TO understand the role of corporate governance in determining                                                                                         
social and economic efficiency, we need to appreciate that it                                                                                         
is shaped by three basic disciplines: self-discipline,                                                                                                
regulatory discipline and market discipline.                                                                                                          
                                                                                                                                                      
Corporate governance depends on self-discipline of corporate                                                                                          
captains. If we look at the most successful and respected                                                                                             
entrepreneurs in Asia, you will notice that the exercise great                                                                                        
self-discipline. Good companies do well because they have                                                                                             
internal processes to ensure that they comply with the law,                                                                                           
deliver value to their customers, and behave ethically.                                                                                               
                                                                                                                                                      
Today various studies suggest that investors would reward                                                                                             
companies with good corporate governance with as much as 20% to                                                                                       
30% share price differentials. It is thus in the self-interest                                                                                        
of corporate captains to ensure that they operate the highest                                                                                         
standards of corporate governance.                                                                                                                    
                                                                                                                                                      
Regulatory discipline helps, but who regulates the regulators?                                                                                        
                                                                                                                                                      
Of course, we all recognise that moral fibre alone will not be                                                                                        
sufficient to prevent the occurrence of insider dealing, market                                                                                       
manipulation and cheating or fraud.                                                                                                                   
                                                                                                                                                      
Clearly, there must be regulatory discipline. The Asian                                                                                               
historical legacy of paternalism, most evident in Confucian                                                                                           
moral codes of correct behaviour, have not prevented the                                                                                              
corruption, fraud and market misconduct that we continue to                                                                                           
witness throughout history to the present day.                                                                                                        
                                                                                                                                                      
Consequently, the Legalist tradition called for a regulation                                                                                          
for every aspect of economic activity. But the Legalist                                                                                               
tradition failed because it was seen as over-regulation.                                                                                              
                                                                                                                                                      
So, how do you balance regulatory and self-disciplines to                                                                                             
ensure that there are sufficient market efficiency without                                                                                            
misconduct?                                                                                                                                           
                                                                                                                                                      
On this issue, the Malaysian Finance Committee Report on                                                                                              
Corporate Governance states the conditions very clearly:                                                                                              
                                                                                                                                                      
First, regulators must be allowed to enforce laws without                                                                                             
interference or fear or favour, and take action, to reinforce                                                                                         
the credibility of the entire regulatory framework.                                                                                                   
                                                                                                                                                      
Secondly, the enforcement of laws and regulations must be                                                                                             
consistent, to ensure a level playing field for all                                                                                                   
participants.                                                                                                                                         
                                                                                                                                                      
Thirdly, the regulator cannot countenance a market that is                                                                                            
perceived to be unfair and must be allowed to enforce laws and                                                                                        
regulations to protect the investor and the integrity of the                                                                                          
system and, where these are not sufficient, to improve and                                                                                            
enhance them.                                                                                                                                         
                                                                                                                                                      
But, as the experience of many countries has shown, the                                                                                               
regulators cannot exercise their functions independently when                                                                                         
the regulatees are either owned by the state or the businesses                                                                                        
have close connections with the state or the political powers.                                                                                        
                                                                                                                                                      
Of greater significance is that quality firms that could                                                                                              
otherwise provide competition may look to other markets that                                                                                          
have a more conducive environment. Worse, good firms that                                                                                             
realise they are unable to compete, join in the game.                                                                                                 
                                                                                                                                                      
As a layman, we often assume that regulation means simply that                                                                                        
the regulator enforces the law against misconduct. But in                                                                                             
reality, the "rules of the game" for the corporation,                                                                                                 
management, controlling and other shareholders and their                                                                                              
regulators are much more complex. For regulations and their                                                                                           
enforcement to be effective, they must fulfil certain                                                                                                 
conditions and objectives. Ideally, they should:                                                                                                      
                                                                                                                                                      
* BE clear, transparent and explicit in objectives;                                                                                                   
                                                                                                                                                      
* HAVE legitimacy, that is have public consultation and                                                                                               
approval;                                                                                                                                             
                                                                                                                                                      
* PROMOTE market efficiency and a level playing field;                                                                                                
                                                                                                                                                      
* HAVE due regard to regulatory burden on market participants;                                                                                        
                                                                                                                                                      
* APPROPRIATELY protect small market participants, for example                                                                                        
consumers and investors; and                                                                                                                          
                                                                                                                                                      
* HAVE transparency and due process in enforcement.                                                                                                   
                                                                                                                                                      
What we commonly mean by the rule of law really means a set of                                                                                        
market rules of the game laid out in a whole range of                                                                                                 
principles, codes, rules and the law, with checks and balances                                                                                        
at every level.                                                                                                                                       
                                                                                                                                                      
Why are these regulatory checks and balances necessary in a                                                                                           
modern market society? Regulatory objectives may change with                                                                                          
the times and social demands. Regulatory processes to meet                                                                                            
these objectives, however, can become obsolete, resulting in                                                                                          
bureaucratic inefficiencies and high transaction costs for the                                                                                        
community.                                                                                                                                            
                                                                                                                                                      
