Current Developments in Monetary and Financial Law, Vol. 2

Chapter 40 Managing the Global Economy: The Role of Governance

International Monetary Fund
Published Date:
October 2003
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Governance in both the public and private sectors is a key aspect of managing globalization. It is essential for the stability of the financial systems and the functioning of domestic and international markets. In its broadest sense governance includes the legal and institutional framework conditions for governments and enterprises: i.e., the rule of law, efficiency and integrity of public administration, an appropriate regulatory system for economic activities, corporate governance, fight against corruption, and business integrity.

The different aspects of governance are closely interrelated: good governance is as needed in the public as in the corporate sectors and deficiencies in one area have pernicious effects on the other. Both are interacting within society and political systems. In a global economy governance has a strong international dimension. Good governance in one country has strong demonstration effects in others and bad governance, as the 1998 financial crises demonstrated, can send shock waves through the international financial system. A global economy does not suffer islands of dishonesty.

The present article is focused on three key components of governance: corporate governance, business ethics, and the fight against corruption. It draws on the experience with the instruments developed by the Organization of Economic Cooperation and Development (OECD) as well as other international players. It aims at demonstrating the contribution of these instruments to stability and integrity in global institutions and markets.

Democratic government and market economy rely on the same set of fundamental principles for governance: transparency, competition, integrity, and accountability. A disfunctioning in any of these areas leads to significant system risks.

If confidence in political systems is undermined, economic instability is the result. Criminal elements can take advantage of gaps and further damage the credibility of the systems in place. If anticompetitive practices in the corporate sector are tolerated, markets cannot function properly, resources are misallocated, and economic power may be accumulated by a few dominant enterprises. Corruption can turn into a terminal disease for political and economic systems.

Global markets need global rules and standards. In this respect, the OECD has proven well placed to provide constructive approaches. The OECD now includes 30 countries, which account for a large share in international trade and investment. It has long-standing experience with policy analysis, formulation of rules and best practices, and monitoring of implementation. In the area of governance, the following instruments are of particular importance: the 1999 Principles for Corporate Governance, the 2000 Guidelines for Multinational Enterprises, and the 1997 Convention and Recommendation on Combating Bribery of Foreign Public Officials in International Business Transactions.

Corporate Governance

What Is It About?

Corporate governance is a term of Anglo-Saxon origin that is difficult to translate into other languages. Yet it has become very popular and is widely used all over the world. The concept itself is not new: it emerged in the nineteenth century and was frequently referred to in the United States during the Great Depression, but during the last two decades it became the subject of much research and discussion. The 1998 financial turmoil in Asia and Russia dramatically underscored the importance of governance in economic and financial systems and after pioneering work in the private sector, a Business Advisory Group to the OECD led by Ira Millstein produced a comprehensive set of recommendations from a private-sector perspective.

If we cannot translate, let us describe the concept of corporate governance:

  • It is about the organization of management and control of companies.
  • It reflects the interaction among those persons and groups that provide resources to the company and contribute to its performance (i.e., shareholders, employees, creditors, long-term suppliers, and subcontractors).
  • It helps define the relation between the company and its general environment, and the social and political systems in which it operates.

Corporate governance is linked to economic performance. The way management and control are organized affects the company’s performance and its long-run competitiveness. It determines the conditions for access to capital markets and the degree of investors' confidence.

In today’s economy, the private corporation has a fundamental role. Whereas over the last two decades, the role of the state in economic management has declined, private sector development has achieved a quantum leap through privatization and enterprise development. Privatization worldwide totals almost $850 billion since 1990 (and more than $1 trillion since 1980). International capital flows also showed unprecedented expansion since the 1980s and direct, as well as portfolio, investment accounts for a significant share. Companies, as well as countries, have to compete for funding in international capital markets, which reward good governance and sanction bad practices.

In the process of investment, corporate governance is important at all stages for

  • mobilizing capital,
  • allocating capital, and
  • monitoring the use of capital.

To maintain confidence of investors and markets, property and shareholder rights need to be protected, there has to be timely and high-quality disclosure of information on the performance and financial situation of the company, and management needs to be accountable to shareholders and the company.

Who Are the Actors?

Obviously companies operate within legal frameworks but much of corporate governance is market driven. Regulators and the investors' community set high standards for access to financial markets, in particular in the areas of disclosure and accounting, and these standards are likely to be applied worldwide through the global operations of multinational enterprises. It is the responsibility of the board to ensure transparency and accountability of management and integrity in business transactions. Corporate culture depends on leadership and a motivated workforce. Internal programs for training, teambuilding, and control are essential.

