level ofexternal financing as a percentage of GNP.However, while these findings may persuadepolicymakers, at the level of the individualfamily firm the slogan “embrace corporategovernance in order to access capital” canremain a tough sell.

Fortunately for the corporate-governanceindustry, a compelling case for corporategovernance can still be made, and itinvolves the greatest challenge family-runbusinesses face: management succession.Succession issues resonate strongly withbusiness owners. While the founder of afamily-run firm might believe that raisingmoney or diversifying wealth will neverpose a problem, one thing he does know forsure is that some day he will die.

Will his children be interested in runningthe business? Will they be capable? Willthey get up as early, stay as late, and workas hard as the founder did?

Keeping a business going across generationsis hard. In fact, North American and UKstudies indicate that only about one in sixfamily-run firms survives to the thirdgeneration. Failure to maintain the familybusiness can stem from any number ofcauses. Divisions form between thoserelatives enjoying both salaries anddividends and those receiving onlydividends. Jealousies emerge as some familyemployees rise higher than others or workless hard for the same pay. Supervisors find themselves incapable of firing anunder-performing subordinate who is achild or a sibling or a cousin.

As the business grows and markets evolve,finding sufficient managerial talent andexperience within the family becomesharder. Where the family decides at last tohire an outside manager, failure to motivateand monitor him can damage or destroy thebusiness.

Corporate governance goes to the heart ofthese problems, though many family-runfirms have never thought of it in theseterms. Families need corporate governanceboth to operate the business and to promotefamily harmony. This means putting in placedecision-making and monitoring proceduresthat are open and fair, as well as possiblyhiring non-family members as advisors,managers and directors.

It is not an overnight exercise, and often, bythe time the need for corporate governancehas been recognised, family relationships orthe business’s prospects have deterioratedbeyond repair.

Family-run businesses can represent thework – and the wealth – of severalgenerations. If business owners want topreserve, enlarge and pass on this legacy,they need to make corporate governance afamily affair.

References● Rydqvist, K. and Hogholm, K. (1995),

“Going Public in the 1980s: Evidence fromSweden”, European Financial Management, Vol. 1, No. 3.

● La Porta, R., et al (1997), “Legal Determinantsof External Finance”, The Journal of Finance,Vol. LII, No. 3.

● OECD (1997), Best Practice Policies for Smalland Medium-sized Enterprises, Paris.

While the founder of a family-run firm might believethat raising money ordiversifying wealth will neverpose a problem, one thing hedoes know for sure is that some day he will die.

Spotlight

Globalisation has drawn seriousattention to the importance of coreworkers’ rights on a global basis.

There is a strange paradox in the treatmentof labour when it comes to mainstreamdebates about globalisation. Surveys onforeign investors’ intentions suggest that inmost sectors market access, goodgovernance, skills and education levels aremore important in attracting investmentthan low wages or submissive workers. Yetrather than improving living and workingconditions, globalisation appears topressure governments into reducingworkers’ rights to minimise labour costsand attract foreign investment.

Take export-processing zones (EPZs) wheresemi-manufactured or raw materials areprocessed into goods for export by foreigncompanies, outside the normal laws andregulations of the host country. They mayoperate very differently in different parts ofthe world, but they tend to have one over-riding characteristic in common: tradeunions are tolerated in few, if any, of them.This is disturbing. An update in 2000 toan OECD report on trade and labourstandards noted that the number of EPZsworldwide had risen from some 500 in1996 to about 850, not counting China’sspecial economic zones. EPZs have become

commonplace in many parts of Asia andCentral America and are now spreading toAfrica as a development model.

Multinational companies may also simplydecide to switch country, or at leastthreaten to do so, when faced with labourdissatisfaction or the prospect of a cheaper

labour market, and this in good as well asin hard times. A study by CornellUniversity in 2000 found that, despite thelongest boom in US history, workers werefeeling more insecure than ever before.More than half the firms surveyed, whenfaced with union action, had threatened toclose the plant and move to another

Globalising workers’ rightsJohn Evans, General Secretary, Trade Union Advisory Committee to the OECD (TUAC)

More could be done tostrengthen the OECDGuidelines for MultinationalEnterprises to ensure globalworkers’ rights receive theattention they deserve inpolicy and businessdecision-making.


