It’s about a year now since the global economy entered a new phase of recession that started from September 11 and reinforced by the fall of Enron a couple of months later. The fall of Enron pressed the alarm bell and put a question mark on the very system of corporate governance and accountability especially of the kind followed in the US. But the genie of US corporate were quick to clarify that Enron was rather a case of aberration and things will be alright very soon. However the continuing trend of corporate failures during the later months have made it amply clear that far from being an aberration Enron was just a tip of the iceberg.
The global and the US economies may be on a comeback trail but the trend of corporate scandals continues unabated. Last year, 255 publicly traded companies put $260bn of assets under court protection, almost triple the record for a decade in the US. This year another new record may be made. No doubt, some of the companies suffered due to a glut of capacity and amid waning demand. But the corporate honchos cannot explain everything with that, as many of them are actually involved in financial scandals
With this scenario in the background the revelation made by a Financial Times survey that the top bosses of the biggest US business collapses amassed billions in salary and share sales while the stock market was still booming, has vindicated the belief held by many that achieving long term corporate success was not necessary for managers to reap enormous personal rewards. The fact that the biggest winners were the former executives of Enron, Global Crossings, and WorldCom, all scam tainted companies, makes it necessary to evolve a new paradigm of measuring the performance of the corporations and their managers.
The unholy nexus between the tainted executives and the reputed accounting firms, so far considered as the watchdog for corporate governance practices, has brought uncertainties and bewilderness even among the corporate circles. The panic stricken responses of hiring and firing of accounting firms could not bring credibility into the system as the companies who have fired their auditors only hire somebody who are also not scandal-free. It’s high time that an appropriate corporate governance framework is evolved and this can be done only through wide consultation involving all stakeholders.
Pradeep S Mehta, Editor
I. Project Progress
The 7-Up Project, as it is popularly known, is running in its last quarter now. The activities are on the verge of completion and would take a final shape in the coming months. During the months of July and August 2002, a considerable progress was made in respect of the phase-II activities of the project
1.1 Final Touches to Phase-I
The phase-I country reports of the project were printed and despatched to the partners for being formally launched at the National Reference Group meeting. These reports would be distributed locally by the partners for wider dissemination.
1.2 Phase-II Review Meeting, 5th- 6th July 2002, Geneva
The Phase-II Review meeting was organised on 5th- 6th July 2002 at Geneva. The purpose of the meeting was to deliberate upon the phase-I synthesis report and discuss the phase-II case studies. The meeting was attended by the project partners, researchers, members of the advisory committee and representatives of some of the competition authorities.
1.3 Phase-II Research Activities
The crucial activities of phase-II were completed to a large extent during the period under review. The case study reports have been revised on the basis of the comments and suggestions of the advisory committee and the discussions of the phase-II review meeting.
1.3.1 These case study reports would take the form of phase-II country reports and would then be discussed at the NRG meetings in these countries. The country reports would be a synthesis and not just a collection of the case studies. Researchers have started preparing the drafts of these reports and these would be revised as per the suggestions of the NRG.
1.3.2 The draft of the phase-II synthesis report has also been prepared and would be finalised in consultation with the project advisory committee.
1.3.3 An outline for the Final Advocacy Document has been framed and the document would be drafted by the end of September 2002.
II. Major News & Views
1. EU Hits Out at US Corporate Bill
European governments are warning the US that the corporate reform bill would extend US regulations to foreign companies, raising concerns of “double jeopardy.”
Fritz Bolkestein. EU internal markets commissioner, is sending a letter to members of the congressional conference today, saying the bill, expected to pass Congress shortly, would “pre-empt” the regulatory role of the European Commission.
And in a similar letter last week, the UK government said that the bill “would extend the reach of US regulation beyond the territory of the United States.” As a result, “it would also undermine our sovereign right to impose a system of regulation in the UK appropriate to our own circumstances”. The concerns have arisen over a section of the Senate version of the bill, which would apply the new regulatory oversight to foreign as well as US auditing firms.
Paul Sarbanes, chief author of the Senate bill, is determined to have such a provision in order to discourage US companies from relocating abroad in order to escape more aggressive oversight of accounting practices.
The Senate bill requires that foreign-based auditors of any foreign company which has a US listing be subject to oversight by a new board to prevent accounting frauds. That board would be empowered to require the auditor to produce records for such foreign companies.