Self-regulatory bodies, nongovernmental groups, and civil society at large exercise an increasing influence on the development of corporate governance patterns. A number of high-quality codes have been developed exclusively through private sector initiatives, with strong involvement by institutional shareholders. Pension funds, among others, tend to take an activist role in favor of socially responsible behavior and good environment management of investee companies.

Governments have not been inactive and in a number of countries corporate law reforms have been introduced in recent years, e.g., Canada, France, Germany, Ireland, Japan, Korea, Sweden, and the United Kingdom. The main thrust of these reforms is to improve corporate disclosure in accordance with international standards, to strengthen shareholder rights, and to provide the framework for accountability of corporate boards and management.

Finally, intergovernmental organizations like the OECD and the World Bank are playing an important role in encouraging good corporate governance worldwide. This is part of an attempt to develop internationally accepted standards to manage globalization and to provide a sound basis for international cooperation. Corporate governance has become an essential ingredient for the stability of the international financial system.

Increasing Convergence in Corporate Governance

Globalization has proved to be a powerful force in encouraging a strong move toward upgrading and convergence of corporate governance, at least as far as listed companies are concerned. Reaching beyond traditional differences, corporate laws and cultures have developed that made the elaboration of global standards possible.

In his book Capitalism Against Capitalism, Michel Albert distinguished two forms of corporate cultures: the so-called Anglo-Saxon one and the so-called rhenanian one of continental Europe and Japan, which is driven by insiders, cross-shareholders, and banks. The former is considered to promote flexibility and shareholder value, whereas the latter would privilege stability and long-term perspectives. These categories, if they ever reflected reality, are certainly no longer valid today.

Companies in whatever countries they operate are increasingly relying on equity finance through capital markets. Their disclosure practices tend to conform with international accounting standards. As a response to shareholder activism and pressure by civil society groups, corporate accountability has significantly increased and there is a new awareness of the importance of business ethics. The value of human capital and the quality of stakeholder relations are recognized.

The OECD Corporate Governance Principles of 1999 provide a strong basis for encouraging further convergence of corporate governance practices worldwide. Endorsed by the OECD Council of Ministers, the principles are the result of intensive discussions within a task force composed of governmental and private sector representatives. They are nonbinding and evolutionary. The provisions they contain are compatible with different legal systems, e.g., unitary boards or two-tier management and supervisory systems. The aim is not legal harmonization but a common framework in which good practices can develop consistently with national regulations and traditions.

The OECD principles are composed of five key elements:

1. Strengthening the right of shareholders through better communications and facilities to participate in decision making at general shareholders meetings. Markets for corporate control should remain open and not restricted through anti-takeover devices primarily designed to entrench incumbent management.

2. Protection of minority shareholders, which includes disclosure of complex corporate structures like shareholder agreements and shares with differentiated voting rights (e.g., nonvoting shares and shares with multiple voting rights). Insider trading and abusive self-dealing should be prohibited, and members of the board and managers should disclose material interests in transactions affecting the corporation.

3. Recognition of the role stakeholders play in wealth creation and the long-term sustainability of financially sound enterprises. Stakeholders include all persons and groups providing resources to the enterprise, i.e., investors, employees, creditors, and long-term suppliers. The principles encourage performance enhancing mechanisms of stakeholder participation in the corporation.

4. Transparency is crucial for investor confidence. Corporate disclosure should include financial information needed to assess the performance, the financial situation, and the risk management of the enterprise. The disclosure of nonfinancial information, including the governance patterns of the corporation, is also recommended.

5. Boards, whether they are unitary or have a two-tier structure (executive board/supervisory board), have the key functions of providing strategic guidance to the company as well as effective monitoring of management. Their composition and responsibilities should follow the following principles: competence, a sufficient degree of independence, and accountability to the company and its shareholders.

The OECD principles are primarily conceived for listed companies. For others, such as privately held and state-owned companies, they would need further elaboration. To be effective they need to be fully reflected in national practices, which may require adjustment to different legal frameworks. However, as they are based on broad consensus, they do provide a common reference for all systems and corporate cultures.

In order to promote good corporate governance worldwide, the OECD and the World Bank have entered into a cooperation agreement. The central element of this initiative is the conduct of reginal corporate governance roundtables. These roundtables bring together officials from emerging markets, transition economies, developing countries, and the private sector to elaborate on the principles and to set reform priorities in a national or regional context. So far, the following roundtables are operational: Russia, Eurasia, Asia, and Latin America. A roundtable for the countries of the countries of the Southeast European Stability Pact will be launched in September 2001.

