There are some basic principles which good corporate governance must have. They can be based on a 'principles-based' or a 'rules-based' approach. The 'principles based' approach means companies are asked to adopt a set of principles and preferred practices which as they see most appropriate to their particular circumstances. It allows companies some freedom to determine for themselves the appropriateness of otherwise of their corporate governance practices. Companies would then disclose their governance practices and explain where and why they have deviated from the principles and/or preferred practices. The principles-based approach is adopted, for example, by the Cadbury Committee and the OECD, among others. The 'rules-based' approach tends to be more prescriptive and mandatory such as the requirements laid out in the Sarbanes-OxIey Act (2002) in the USA. ICANZ (2003)24 deSCribe these approaches as a 'comply
or explain based' approach. Table 2.3 presents the OECD Principles of Corporate Governance.
Table 2.3 The OECD Principles of Corporate Governance
Principle Narrative
The corporate governance framework should I . Ensuring the basis for an promote transparent and efficient markets, be consistent with the rule of law and clearly effective corporate governance articulate the division of responsibilities among framework different supervisory, regulatory and
enforcement authorities.
n. The rights of shareholders The corporate governance framework should protect and facilitate the exercise of and key ownership functions shareholders' right.
The corporate governance framework should ensure the equitable treatment of all
Ill. The equitable treatment of shareholders, including minority and foreign
shareholders shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their rights.
The corporate governance framework should recognise the rights of stakeholders established IV. The role of stakeholders in by law or through mutual agreements and corporate governance encourage active co-operation between
corporations and stakeholders in creating wealth, jobs, and the sustainability of finanCially sound enterprises.
The corporate governance framework should ensure that timely and accurate disclosure is V. Disclosure and transparency made on all material matters regarding the
corporation, including the fmancial situation, performance, ownership, and governance of the company.
The corporate governance framework should VI. The responsibilities of the ensure the strategic gUidance of the company,
board the effective monitoring of management by the
board, and the board's accountability to the and the shareholders.
Source: OECD Principles of Corporate Governance (2 004)
The importance of corporate governance principles to a company is similar to that of a road map for a driver, in that the adoption of corporate
governance principles can assist management and directors in outlining the best practices by which they intend to operate (Daily and Dalton, 2003: 42) . In addition, well-articulated corporate governance principles have three additional benefits (!bid: 42). The first benefit is that they serve as a strong signal to shareholders and the investment community that the enterprise is committed to operating in line with current best practices. The second benefit is that they can be used as gUidelines in recruiting new directors. The third benefit is to provide the additional element of comfort that a director candidate needs in deciding whether to accept or reject a board membership, given the pressures directors face in the current governance environment.
In practice, many countries and companies adopt the OECD Principles of Corporate Governance as general gUidelines for practicing good corporate governance. The OECD Principles are primarily concerned with listed companies. They are organized into six sections: (I) Ensuring the basiS for an effective corporate governance framework, (II) The rights of shareholders and key ownership functions, (III) The equitable treatment of shareholders, (IV) The role of stakeholders in corporate governance, (V)
Disclosure and transparency, and (VI) The responsibilities of the board. The following section will dicuss three main principles of corporate governance.
Transparency
The relationship between managers and owners is asymmetrical, Le., the managers have more knowledge and information about the enterprise and, consequently, more power to influence outcomes. In practice, the owners have virtually no first-hand information with which to judge the actions of the governing group that they have elected to represent them - no speeches, no reports, no votes - until the firm's financial performance is disclosed a year later (Useem, 2003: 242) . To avoid the problem, a company needs to be transparent; it must provide the information needed by all relevant parties that are affected by the companies' operations through providing adequate disclosure. Implementing transparency can be in the form of providing the company's financial accounting statements in
plain language so that the manager-on-the-street can understand them (Bicksler, 2003).
Transparency means openness. That is 'letting the public know' and allowing various parties to make informed investment decisions (Victor Wee, 1 999 cited in OECD, 1 999) . The essence of transparency is 'financial disclosure which reflects economic reality' (Henry Paulson, 2002 cited in Bicksler, 2003). A free, efficient, and globally competitive market depends on openness. Investors must have confidence in the market and in the information provided by and about the companies in which they invest. If a company does not provide that level of confidence, investors will cease to partiCipate in it. Examples of this openness are disclosing publicly ( 1) details of operations and financial conditions, (2) how the board makes key decisions, including those affecting executive compensation, strategic planning, the nomination of directors, the appointment and assessment of management and (3) the backgrounds of director nominees, including any economic links to the company. In addition, companies must inform the public or relevant parties as to whether they comply with the Codes of Best Practice and explain the reasoning for any variations. In line with this, Boards should have the ability to effectively mOnitor management performance, and investors should have the ability to effectively monitor the Boards.
The results of the OECD study in 1 998 showed that transparency and good corporate governance practices were conSidered as the major factors in attracting the support needed to prosper in conditions of increasing uncertainty (cited in Davies, 1 999: 1 1 3) . Similarly, Mitton's study (2002) showed that in a sample of companies from five Asian countries, those adhering to more stringent standards of corporate transparency significantly outperformed low-transparency enterprises during the crisis
Having said the above, it is important to note that practicing transparency per se is not a guarantee that the interests of shareholders are well protected. An example can be drawn from the recent Enron corporate misdeed. Enron published its audited annual report to the public transparently so that it could be examined and evaluated by the
public. However, at the same time , Enron provided false and misleading financial statements which lead the shareholders (and the public) to undertake misinformed decision making. Therefore, it is essential that transparency is acted upon with honesty and integrity. Perfect transparency, according to Bicksler (2003) , 'is the absence of any important corporate financial informational asymmetries between the security owners and the corporate executive management.'
