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June 5, 2002 – In the wake of Enron and other scandals, the United States must place corporate governance firmly on its foreign policy agenda, argue James Shinn and Peter Gourevitch in a new Council on Foreign Relations paper, How Shareholder Reforms Can Pay Foreign Policy Dividends.
This is an opportune moment to discuss corporate governance—the rules which govern the relationship between managers and shareholders—and its connection to foreign policy: there are currently 40 bills in Congress dealing with corporate governance and the laws that ultimately emerge will shape international corporate governance for years. The current debate must consider the foreign policy implications of these decisions before the legislation is finalized.
Improving corporate governance and enhancing shareholder protections has several foreign policy advantages.
It will clear contentious disputes from international trade negotiations, reducing the political fallout; enhance financial stability and reduce the need for the United States to get involved in expensive bailouts; buttress the legitimacy of free-market capitalists; and finally, preserve the merits of "light-handed" U.S. securities regulation.
The study argues that the U.S. government should embrace corporate governance reform as a strategic goal and promote it at the highest international level, and proposes concrete policy recommendations to accelerate the pace of corporate governance reforms at home and abroad:
- The U.S. government should expand its support for principles of corporate governance and use them as the basis for developing a global “gold standard” of shareholder protections.
- The SEC should encourage a higher standard of accounting and audit rigor in global capital markets.
- The United States should endorse regulatory changes at home and abroad that promote contests for control of publicly-traded firms.
- U.S. government agencies should require fuller disclosure of corporate governance policies and proxy voting records, and press for liberalization of pension fund and money-management services in the WTO’s market-access negotiations.
- The Treasury Department and the Federal Reserve Bank should engage foreign prudential regulators to develop corporate governance standards for global financial institutions.
- U.S. private sector firms should support the creation and dissemination of objective third-party corporate governance indices.
- The U.S. government should place responsibility for coordinating corporate governance policies at a senior level in Washington, D.C.
James Shinn is a senior fellow at the Council on Foreign Relations and a lecturer at Princeton University. Peter Gourevitch is a professor at the University of California, San Diego and a research fellow at the Center for European Studies, Harvard University.
The views expressed in How Shareholder Reforms Can Pay Foreign Policy Dividends are entirely those of the authors and not those of the individual participants in the roundtable or the Council on Foreign Relations.
"Shinn and Gourevitch have produced in How Shareholder Reforms Can Pay Foreign Policy Dividends a penetrating, comprehensive and subtle discussion of corporate governance. One goes from initial skepticism of their view that global reform of corporate governance practices should be a foreign policy objective of the U.S. government to a realization of how intricately and significantly American global interests depend upon such progress."
-- John Biggs, CEO, TIAA-CREF
“Markets don’t run on money -- they run on trust. Recent concerns about the trustworthiness of directors, auditors, managers, and analysts have made it clear that corporate governance should be a core concern for investors and policy-makers. As investing in global markets becomes almost seamless, it is crucial for investors in the U.S. and abroad to make sure that all markets meet the highest standards of transparency and accountability. This report is timely, insightful, and particularly constructive in identifying the issues and next steps. It makes a contribution that we literally can’t afford to ignore.”
-- Nell Minow, founder, the Corporate Library
“James Shinn and Peter Gourevitch have provided some genuinely new insights on the relationship between the way that markets and corporations are organized and U.S. foreign policy. From an expansive definition of "corporate governance" to a clear-eyed examination of market failures in promoting better governance, this is a paper worth reading and debating.”
-- Stephen J. Friedman, partner, Debevoise & Plimpton and former commissioner, Securities & Exchange Commission
“Shinn and Gourevitch break ground in proposing to galvanize US foreign policy with a fresh market-developing strategy. Corporate governance is the newest and least known pillar in the architecture of the global economy...it can be critical in fighting corruption and poverty as well as political instability..."Reputations at Risk" is the first authoritative effort to call for changes at home and in our policies abroad that can spur growth and security.”
-- Stephen Davis, editor, Global Proxy Watch