Challenges Ahead

One of the key issues is regional disparity, and this is the main reason why the regional roundtables mentioned above have been established. Each region has its own specificity that needs to be addressed. For Russia and other countries of the former Soviet Union, the main problem is the lack of authority and credibility of state institutions, which has left a wide margin for dishonest behavior (e.g., asset stripping, self-dealing, and violation of the rights of shareholders). For Asia, the key problem is improvement of transparency of corporate structures and operations, while in Latin America concerns arise with respect to the presence in many companies of dominant shareholders or groups of shareholders. The approach used to improve the situation is the drafting, within each region, of a White Paper through which the development of local/regional best practices is encouraged. This is a participatory approach where governments, business associations, trade unions, and other civil society groups are closely associated with the drafting process.

The OECD Corporate Governance Principles are relevant to closely held corporations and enterprises that are wholly or majority owned by governments, but further elaboration is needed on the specific aspects of management and control of these entities.

Another area where more work is needed is the market for corporate control. In order to develop best practices, it would be useful to undertake a comparative study on individual country approaches and corporate practices with respect to voting rights linked to different categories of shares. A comparative assessment of anti-takeover devices would also be necessary in light of evolving experience with international mergers and acquisitions.

To prevent further corporate scandals, a major international effort is needed to improve disclosure of information by companies and to strengthen rules and standards to safeguard the integrity of corporate service providers, in particular, the accounting profession.

Measuring human capital as a major factor for the performance and prospects of the company is another challenge. Unfortunately, accounting practices for intangibles do not reflect the situation of an increasing number of enterprises for which the quality of human resources is crucial in terms of economic performance. Work in this area has started in the OECD, but more efforts are needed to develop best practices.

Modern information technology offers unprecedented opportunities for interaction among companies, shareholders, other stakeholders, potential investors, and the general public. It opens new avenues for communication. Absentee shareholder voting through electronic means is another possibility, which is already used by many companies.

Finally, no company that cares about its future can ignore the increasing expectations of civil society in the field of business ethics and corporate social responsibility. If investment is to contribute as it should to sustainable development, social and environmental considerations need to be integrated in corporate strategies.

Many companies have already responded by developing internal company codes setting forth standards of business ethics. There are also collective efforts undertaken by private sector groups, and the OECD Guidelines for Multinational Enterprises provide the first multilaterally agreed set of standards for responsible business behavior.

Standards for Business Ethics

In June 2001, the OECD Council of Ministers adopted a revised set of Guidelines for Multinational Enterprises together with strengthened implementation procedures. The original Guidelines had been in place since 1976 as part of the Declaration on International Investment and Multinational Enterprises. Also included in this Declaration is the Principle on National Treatment for Foreign Controlled Enterprises as well as provisions for international cooperation in the field of investment incentives and disincentives and conflicting requirements resulting from the extraterritorial application of national jurisdiction.

The Guidelines are designed as a contribution to a favorable climate for international investment. They express values shared by governments, businesses, trade unions, and the civil society with respect to corporate behavior. They are not legally binding and not intended as substitutes for national law. They do reflect expectations that enterprises cannot easily ignore and these expectations can reach beyond national law.

The Guidelines cover all aspects of corporate behavior and apply in all sectors of the economy and all types of multinational enterprises, whether large or small, whether private, state-owned, or under mixed ownership. They extend to corporate operations worldwide. The Guidelines are relevant for national enterprises as well, and enterprises are expected to encourage compliance by business partners, including suppliers and subcontractors.

The 2000 Revision of the Guidelines includes the following new elements:

  • the chapter on employment and industrial relations includes a reference to the four core labor standards of the 1998 ILO Declaration (freedom of association and right to collective bargaining; elimination of all forms of forced and compulsory labour; effective abolition of child labor; elimination of discrimination in respect of employment and occupation);
  • the chapter on environment sets forth recommendations for environmental management and contingency planning;
  • the chapter on disclosure of information reflects the transparency provisions of the OECD Corporate Governance Principle and encourages social and environmental accountability;
  • new chapters have been added on bribery concerning both public officials and private agents, as well as consumer protection including safety, labelling, and consumer complaints; and
  • companies are expected to contribute to the respect of human rights.

The most important feature of the 2000 revision is the strengthening of the implementation procedures at national and international levels. All participating countries have to set up national contact points for handling inquiries and complaints. Governments remain free to determine the institutional setting of their contact points as long as they respect criteria of functional equivalence; i.e., the contact points need to be visible, easily accessible, transparent, and accountable.