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country. In some sectors, the figure rose to68%. The fact that only 5% of firmsactually moved away does not lessen theperceived risk of the threat, increasing theimbalance of relative power of unions andemployers in the labour market.

The trade union response to globalisationmust be to ensure that, in terms of labour

conditions, we start a “race to the top” andstop the “race to the bottom” betweenmultinational companies. At the level ofTUAC, we are giving priority to maintainand encourage enforcement of the OECDGuidelines for Multinational Enterprises,revised by governments in consultationwith labour unions, businesses and NGOsin 2000. The guidelines arerecommendations for good corporatebehaviour, primarily addressed tocorporations based in countries that adhereto them but applying to their operationsworldwide, that cover 85% of total foreigndirect investment.

The MNE guidelines may not be binding ina legal sense at the international level butthey are not optional either. If companiescould simply pick and choose among theprovisions of the guidelines or subjectthem to their own interpretations, then theguidelines would have no value. Nor doestheir application depend on endorsementby companies. The OECD’s MNEguidelines are the only multilaterallyendorsed and comprehensive rules thatgovernments have negotiated, in whichthey commit themselves to help solveproblems arising with corporations. Mostimportantly, the ultimate responsibility forenforcement lies with governments. Thismakes the guidelines more than just apublic relations exercise.

To judge by experience of the past twoyears since the MNE guidelines were

revised, we have made some tentativeassessment of how they are functioning inpractice and what can be done to improvetheir implementation. One problem is thatprobably still less than half of thesignatories of the OECD guidelines havereally functioning National Contact Points(NCPs), which are meant to vet theimplementation of the guidelines. Though

an improvement on the situation before2000, we have still not arrived at a criticalmass of governments who take theirresponsibilities seriously.

Another problem is that the guidelines stillneed to be better known compared withother instruments, like the UN GlobalCompact. Within TUAC we have organiseda project to raise awareness among tradeunions, including a users’ guide for tradeunionists which is now available in severallanguages. With our partners, we arerunning workshops and seminars on theguidelines, particularly in non-OECDcountries. But we feel governments coulddo much more. Also, although cases arenow appearing before NCPs, they are oftenbeing dealt with very slowly. Of the 20cases which have been raised over the pastyear by trade unions, as of June 2002 onlyfive have been resolved or have led torecommendations being issued.

One might ask whether the OECD couldnot devote more resources to theimplementation of the MNE guidelines. Ifthe OECD does not take them moreseriously, who will?

There are other instruments in an evolving“toolbox” that the global union movementcan use to counteract the social downsideof globalisation. They include work by theGlobal Unions Federations to developcollective bargaining relationships withcompanies at an international level. Some

20 global framework agreements have beenconcluded – most in the past two years –between the federations and companies insectors such as mining, chemicals, food,forestry, services and automobiles.

TUAC is also part of a joint Global Unionscommittee reviewing the socialperformance of enterprises in whichworkers’ pension and saving funds areinvested, and it is beginning to train uniontrustees.

We have also been working closely withthe European Trade Union Confederationand the European Parliament to ensurethat, at the European level, initiatives canbe taken to achieve better enforcement of the MNE guidelines and linkagesdeveloped with European Works Councils.

There are also non-government activities inwhich unions are participating, such as theGlobal Reporting Initiative’s (GRI) work toestablish common international standardsfor corporate reporting on social andenvironmental sustainability (see article p.14), or certification schemes suchas SA 8000.

The International Labour Organizationitself is having to define its own role in thearea of corporate social accountability –one task for the newly established ILOWorld Commission on the SocialDimension of Globalisation.

For labour perhaps the greatest danger isnot globalisation itself; it is rather to arguepolicy paralysis as a result of it. Some of the tools to prevent this paralysis are there – it is up to the union movement tomake sure it uses them effectively, butgovernments cannot absolve themselvesfrom their own ultimate responsibility formanaging markets globally. ■

References● For more on the Global Unions Group:

www.global-unions.org● For the TUAC Users’ Guide to the OECD

MNE Guidelines: www.tuac.org● Bronfenbrenner,K. (2000), “Uneasy terrain:

The Impact of Capital Mobility on Workers,Wages, and Union Organizing”, CornellUniversity, report prepared for US TradeDeficit Review Commission.

