"Corporate Governance and Investment"

Remarks of Ambassador Jimmy Kolker
U.S. Ambassador to Uganda

Institute of Corporate Governance of Uganda
April 14, 2004

President and Outgoing President, Institute of Corporate Governance
Honorable Governor of the Bank of Uganda
Diplomatic Colleagues
Leaders of Uganda business and Government
Ladies and Gentlemen:

First and foremost, thank you for the invitation to address the Institute of Corporate Governance.  The Institute, like its counterparts in the United States and around the world, plays an important role in promoting a business environment rooted in transparency, fairness, and accountability. I salute you and your sponsors and funding partners on the good work you are doing.    

Corporate governance is a big deal in the United States.  We have organizations like yours that set standards for directors in the private sector, but there are also organizations to improve governance and the role of boards of directors for NGO's, for foundations, for educational institutions and many more.  But that's not why corporate governance is such a hot topic in the United States these days.  The reason can probably be summarized in one word:  Enron. 

We continue to tabulate the human and economic costs associated with recent examples of  dishonest corporate governance in the U.S.  Enron was a company with assets valued at 60 billion dollars at the time it declared bankruptcy in December 2001, a value later revealed to be a fiction carefully constructed by some among the company's senior management.  And Enron's outside directors and auditors never raised the right questions or warned of the corruption.

As shocking as Enron's collapse was, it was dwarfed just six months later by the disintegration of WorldCom, with assets valued at 107 billion dollars.  Unfortunately, such examples abound in recent years, and are not restricted to the U.S. market, as the examples of Ahold and Parmalat in Europe demonstrate.  Common to all these stories are accusations of corporate malfeasance, auditor bias, misrepresentations of market position, and deception of shareholders.   These companies all had corporate directors.  Where were they?  What were they doing or not doing to protect the firm and the public from fraud?

Over the last three years, the United States has moved to address regulatory ambiguities that permitted corporate executives to misrepresent their activities and disguise corporate earnings.  We now require that CEOs or CFOs personally certify that financial statements are accurate.  We prohibit loans to officers of the company, increased regulations on how companies interact with accounting firms, and stiffened disclosure requirements for legitimate insider trading. 

Clearly market economies require certain legislative and regulatory controls - bankruptcy laws, contract protections, oversight authorities - for example.  However, such controls are no substitute for corporate character, and ultimately the efficient exchange of goods and services will never occur in any market if the character of a contracting partner is in doubt.  The Government cannot legislate ethics and while regulatory systems and enforcement schemes may encourage people to follow the law, ultimately the decision to act responsibly must come from within.

The issue is the reputation of the business.  Corporate reputation has emerged or perhaps reemerged as a core economic value, a marketable asset.  

No example better illustrates this than the case of accounting giant Arthur Andersen.  Andersen, one of the oldest and largest accounting firms in the world, saw its reputation destroyed by the company's association with Enron's suspect accounting practices.  In the year subsequent to Enron's collapse, Andersen lost all of its important accounting contracts, dismissed 27,000 of its 28,000 employees, and was convicted of obstructing justice in the Enron investigation.  This was a profitable, financially stable operation that was essentially destroyed over a period of months - a casualty of its tarnished reputation.

What does this mean for investment in a developing market such as Uganda? 
1. A good corporate governance reputation is crucial to attracting foreign investment.  The reputation of an individual company is important, but so are the reputation of the general business climate and the country as a whole, including questions about security, official corruption, and the pace of democratization.

2. It means that every business needs to be honest with itself.  Do you expect a bank to loan you money or an American firm to start a joint venture with you if you keep two sets of books - and one of them says you're making no profit?   

While Uganda has enjoyed considerable success in liberalizing its economy and opening its markets, poor corporate governance, whether through tax avoidance, insider dealings, or lack of transparency and accountability, prevent Uganda from taking full advantage of its growth-friendly policies.  Many Ugandans wonder why their economy has not grown faster, considering all that they have done right.  Part of the answer is poor corporate governance, which, when combined with the related ills of corruption and an inconsistent application of the rule of law, has held Uganda back. 

Everyone here is familiar with where Uganda resides on the latest Transparency International Corruption Perceptions Index -- Number 117 of 133 countries rated.  This is not the Premier League.  This is not the league Uganda wants to be playing in.  And while the index attempts to encompass corruption at both official and unofficial levels, the effect of either is the same on foreign investors assessing possible market opportunities.  Uganda's tremendous human and natural resource assets will not outweigh corruption and poor governance in the eyes of the typical investor.     

I applaud the Institute's efforts to persuade Uganda's business community to combat both the reality and perception reflected in the TI index, and we all need to work with government to address the cycle of corruption often associated with poor corporate governance. 

I further applaud the progress toward transparent corporate governance represented by the Uganda Securities Exchange's listing requirements.  These requirements, including financial transparency, regular reporting, and auditing requirements.  The United States, as a matter of policy, wants more firms to list on the Exchange.  It will help them, attract unit trust investments and encourage all of Uganda's financial institutions.  But even companies that choose not to list should adhere to the USE's listing requirements, and you as directors should insist that they do.  This will improve the perception of the company's integrity and create a useful benchmark for local, regional and international investors. 

Access to capital, both public and private, is contingent upon businesses being able to present to financial institutions and potential investors clean books and complete records.  

Ladies and Gentlemen, tonight we congratulate the Institute's outgoing Council on the hard work they have done to advance the type of corporate governance Uganda will need if it expects to attract and retain the investment necessary to fuel the nation's development.  The turmoil of the 1970s and 80s destroyed much of Uganda's business and legal infrastructure, and forced many businesspeople to rely on their wits to survive.  Now, as Uganda's economy grows and becomes more sophisticated, so must its business practices, and your Institute can play a leading role in educating Ugandan entrepreneurs, industrialists, and investors on how to upgrade their standards to reflect Uganda's changing economy.  "Things have always been done this way" is not a legitimate response to attempts to improve management practices.  The global economy is not static and Uganda must adopt modern and efficient methods in order to compete -- business cannot function the way it has in the past.  Ugandans must work together to craft a more transparent, and responsive corporate governance system. 

I also urge you to continue to work with the Government and Parliament to craft strong anti-fraud and anti-money laundering laws that protect investors and consumers.  Strong and clear laws to prevent fraud and money laundering, backed by active and fair enforcement, will boost confidence in Ugandan markets.  By creating an open and honest corporate culture together with a realistic and effective regulatory regime, Uganda should be able to enjoy the fruits of its economic liberalization.

To the incoming Council I would simply say, you have a tough act to follow, but a clear path upon which to tread.  Thank you very much. 

* 117th out of 133 reviewed nations.