The OECD Committee on International Investment and Multinational Enterprises (CIME) monitors national contact points. If national contact points do not fulfil their responsibilities, the matter can be raised directly with CIME. CIME can also act on a substantiated claim that an interpretation of the Guidelines issued by a national contact point was erroneous. National contact points are accessible for business, labor, NGOs, and other interested parties. For CIME, governments and the social partners, represented through their advisory bodies to the OECD (the Business and Industry Advisory Committee and the Trade Union Advisory Committee), have standing to raise specific cases and request clarification of the Guidelines in light of these cases. The clarification will refer to the issues raised by the case at hand but the Committee will not engage in fact finding, nor can it reach conclusions on the conduct of individual enterprises.

The effectiveness of the new procedures remains to be tested. In June 2001, national contact points of all adhering countries (all 30 OECD Member countries plus Argentina, Brazil, and Chile) will hold their first annual meeting to exchange experience. In the longer run, the success of the Guidelines will depend on leadership by governments, dialogue with social partners, and the continuing interest of civil society. The Guidelines are open for participation to those OECD nonmember countries that, after an initial examination of their investment policies, are invited by the OECD Council to adhere to the Declaration on International Investment and Multinational Enterprises.

Fighting Corruption in International Business Transactions

Globalization of markets, business transactions, and corporate structures has created opportunities for enhanced efficiency and growth in the world economy. Whether individual countries benefit will depend on comparative advantages and a mix of economic and regulatory policies that are perceived as favorable to trade and investment.

In the absence of proper rules, globalized markets driven by deregulation and technological progress can be breeding grounds for internationally organized crime, e.g., large-scale fraud, corruption, and money laundering. Criminal activities of this nature undermine political institutions, create financial instability, distort market competition, and hurt economic development. Individual countries acting in isolation are not able to stem the tide of international financial crime and vigorous action by the international community is urgently required. There is a need for international instruments and effective monitoring of application.

The OECD has taken a pioneering approach in fighting international corruption through its 1997 Convention and related Recommendations, which, taken together, constitute a comprehensive action program. Why has the OECD been involved? What is the value added of its instruments? How is effective implementation ensured? What are the implications for corporate responsibilities?

One can only measure the progress achieved by looking back to where the process started. Corruption of domestic public officials is an offense in all legal systems, but until recently, the U.S. Foreign Corrupt Practices Act was the only statute explicitly criminalizing bribery of foreign public officials. Some countries claimed that their law was applicable to international corruption as well but could not demonstrate cases of application. Corruption in international business was a universally condemned but widely tolerated phenomenon. It was against this background that work at the OECD started at the beginning of the 1990s with a feasibility study on alternative approaches to fight corruption in international transactions.

A first concrete result was achieved in 1994 with the adoption by the OECD Council of a recommendation committing member countries to take meaningful and effective steps against bribery in international transactions. A catalog of possible actions was provided but, in the absence of any specific obligations, was purely optional. A further step was taken by the OECD Fiscal Affairs Committee in 1996 when it agreed on a recommendation to eliminate tax deductibility of bribes.

At the same time, a dramatic change in public opinion occurred. Powerful business groups called for coordinated international action against bribery and anticorruption coalitions emerged in civil society under the leadership of Transparency International, a Berlin-based NGO with constituencies in many developed and developing countries. In many countries, the media mobilized against corruption, and a number of big corruption scandals created uproar in public opinion. In the OECD, a breakthrough occurred in May 1997 with the adoption of an expanded antibribery recommendation, which was followed six months later by the signature of a criminal law convention.

Key Elements

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions is addressed to the supply side of corruption. It criminalizes “active” bribery, whereas passive corruption is left to the jurisdiction of the countries that are at the receiving end. In this manner, OECD countries, which are the main suppliers of capital, goods, and services, affirm their determination to dry up the sources of corruption.

The Convention takes a broad and comprehensive approach to fighting international bribery:

  • a broad concept of a public official, which covers not only civil servants, elected officials, and judges but all persons performing a public interest activity (this may include executives of state-owned companies or even private companies if the latter exercise a monopoly or other function entrusted to them by the government);
  • an autonomous definition of the offence of bribery, which does not allow any exceptions nor reservations by signatory countries;
  • effective sanctions to include imprisonment of offenders, fines, corporate liability, and confiscation of illegal gains;
  • an effective jurisdictional basis for action against bribery, i.e., a broad definition of territoriality or nationality (most countries apply a combination of both); and
  • mutual legal assistance where bank secrecy cannot be invoked to refuse exchange of information.

The Convention provided a very brief period for ratification and transposition into national criminal law and, by February 15, 1999, the critical mass of ratification/implementation was achieved to allow the Convention to enter into force. By spring 2001, the quasi-totality of the 34 signatory countries (30 OECD Member and 4 non-OECD Member countries) had ratified, even if a few of these countries still lack national implementing legislation.

