101514

Corporate Governance and the Challenge of Development


Speech delivered at the International Conference on Building the
Institutions for a Modern Market Economy: Corporate Governance Reform in
Post-WTO China



by

James D. Wolfensohn
President
The World Bank Group
  Beijing, China, May 26, 2002


Good morning. Thank you Minister Wang, and President Liang for co-hosting
this important event. Thank you all for coming. It is a pleasure for me
to be here today and to have this opportunity to address such a
wonderfully diverse audience comprising policy makers, company directors
and managers, academics; representatives of the media, chief accountants
of large companies. I am particularly pleased to have this opportunity to
interact and exchange ideas with the participants in the campus of
Ningxia University, who have joined us through the Global Development
Learning Network facilities. The Global Development Learning Network is
an initiative that I have a strong personal interest in and it is great
to take advantage of the network today to reach this wonderful audience
in Yinchuan city.

I would like to share with you some ideas about corporate governance and
development. Let me start by thanking the Development Research Center for
their partnership and support for the successful completion of this study
on corporate governance. We appreciate very much DRC¡¯s role and
achievements in promoting good policies in corporate governance and
enterprise reform and look forward to continued fruitful cooperation in
this and other fields.

It is hard to think of a more appropriate venue to discuss the topic of
corporate governance than the National Accounting Institute. Within the
broad framework of corporate governance, transparency and information
disclosure are absolutely central for well informed investment decisions
and the protection of small investors. Transparency and adequate
disclosure can not, however, become established business practices
without well trained, competent, and honest accounting professionals. The
National Accounting Institute, our co-host today for this event, is an
excellent example of the type of institutions that are needed to support
improvements in corporate governance practices. We in the World Bank are
very proud to be associated with the work done by the National Accounting
Institute and the Chinese Institute of Certified Public Accountants
through the assistance we provided in the Accounting Reform and
Development Project. Although the National Accounting Institute opened
just a year ago, many professional CPAs and financial managers from both
public and private sectors have already benefited from its high quality
training programs and many more will follow.

The establishment of this Institute and the strong demand for its
services is an indication of the growing public awareness in China of the
importance of good corporate governance. The Institute is one among a
number of recent important initiatives such as the establishment of a
system of independent directors for Chinese listed companies and the
introduction of a code of corporate governance, which reveal the
increased importance given by the authorities to the improvement of
corporate governance practices in China. As China begins to implement its
commitments under the WTO, the policy focus on corporate governance in
China sends a strong signal that the government is committed to further
market reforms. This in turn provides a strong reassurance that the
significant gains that China has made in development and poverty
reduction over the last two decades will be sustained and enhanced.

China's impressive achievements in improving the living standards of its
people are well recognized throughout the world. Given China's success in
generating growth and reducing poverty, one may ask the question what
drives China¡¯s recent focus on corporate governance reforms.

The policy focus on corporate governance in China reflects new external
realities. China has made a major step towards a greater involvement and
a more prominent role in the global community with its membership in the
World Trade Organization. However, the crisis in Asia indicated that
integration into the global economy without the proper institutions of
governance can create vulnerabilities that can partially reverse gains in
development and poverty alleviation. Thus good corporate governance
institutions are critical for sustainable growth, development, and
poverty alleviation in a highly interdependent world because good
institutions of corporate governance are central to the ability of
getting money and resources to countries to create opportunities for jobs
and lift people out of poverty. It is very impressive that China has
learned from the crisis in Asia and has intensified its efforts to
develop the institutions of modern corporate governance.

The current focus on corporate governance also builds on past and ongoing
market reforms and should be viewed in the context of the natural
progression of market reforms in China. It reflects the fact that market
reforms in China have deepened and progressed to the stage of so-called
second generation of reforms, where there is a need to tackle issues in a
more integrated and comprehensive manner.

Reform issues typically become more intertwined and complex at this
stage. For example, corporate governance issues are closely linked with
issues of corporate restructuring, and corporate restructuring can not be
separated from the soundness of the financial system and the social
security issues related to layoffs in the context of restructuring.
Complex reform issues, including corporate governance issues, often pose
difficult trade-offs. It is important, as problems are being addressed,
to keep a balance and not to undermine some of the key elements of a
functioning market system. For example, it is important not to sacrifice
financial stability and efficiency in order to mitigate the social costs
of restructuring by shielding companies from market discipline and
pressure.