CORPORATE GOVERNANCEWorkers ’ v iew


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A study by Cornell University in 2000 found that, despite the longest boom in US history, workers were feeling more insecure than ever before. More than half the firms surveyed, when faced with union action, had threatened to close the plant and move to another country.

Afew months after the FIFA soccerWorld Cup, the fever with which theJapanese people watched their players

in blue heroically reach the latter stages of thecompetition has not much dissipated inTokyo. But the interest is moving quietly fromthat of a sports event to the personality of aforeigner who engineered the team’sunexpected success and how he did it. He isPhilippe Troussier, a 47-year-old Frenchmanwho coached the Japanese team for four yearsuntil stepping down just after the World Cup.His place has been taken by another non-Japanese manager, the Brazilian Zico. Mr Troussier has set a high standard.

In fact, his is the second French success storyto take Japan by storm after Carlos Ghosn,the CEO of Nissan, who was sent by Renaultto rescue the financially troubled secondlargest automotive company in Japan andnow enjoys widespread respect in Japanesecircles (see references).

Mr Troussier was invited to Japan four yearsago when the country, together with Korea,volunteered to host the World Cup 2002.Doing well in football became a matter ofnational pride for both co-hosts. Humiliatingdefeat at an early stage of the competition hadto be avoided. This was an ambitious goal forJapan, since it had never won a single game

in the history of the World Cup! By 9 July,when the Japanese football team made itthrough to the final stages, Mr Troussier hadbecome a national hero. Eventual defeat byTurkey would not change that. The emperorand prime minister each sent a message toexpress their personal thanks.

Mr Troussier’s rise is full of lessons forJapanese managers working in largecompanies. When the Frenchman waschosen, there was considerable doubt andsuspicion as to whether a foreigner should beallowed to coach a Japanese team at all.Moreover, Mr Troussier was largely unknownin Japan – nor was he a household name inFrance – and despite some success in Africa, his track record had not been that

outstanding. Hardly a first choice candidatefor a nation bent on avoiding embarrassingdefeat. To cap it all, this Parisian had to speakthrough an interpreter.

How irrelevant all of this proved to be. Mr Troussier’s first pleasant discovery was thathe would work with several good youngplayers with international potential. Butbecause of the heavy culture of seniority andother background issues, they had not beengiven the chance to demonstrate their talents.He promptly replaced old players with theseyoung people, making Japan’s perhaps theyoungest team in the competition. (Ironically,his own country France’s dismal failure at theWorld Cup has been put down by many to afailure to do just that: renew an ageing team.)

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No longer the odd couple

CORPORATE GOVERNANCEJapanese management

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Japan: in search of a winning formulaRisaburo Nezu, Senior Executive Officer at Fujitsu Research Institute and board member of the Research Instituteof Economy, Trade and Industry, a research organ of the Japanese Ministry of Economy, Trade and Industry*

Teamwork, goals, out-of-bounds: sport is often held up as a model forbusiness. Now, the successof a French sportspersonality in Japan mayhold lessons for thecountry’s corporate players.


CORPORATE GOVERNANCEJapanese management

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Mr Troussier urged his players to think forthemselves and act independently, rather thanwaiting for his instructions. A spirit ofindependence and mental toughness were thequalities he wanted to inject into the minds ofthe Japanese players.

Out of frustration, the Frenchmanoccasionally criticised Japanese attitudes,sometimes in rather acerbic fashion. “Thosewho wait until the traffic signal turns greenare of no use on the pitch. You must gowhen there is no car coming,” he once said.In many respects, this ran counter to theculture that had dominated the Japanesesports community, where collectiveachievement is given priority overindividual success. He introduced a sense ofcompetition among the teammates andcaused a public uproar when he did notinclude some popular names in the finalteam sheet. In short, his management styleand handling of problems were anythingbut Japanese. He was stubborn and fromtime to time caused tensions in the camp torise. His abrasive style nearly cost him hisjob early on, but success followed success,with a runners-up spot for his youth teamat the FIFA World Youth ChampionshipNigeria 1999, a quarter-finals place at the2000 Sydney Olympics and victory in theAsia Cup the same year. How right he wasto stick to his guns; in Japan, a polite andconciliatory coach would probably not haveachieved as much.