Accountability
Accountability provides a way of measuring performance in any and all segments of society, from political organizations and government institutions to social and business communities (Bavly, 1 999) . It represents an obligation to answer to the execution of one' s assigned responsibilities (Alberta Legislature, 1 994: 1 cited in Burger, Bolender, Keates, and Townsend, 2000). It implies acceptance of responsibility, without which there is no basis upon which an injured party can initiate a tort of action to redress grievances (Branscomb, 1995) . It is to ensure that the behaviour of the Board of Directors is consistent with the interest of shareholders. Pitkin and Farrelly ( 1999: 253) argue that accountability is imperative to increase efficiency and competitiveness, for without adequate external accountability there is no incentive for efficiency and effective management practices. In addition, they assert that where accountability is absent, corruption and fraud can flourish.
Within the corporate governance context, accountability means holding the Board of Directors responsible to provide good quality information to the shareholders (CadbUlY Committee Report, 1992 , par.
3.4). In addition, a system of accountability mandates full reporting of the results of responsibilities (Bavly, 1999 : 1 5) . The OECD Principles state that board members are accountable to shareholders and to the company. Accountability to shareholders means equal treatment of majority and minority shareholders. Accountability to the company means that directors must ensure that the company complies with existing laws and regulations, such as tax, labour, health and safety laws, equal opportunity, environmental legislation and competition law.
Paul C. Ught ( 1 993, cited in Bavly, 1999: 15) distinguishes between two forms of accountability: one relating to performance and the other to compliance. Performance accountability has to do with the evaluation of effectiveness and bench marking; compliance accountability demands detection of violations and enforcement of sanctions. One of the most effective forms of Board of Directors' accountability is to align the interests of management with the interests of shareholders. In doing so, the Board of Directors and the management should be open and accessible to inquiry by shareholders and stakeholders about the condition of the company and their performances by producing and publishing annual reports. Thus, effective accountability is highly dependent on the supply of information. As Bird ( 1 973: 55) states:
The duty of accountability arises throughout the private and public sectors wherever resources are entrusted to stewards by their owners. This duty is discharged by the provision to the owners of statements of account and an audit report. The objective of both of these is to give information to owners. They will succeed in doing this only if they communicate effectively to the owners their intended message, and that message is relevant to decisions that owners must take in relation to the resources they own, especially the decision whether to allow the steward to retain his pOSition (quoted in Spira 200 1) .
Despite the importance of accountability in corporate governance, it is interesting to note that the parallel corporate governance debate in the USA has placed more emphasis on enhancing performance over accountability (Keasey, Thompson and Wright, 1 997: 2) .
Fairness
Fairness means providing equitable treatment to all parties related to the company including foreign investors and minority shareholders. It also means that shareholders and stakeholders can have access to the same information. The company cannot take actions which significantly advantage one party and disadvantage the others. Hence, the Board of Directors is essential to balancing the interests of company, shareholders and stakeholders.
The Implementation of Principles in Practice
It is worth noting that practising the principles is not an end of corporate governance. The New Zealand Institute of Chartered Accountants (2003) stresses the importance of focusing on the objectives as well. This means that:
• It would not be enough for the companies to merely disclose that they comply with the principles. Rather, they would need to identify how it is that they achieve the corporate governance objectives.
• If there is a 'principle' for the company to comply with, there is a risk that investor will gain a false and unsafe impression that the regulator is providing an assurance to investors (the moral hazard problem) .
• 'One size fits all' is avoided. That is alternative and better ways of achieving good governance and meeting investor preferences are easily accommodated.
• Developments in corporate governance are driven by what works,
and by what investors want, in preference to what might otherwise be the product of regulatory compromise.
• The continuing development of better corporate governance practices is facilitated through competition to demonstrate practices that best meet the preferences of investors.
In addition, implementing corporate governance principles can be problematic and not without costs because as one Australian company, MIM Holdings, stated it would cost it more than A$ 1 million a year to comply with international accounting standards and yet shareholders' interests would not necessarily be served by making commercially valuable information public knowledge (McLeod, 2003). Box 2 . 1 provides an example of difficulties in enforcing fairness to shareholders.
Box 2. 1 Difficulties in Enforcing Equitable Treatment of Shareholders
A recent case illustrating the lack of equitable treatment in the market for corporate control was the acquisition of the Moroccan bank Banque Morocaine de l' Afrique Occidentale (BMAO) by a listed state-owned bank called Banque Nationale pour le D6veloppement Economique (BNDE) in 2000. BNDE commissioned one of the big five consulting firms to do the valuation. BMAO's minority shareholders representing ten percent of capital objected to the buyout price and requested a second valuation. A press campaign was initiated against the dissenting shareholders, arguing the law should not allow just any shareholder to bring a transaction to a standstlll. The minority stakeholders lost their case.
This example illustrates the conflicts that prevail in countries where the rights of minority shareholders are not well understood and where a shareholder culture does not exist. BMAO was widely known to have a balance sheet with serious problems. In consequence, the valuation might well have been favourable to minority shareholders.
Nevertheless, this is not the point. The minority shareholders were not able to go through with their motion of a second valuation. It was not deemed acceptable that minority
shareholders would question a deciSion of
management/ controlling shareholders.
Source adapted from Fremond and Capaul (2 002)