In order to have a clear understanding of the fundamental principles underlying corporate governance, it’s essential to also understand the fundamental purpose of companies themselves and how corporate governance promotes investment in, and growth of, companies.
Companies as collective investment vehicles – the need for corporate governance
Companies have the status of ‘legal persons’ that are able to enjoy the same rights as a natural person. The shareholders or members of a company also enjoy limited liability – subject to any exemptions in legislation, shareholders only have to contribute the subscription price of their shares and are not liable for the debts of the company. These aspects make companies particularly attractive as a vehicle for operating businesses and making investments. However, the fundamental purpose of companies is as vehicles for collective investment. Companies provide a convenient way to access more investment from a broader base by having investors who do not necessarily know each other, and do not necessarily know the management of the company, pool their investment funds together.
While ‘legal person’ status and limited liability make the company structure attractive, in practice how do you get a group of strangers to pool their investment funds into a company? In order to be confident of making an investment in this situation, investors need to have a reasonable degree of trust that they will be provided with sufficient, accurate information on the status of their investment and that management of the company will be required to comply with some minimum standards in the way it runs the business to protect their investment. This is the basic concept of ‘corporate governance’ and why it was created – so that investors can have confidence to put money into companies (or other collective investment structures) that they are not themselves managing – and so that is therefore possible in turn to grow much larger and more sophisticated economies.
Promoting investment and growth through corporate governance standards
Corporate governance aims to create a whole economy, or ‘ecosystem’, where investors can expect to have this basic level of trust when investing in companies. Therefore, minimum standards are applied across the board, regardless of the actual ownership of a particular company. In Myanmar, for historical and developmental reasons, most companies are still managed by the founders or majority owners. Shareholders who are not founders or part of management are usually personal acquaintances of management or of other major shareholders. (This is also still common in more developed economies, but less so than in Myanmar at present). This is one of the reasons why corporate governance has not been an area of major focus in Myanmar in the past.
However, it is not possible to grow a large and sophisticated economy if business owners and managers can only raise investment capital from their family and friends. If Myanmar is to have a large, developed economy it must have a broad and deep investment base. In order to have a broad and deep investment base it must have reasonably high standards of corporate governance to give investors confidence to invest. In order to have reasonably high standards of corporate governance, it must have a robust system where corporate governance standards apply to all companies (even those that are still owned by family and/or friends and that don’t want or need new investors to expand) so that corporate governance principles are strongly entrenched.
Corporate governance principles therefore apply to every company as though the managers are not themselves the shareholders or investors. Every company is required to comply with standards as though the directors and management are managing someone else’s investment and business and therefore have to adhere to reasonable standards of care and diligence in decision making and provide reasonably transparent reporting.
International corporate governance norms will attract more investment for Myanmar
We often hear in Myanmar that things have to be done ‘the Myanmar way’. That is not always true or reasonable though. No investor is obliged to put its money into any company. In particular, no foreign investor is obliged to put money into any Myanmar company. If a company wants the benefit of using someone else’s money, it’s only fair that it should be required to comply with minimum standards to give the investor trust and confidence to invest. Therefore, if the Myanmar economy is to grow significantly and reach its potential, higher corporate governance standards (based on international norms) are essential.