The Convention is part of a broader action program that includes measures to effectively deny tax deductibility (a handbook for tax inspectors is under preparation); improvement of accounting and auditing practices; integrity in public administration; and inclusion of anticorruption clauses into contracts financed by official development assistance.


The Convention is not aimed at harmonizing national legal systems, which would have been a time consuming, if not impossible, task. The key notion is functional equivalence of implementation. National laws need to be in conformity with the standards of the Convention and have to be effectively enforced.

Monitoring of national legislation and enforcement is one of the most powerful features of the OECD approach. A two-phase process has been established. In the first phase, the Secretariat, together with two examining countries, assesses the implementing legislation of each signatory country to determine whether it complies with the Convention. The reports are discussed with the examined countries and reviewed by the OECD Working Group on Bribery in International Transactions. If deficiencies are found, the Group makes recommendations. The report and the recommendations are published. By spring 2001, 26 countries had been examined.

The result of monitoring in phase 1 is generally encouraging. The examinations were thorough and frank, and the examined countries cooperative. The overall picture is a large degree of conformity in many signatory countries. In one country, the United Kingdom, the Working Group was not convinced that there was any proper implementing legislation but remedial action was taken in December 2001. Deficiencies recorded in other countries include legal defenses not provided for in the Convention, the absence of corporate liability, inadequacies of sanctions, and short statutes of limitation. One country, Japan, introduced a restrictive definition of international business transactions, the so-called main office clause, which would exclude criminal action in cases where the foreign official is bribed by an employee of a subsidiary established in the country of that official. This exception is not in conformity with the Convention and, following the Working Group’s recommendation, was subsequently removed through a change in legislation.

Phase 2—monitoring application—started in autumn 2001. It provides for on-site inspections conducted in each country by a team of examiners composed of the OECD Secretariat and experts from two examining countries. The team has the opportunity to discuss with competent ministries, judges and law enforcement agencies, tax authorities, and the business community; it can also collect the views of civil society organizations.

At a worldwide scale, the OECD, in cooperation with other international agencies and donor countries, has set up regional anticorruption networks bringing together governments with business and civil socitey representatives. Network meetings have been held in Manila and Seoul for Asian and Pacific countries, and in Istanbul for transition economies of Central and Eastern Europe and the former Soviet Union. An Anticorruption Initiative has been launched in the context of the Stability Pact for Southeast Europe and an Anticorruption Compact for Asia is being developed jointly with the countries of that region.

Business associations and individual companies have expressed their support for the exercise. The International Chamber of Commerce has developed guidelines that cover both corruption of officials and private agents. Trade unions and international trade union federations have also joined international anticorruption efforts and, together with businesses, participate in consultative meetings at the OECD and in regional network activities. Transparency International and its national constituencies provide major input to the OECD work and anticorruption activities worldwide.

Criminal law is important to deter and punish offenders, but compliance programs are as important for the purpose of prevention. Many companies have already developed codes of ethics and request commitment from their staff to abstain from corrupt activities. Training programs are being put in place and companies are seeking legal advice in order to distinguish permissible from illegal activities. Senior management and boards should be accountable for the implementation of these programs.


Public and corporate governance go hand in hand. Transparency, integrity, and social responsibility are fundamental to both the public and private sector. They build confidence, create stability, and contribute to economic performance.

Corporate social responsibility and business ethics, which include a strong commitment to fight corruption, should be firmly integrated into the governance structure of each corporation. These elements should be reflected in internal management and control, training programs for managers and staff, board responsibilities, disclosure practices, and stakeholder relations.

Internationally accepted standards in these areas are essential as part of a framework of rules for a globalized economy. In their absence, markets cannot function properly and will produce socially unacceptable results.

The OECD instruments discussed in this article are landmarks for international cooperation. Their relevance is not confined to industrialized countries nor big multinational enterprises; they reflect good practice for all. Where specific rules and standards are needed to meet local or regional conditions and legal systems, they can build on these principles.

As it already does in its partnership with the World Bank, the OECD is ready to deepen its dialogue with nonmember economies, strengthen cooperation with other international organizations, and contribute to global initiatives to construct a sound international financial architecture and to mobilize financial resources for development.


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OECD Instruments

    OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (November 21, 1997):

    OECD Guidelines for Multinational Enterprises (Revised version ofJune 27, 2000):

    OECD Principles of Corporate Governance (May 26–27, 1999):

    Revised Recommendation of the Council on Combating Bribery in International Business Transactions (May 23, 1997):

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