While the US already has bilateral agreements with many European countries allowing access to auditing records for certain investigations, EU officials fear the bill goes much further, and could open corporate officers of European firms to both civil and criminal penalties in the US.
In addition, EU officials are worried that the legislation could interfere with efforts to agree on European-wide corporate governance rules, by creating a de facto standard for all European companies that trade in the US.
European officials argue that there are no similar provisions in European law that would impose additional regulations on US auditors of US firms that have stock listings in the EU. House Republicans are opposed to the extra-territorial provisions of the bill, but they are in a weaker position in talks with the Senate. (By Edward Alden in Washington, FT, 23.07.02)
2. UN Seeks Role for Developing Nations in Curbing Food Groups
The operations of large food multinationals should be more actively regulated by developing nations heavily reliant on agriculture, the United Nations Food and Agriculture Organisation (FAO) said yesterday.
An FAO study, to be released today, warns that globalisation “has led to the rise of multinational food companies with the potential to disempower farmers in many countries”. Developing countries needed “the legal and administrative framework to ward off the threats while reaping the benefits”. But it concludes that the overall benefits of globalisation are likely to outweigh its risks and costs.
The call for greater regulation, contained in a study on world agriculture and food trends in the next 30 years, coincides with the debate on regulating big multinationals expected to feature at the World Summit on Sustainable Development opening in Johannesburg at the weekend.
The report says the negative impact of globalisation can be mitigated by measures including openness, investments in infrastructure, promotion of economic integration and limits on market concentration and control, to make globalisation work for the benefit of the poor.
Multinationals, which have launched a campaign ahead of the summit to show that their goals are compatible with sustainable development, are lobbying the UN to endorse their plans for voluntary self-regulation. But Jacques Diouf, FAO director-general, told the FT self-regulation was often based on the “immediate interests” of big business.
The FAO also felt genetically modified organisms should be subject to international rules. GMOs could be a “good scientific tool” to improve conditions, especially in the poorest countries, but had to be controlled. Another issue likely to dominate the summit was the need for developed countries to make a greater financial effort to assist poorer countries. Although the latest FAO report predicted that there would be enough food for a growing world population by 2030. “hundreds of millions of people in developing countries will remain hungry”. (Paul Betts in Rome, FT, 20.08.02)
3. Consumer Watchdog Urges More Business Regulation
Deregulation has created a U.S. marketplace that is often bad for consumers, finds a study by Consumers Union, publisher of Consumer Reports magazine. The study, to be published in July’s issue, looks at how deregulation affects prices, consumer satisfaction, safety choice and innovation in the air travel, telecommunications, cable-television, banking and electricity markets.
Most deregulation talk focuses on benefits for business, but for consumers, “deregulation isn’t all it’s cracked up to be.” said James Guest, President of Consumers Union; a nonprofit watchdog. He doesn’t recommend abandoning deregulation, but advocates a “midcourse correction” of the trend that began in the 1970s, like more regulation of cable and local telephone monopolies. (Dow. Jones)
IV Forthcoming Events
CUTS-Centre for International Trade, Economics & Environment is organising the subject mentioned meeting in collaboration with National Council of Applied Economic Research at New Delhi on 4th October 2002. The purpose of this half-day seminar would be to discuss upcoming issues related to domestic and international competition concerns from the perspective of developing countries, particularly India. It will also launch the Phase-I country report of India prepared under the 7-Up Project. It analyses the competition policy in the broader context of the changing economic policy regime in India. It also deals with the institutional framework for enforcing competition law in the country. The Seminar would involve the participation of different stakeholders – consumer organisations, competition and regulatory authorities, academia and media.
On 18-19th October 2002 an African Regional Seminar on “Investment for Development”, is being organised by CUTS’ Centre for International Trade, Economics & Environment and Eco News Africa in collaboration with UNCTAD. At this one and a half day seminar, participants will discuss economic and political issues relating to Foreign Direct Investment, in order to understand national, regional and international rule maki8ng in this area in a better manner. Project researchers from South Africa, Tanzania and Zambia will present their findings at the seminar.
3. ICN Conference in Naples, 27-29 September 2002
The inaugural conference of the International Competition Network would be held on September 27-29, 2002, at Naples, Italy. The conference would address issues and challenges of common interest to competition agencies. It will bring together heads and senior representatives of competition agencies from around the world to review the progress and recommendations of current projects under way and decide on the new work programme for 2002/2003
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