"J R Tolkein would not have been surprised by Enron," Commissioner Roel Campos of the United States Securities and Exchange Commission told a Wellington audience last month.
Referring to the Lord of the Rings, Mr Campos likened the power of the ring and its tendency to corrupt to the temptations faced in the corporate world, and the pressures of wealth and greed.
"Human beings are vulnerable," he said. "Greed and power can corrupt any individual." This is why ethics matter, and why effective standards of corporate governance are needed.
Commissioner Campos noted three recent developments in corporate governance in New Zealand:
- the positive report given by the Financial Sector Assessment Programme in November last year, which looked at New Zealand's financial regulatory arrangements and compliance with international standards and codes;
- acceptance as a signatory to the IOSCO multi-lateral memorandum of understanding, which demonstrated that New Zealand's regulatory regime had met the required standards; and
- the recent release of the Securities Commission's corporate governance principles for New Zealand.
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"New Zealand is on a roll," he said. But he urged against smugness on the part of any country which had not experienced corporate scandals such as those that have rocked the United States in recent years.
"Maybe you just haven't found out about them yet."
Under the Sarbanes-Oxley Act, United States companies are not legally obliged to have codes of ethics. However, if they don't, they need to explain to investors why not. Similarly, if they depart from their code of ethics, they need to explain why.
The Commissioner also emphasised the role of the board of directors of a company in maximising returns to shareholders, maintaining the integrity of the company, and ensuring that financial statements are transparent and accurate. Under Sarbanes-Oxley, a majority of directors will need to be independent.
Auditors in the US now report to the audit committee, rather than to the CEO. Audits of internal controls over financial reporting are also required under Sarbanes-Oxley. The non-audit functions which can be carried out by auditors have been tightened. The Public Company Accounting Oversight Board was set up almost a year ago to oversee auditors, and restore confidence in the audit process.
Continuing the analogy with the Lord of the Rings, Roel Campos likened Gandalf to
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Commissioner Campos |
the regulator. Without him, Frodo can't complete his quest. The regulator's role is to establish rules, and to keep competition as a real force in the market. To be effective, regulators must have enforcement powers.
In conclusion, Mr Campos reiterated the importance of an effective regulatory regime even in countries which have not so far experienced an Enron-style collapse. If countries want to be part of the global economy and to attract capital, there must be transparency in the market place, and standards and principles must be seen to be in effect.
Several questions after the lecture focused on issues around independence, for example in terms of share ownership by directors, and the remuneration of CEO's. Commissioner Campos also referred to his country's willingness to work with other countries as they develop their regulatory regimes.
The lecture by Mr Campos was attended by securities regulators of the Asia Pacific region as well as by Wellington lawyers, accountants, and business people.
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