Reform, de-regulation or re-regulation is therefore necessary                                                                                         
for innovation and competition.                                                                                                                       
                                                                                                                                                      
Regulatory reform can come about in two fundamental ways.                                                                                             
First, they can come about because of financial scandals or                                                                                           
crises. This gives the political backing for change.                                                                                                  
                                                                                                                                                      
Alternatively, reform can come about be cause of vigilant                                                                                             
regulatory "fine-tuning." If the regulatory framework is                                                                                              
constantly adjusted to changing market and social needs, there                                                                                        
is no need for crisis response. Since reform success depends on                                                                                       
market support it requires the regulator to continually explain                                                                                       
what it is doing, and why reforms must be carried out in                                                                                              
consultation and partnership with the market, professional                                                                                            
bodies, nongovernmental organisations, universities and other                                                                                         
participants.                                                                                                                                         
                                                                                                                                                      
Regulatory reform requires also transparency and legitimacy.                                                                                          
It cannot be a solely "top-down" exercise.                                                                                                            
                                                                                                                                                      
Using market discipline                                                                                                                               
                                                                                                                                                      
Market discipline comes from two inter-related forces - market                                                                                        
pricing and market competition. The market should be in a                                                                                             
position to monitor the conduct of agents and call them to                                                                                            
account. In well-functioning markets, the market's assessment                                                                                         
of corporate performance is reflected in the prices of equities                                                                                       
and bonds, and corporations that fail the test could find                                                                                             
difficulty in raising new capital, and eventually be competed                                                                                         
out of the market. Surveys on Asia already show that the                                                                                              
international market will give a premium for good corporate                                                                                           
governance.                                                                                                                                           
                                                                                                                                                      
Increasingly, credit rating agencies are now moving into the                                                                                          
area of rating corporate governance. But unfortunately,                                                                                               
institutional or shareholder activism is only at very early                                                                                           
stages of development in Asian markets.                                                                                                               
                                                                                                                                                      
We see, for instance, investor activist groups in South Korea                                                                                         
taking successful derivative suits. Even in China, the China                                                                                          
Securities and Regulatory Commission has announced interest in                                                                                        
promoting investor associations that look after minority                                                                                              
rights. Malaysia now has its own Badan Pengawas Pemegang Saham                                                                                        
Minoriti Berhad. In Hong Kong, there is a proposal being                                                                                              
debated for a Hong Kong Association of Minority Shareholders.                                                                                         
                                                                                                                                                      
But market discipline will not work without accurate,                                                                                                 
consistent and timely information. Nor will it work if there is                                                                                       
no level playing field for competitive forces to function.                                                                                            
                                                                                                                                                      
In other words, market discipline cannot be deliver quality                                                                                           
information, transparency and level playing fields.                                                                                                   
                                                                                                                                                      
Transparency and accountability                                                                                                                       
                                                                                                                                                      
Transparency, which involves the periodic release of                                                                                                  
information on objectives, processes and results, enhances the                                                                                        
quality of governance at all levels - individual, corporate,                                                                                          
government and international.                                                                                                                         
                                                                                                                                                      
Transparency also ensures that performance is benchmarked                                                                                             
against objectives, so that those entrusted with economic power                                                                                       
are held accountable for their responsibilities.                                                                                                      
                                                                                                                                                      
International investors demand that information disclosure be                                                                                         
up to international standards. And international financial                                                                                            
institutions, such as the IMF and World Bank, and regional                                                                                            
development banks, as well as regulatory bodies and standard                                                                                          
setters, such as Basle Committee on Banking Supervision, are                                                                                          
now increasingly benchmarking economies and markets according                                                                                         
to international standards.                                                                                                                           
                                                                                                                                                      
Through technology, the market now allows everyone the freedom                                                                                        
to choose. At the local level, the corporation or the market                                                                                          
authorities can choose to meet local standards or global                                                                                              
standards. If you wish to tap international capital, then you                                                                                         
have to meet international standards.                                                                                                                 
                                                                                                                                                      
The international investor and lender also have freedom of                                                                                            
choice. If they are not confident about the level of                                                                                                  
transparency and accountability, and believe, rightly or                                                                                              
wrongly, that decisions made by firms or markets they invest in                                                                                       
are taken against their interests, then they will simply exit                                                                                         
that particular investment or market. The market can be brutal                                                                                        
in its judgment.                                                                                                                                      
                                                                                                                                                      
In today's environment of rapid change, we need to remind                                                                                             
ourselves that the delivery of value and performance - the                                                                                            
fulfilment of trust and confidence, is a delicate combination                                                                                         
of self-discipline, regulatory discipline and market                                                                                                  
discipline.  Such changes are as much changes of mind-set, as                                                                                         
changes in social and regulatory processes.                                                                                                           
                                                                                                                                                      
If Asian markets are to thrive and deliver the next Miracle,                                                                                          
then we have to ensure that the checks and balances of                                                                                                
transparency, accountability and due processes exist to enable                                                                                        
us to match global competitiveness.                                                                                                                   
                                                                                                                                                      
If we succeed, we can take Asia to its rightful place in the                                                                                          
global market place. If we fail, we have only ourselves to                                                                                            
blame.