It is important to keep in mind that legal reform is part of these
interrelated and complex issues. Sound legal rules in company laws and
securities regulations are a first step towards effective corporate
governance. Here, comparative practice can be quite helpful, and today's
conference is an opportunity for just this sort of exchange of views
among practitioners and thinkers from a world of experience.

But rules on the books are not enough. Corporate directors, public
accountants and government regulators alike must believe that these rules
reflect commonly-shared and socially-reinforced values. So we see that
compliance by private parties with corporate governance rules depends in
part on a country¡¯s legal culture and respect for rule of law,
reinforced by a belief that the rules have "teeth."

At the same time, more effective regulation will require increased
enforcement capability for regulatory bodies, which, in turn, means
greater reliance on legal instruments and the ability to enforce them.
Thus, the problems faced by many judicial systems¡ªquality of judges,
weak enforcement of judgments, government interference and corruption---
can stand in the way of stronger market regulation.

Permit me to take a moment here to recognize China's decade of
achievement in developing the legal framework for its market economy,
putting in place the building blocks on which corporate growth and
governance rest, such as company law, securities law, banking laws. The
next stage, already underway--implementation---can often be even more
challenging, as it will require changed roles and behaviors by
institutions, enterprises and individuals, faced with new rules and new
incentives. The Bank has had the opportunity to assist China in its
legislative developments over this period, and we are ready to continue
to provide advice and support to the ongoing transformation of the
institutions of its legal system .

The fact that corporate governance reforms are complex reforms implies a
strong need for countries to share experiences, knowledge, and lessons
learnt while maintaining full ownership of reforms. China's experience is
a case in point. While China has followed a unique path in market
reforms, it has also creatively borrowed and applied market concepts and
lessons from the experience of other countries. China has shown a great
capacity to learn and modernize in the area of corporate governance as
well.

On the other hand, China's experience also offers valuable lessons for
other countries struggling with reforms. China has shown that grafting
of imported concepts and institutions into old and traditional
institutions is possible and can result in improved functioning of market
institutions. China¡¯s approach also illustrates that imperfect, but
functioning institutions are to be preferred to institutional vacuum. We
have seen the negative impact on growth, poverty alleviation, and the
legitimacy of the market order of institutional vacuum created by shocks
and rapid change in some transition countries.

For the World Bank Group, the generation and dissemination of knowledge,
and building capacity in developing countries in partnership with
domestic and international institutions is at the core of our mission.
Our partnerships with a number of government agencies in China in the
area of corporate governance have produced good results. I already
mentioned our cooperation with the Development Research Center on the
production of this study on corporate governance.

IFC and the World Bank have been working with the Chinese Securities
Regulatory Commission, which is one of the most active champions of
corporate governance reforms in China, to develop capacity to improve
corporate governance practices in the securities industry and to train
independent directors of Chinese listed companies.

Creditors have a key role to play in corporate governance, and in this
context the work of the People's Bank of China on regulating and
supervising commercial banks is of central importance. The World Bank has
been supporting the efforts of the Central Bank to strengthen the
corporate governance of commercial banks through studies and policy
notes.

At the company level, IFC is playing an important role in bringing
Chinese companies closer to international standards in corporate
governance through technical assistance, institution building in the area
of financial markets, and incentives embedded in financial instruments.

I don't want to finish, however, without emphasizing that while corporate
governance reforms are central to development, they are part of a much
broader framework of development. Corporate governance needs to be viewed
as an essential element in terms of job creation, in terms of
distribution of resources, in terms of the spreading of wealth, in terms
of integration into the international community. But it is also a part of
a broader paradigm of development and it should be looked at in this way.
The World Bank Group follows a holistic approach to development. It
emphasizes the interdependence of all elements of development - social,
structural, human, governance, environmental, economic, and financial-
and builds on partnerships for its implementation. We in the World Bank
Group look forward to working with you on the challenging issues of
development in China. Thank you very much.