If only Japan’s companies could follow Mr Troussier’s example. In the 1980s,Japanese firms dominated key globalindustries such as electronics andautomobiles. Today, although informationtechnology is still a strength, the worldcorporate directory is dominated byAmerican and European names, like Nokia,Motorola, Microsoft and Dell. Koreanelectronics companies, like Samsung, arecompeting head-on with Japanese ones.(Incidentally, Korea also enjoyed World Cupsuccess under a foreign coach, DutchmanGuus Hiddink.) And three of the five mainJapanese automotive companies are foreign-owned. Japanese industry has withoutdoubt lost ground.

But as the case of Mr Troussier shows, aleader from abroad can have a better chanceof succeeding in driving industry forward

where local managers fail. Insiders tend toshy away from a bloody reform. They areeither too close to the people or too used toestablished working practices. JapaneseCEOs have long been chosen from theinside. Continuity is too often seen asimportant, the fear being that a major breakwith the past would only result in confusionand a loss of loyalty and morale.

Another lesson from the experience with Mr Troussier, who never played for France

and who has a Master’s degree in sportsscience, is that playing and coaching call forvery different talents. Selecting managersbased on in-company record is afundamentally flawed approach. Yet, this iswhat most Japanese companies still do.

Mr Troussier made clear what he wantedfrom his team. He asked the same of hisplayers, urging them to come forward andspeak clearly. This is in sharp contrast withJapanese management practice wheresilence and evasiveness rule.

An international perspective was anotherquality that Mr Troussier brought to the job.European players are used to playing abroad,including in Japan’s J-league, with teams likeGrampus and FC Tokyo. But apart fromIchiro, a Japanese baseball player plying histrade in the US, Japanese sports people rarelyplay abroad. Under the Frenchman, severalstars joined leading European clubs. Thoughthe Japanese Football Association fearedlosing their top strikers, Mr Troussier wasuncompromising.

The CEOs of leading global companies likeCanon and Sony spent their early years inforeign subsidiaries. Ironically, such overseasposts were not mainstream career paths. Yetthey created the bosses that now lead thesesuccessful companies.

This is what openness is all about. As well astrade liberalisation, foreign investment andinternational capital transactions, opennessshould apply to recruitment of managers andskills. In general, the Japanese are very cautiousabout immigration. They fear it would result inmore crime and higher unemployment amonglocals. However, the success of Mr Troussier isleading people to think that foreigners can dosome good after all.

Is it just a coincidence that Mr Troussier andMr Ghosn are both French? Japan and Franceknew very little about each other. In fact, theywere often at odds with each other, as well aswith everyone else. The French viewed theJapanese as economic obsessives. One Frenchleader famously likened them to antsscurrying around and invading with theirindustries. In turn, the French were hardlyseen as an open, corporate lot, but rather asarrogant, with their own suspicion offoreigners and seeming respect for hierarchyprobably making them quite like theJapanese. And while the Japanese were fondof French wines and fashion, they had neverviewed France as a model business nation.Now the two nations enjoy each other’scompany immensely. For while Messrs Ghosnand Troussier have been opening Japanesecorporate minds, Paris has become home toJapan’s first major overseas cultural institute.

A good number of the Japanese players whoexcited the Japanese people in June 2002 leftfor Europe this summer. They will form thecore of the World Cup team in 2006. Thenumber of students leaving Japan to studyabroad is also on the rise. Foreign companiesin Tokyo are pleased with their increasingpopularity among top-notch students who 10 years ago would never have thought ofapplying to them for jobs. A gradual butsteady change is occurring in the businesscommunity of Japan. The World Cup 2002probably helped accelerate this change. Atlong last, the Japanese have begun toappreciate the real benefits of openness. ■

*Risaburo Nezu is former head of the OECDDirectorate for Science, Technology and Industry.

References● OECD (1999), Open Markets Matter: The Benefits

of Trade and Investment Liberalisation, Paris.● Nezu, R. (2000), “Carlos Ghosn: cost cutter or

keiretsu killer?”, OECD Observer No. 220, April 2000, Paris, also available atwww.oecdobserver.org

Mr Troussier urged his players to think for themselves and act independently, rather thanwaiting for his instructions. His management style andhandling of problems wereanything but Japanese.

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