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Contribution by BIAC Secretary General Tadahiro Asami to the OECD Global Standard Blog
18 August 2009

 

The business community welcomes the discussion to develop a Global Standard, now referred to as the “Lecce Framework”, initiated by Italian Finance Minister Tremonti and recently supported by the G8 and the OECD. In our view, the OECD has a leading role to play in this process.

The Lecce Framework initiative reflects serious concern over the magnitude and global nature of the current financial and economic crisis, and the need to address and resolve flaws in the international economic and financial system. Effective solutions are best found through constructive dialogue among all major stakeholders (international organisations, governments, business, labour and civil society). We must work together to achieve practical policy approaches across all issues necessary to support sustainable economic activity and enterprise growth.

Business understands that the strategic objective to create a comprehensive Lecce Framework is to build on existing initiatives, to identify and fill regulatory gaps and foster the broad international consensus needed for rapid implementation*. This guidance should be based on a common set of principles and standards for propriety, integrity and transparency in the conduct of international business and finance, respecting the legal nature of existing instruments.

The OECD is ideally placed to play an important role in the Lecce Framework initiative as several of its instruments could serve as the basis for a Global Standard, such as the OECD MNE Guidelines, the OECD Corporate Governance Principles, the OECD Tax Standard, and the OECD Bribery Convention.

The strength of the OECD’s consensus approach and competence in developing credible policy guidance cutting across several policy disciplines relevant to this initiative naturally equip the Organisation to lead the Lecce Framework process.

 

Going forward, a successful outcome of the Lecce Framework initiative will require a clearer understanding of its aims, its form, and its eventual implementation. This understanding can only be achieved through a transparent consultation process identifying all elements for consideration in the final framework.

In whatever form a Global Standard is implemented, we call on the OECD to construct and lead a thorough and practically focused process in coordination with the IMF, FSB, World Bank, WTO, ILO, Governments as well as major stakeholders, including business and trade unions.

Importantly, the process must also engage emerging and developing economies in order to create a level playing field among economies in different stages of development.

The current crisis makes clear that no one actor has all of the answers to ensuring a sustainable recovery, but each actor must be part of the solution.

 

In summary:

• BIAC welcomes discussion to develop the Global Standard “Lecce Framework”;
• Consultation among all major stakeholders (international organisations, governments, business, labour and civil society) is necessary to take this initiative forward;
• The OECD should play a lead role in these consultations.

Finally, it is critical that a Global Standard should not discourage innovation, nor threaten or put at risk the sound development of market-based open economies. BIAC looks forward to continued engagement in this process.

 

*8 July 2009, L’Aquila G8 Summit Leaders Declaration: Responsible Leadership for a Sustainable Future, para 27.

-- by Amb. Giampiero Massolo, Italian Prime Minister’s Personal Representative for the G8 and G20

Secretary General of the Italian Ministry of Foreign Affairs

 

     The Global Standard/Lecce framework aims to respond to a need acutely felt since the beginning of the global financial and economic crisis. One of the things we have discovered through these troubled times is that the extent of irresponsible risk taking, of tax evasion, of free riding – sometimes verging on fraud, sometimes going well beyond it – has proved to be unsustainable. The costs and the losses imposed by this type of behaviour on the global community, on consumers, investors, workers and taxpayers are unacceptable.
     In promoting the Global Standard, the Italian Government aims to restore sound principles of prudence, transparency and integrity. As initially underlined by Economy and Finance Minister Tremonti, the Global Standard is meant to recreate a standard of ethical behaviour in international economic activity, in the same way that adherence to the Gold Standard was a “good housekeeping seal of approval” for governments around the world until World War One.
     It is clear that we are not trying to reinvent the wheel: we are rather trying to bring back, to coordinate, improve and spread around the world a series of rules and codes of conduct, not all of which are legally binding, which have for the most part existed for some time but were neglected in the euphoria of the past decade. The Global Standard is part of the international effort to restore growth on solid basis, providing meaningful and effective rules to govern globalisation and to prevent the resurgence of the problems we have encountered in the last two years.
     The Global Standard/Lecce Framework is a process which started at the beginning of this year. G8 Finance Ministers agreed on the objectives of this strategy in June at their meeting in Lecce. We have been particularly pleased by the warm reception given at the L’Aquila Summit by world Leaders to the ideas behind the Lecce Framework. The political endorsement of this initiative at the highest level is particularly important.
     The German Chancellor Angela Merkel has also shared the idea that agreed principles and standards must be at the centre of global governance to ensure stability in the long run. She therefore proposed to develop a “Charter for Sustainable economic activity”, indicating the common principles and standards on propriety, integrity and transparency of the Lecce Framework as one of its main pillars. With a view to bringing the Lecce Framework and the Charter to the largest possible audience, our two governments are now working together with the OECD and the G20 Presidency to bring forward this issue to the Pittsburgh Summit in September. Rules on international conduct must be widely accepted and enforced internationally in order to be effective. That is why we would like to share them with the largest possible number of States, to avoid a race to the bottom and regulatory arbitrage between jurisdictions.
     The discussion will also continue on a technical and academic level, involving civil society in the debate, following the “bottom up” approach of the last few months, in order to receive the best information, advice and proposals from the international community of professionals, professors and civil servants.

-- Kimon Valaskakis PhD
Kimon Valaskakis is a former Canadian Ambassador to the OECD President of the New School of Athens and emeritus professor of economics at the University of Montreal.


Without Law there is no civilization. This principle is well known and applied in all national states where a central organization called a ‘government’ establishes and enforces rules to regulate the economy and society. Yet, at the international level, we seem to lay aside this idea and under the system of national sovereignty, inherited from the 1648 Treaty of Westphalia, each state is free to accept or reject international rules, by signing or not signing treaties.
Even more surprising, private sector actors, such as individuals, corporations and special interest groups, although submitted to national rules, can well escape from the latter by moving to other jurisdictions. This explains the proliferation of tax havens, outsourcing to low wage areas and environmental dumps. When these private sector agents are asked to show ‘corporate social responsibility’ it is mainly through ‘guidelines’, ‘frameworks’ and general recommendations which are left optional. In spite of globalization, very few, if any, intergovernmental organizations have the power to exert any direct authority on these private actors. Most IGOs are designed to discipline signatory governments by moral suasion or in some cases, sanctions, but not corporations which remain completely unregulated at the global level. As a result, the ‘guidelines’ and ‘frameworks’ end up having the same status as New Year Resolutions, such as quitting smoking or losing weight. Most of them are just not kept.


In the paper which I was asked to write for the G8 Research Group in preparation of the Aquila Summit, I have argued that the Good Samaritan approach, which relies exclusively on benevolent or philanthropic CEOs to implement global corporate social responsibility, very quickly meets its limits. Good Samaritans, like Philosopher Kings are few and far between. The financial excesses of 2008 which led to the current global crisis confirm the proposition that for every philanthropist there are many more cheaters who don’t play by the rules.  More importantly, the absence of global rules makes the very concept of cheating too vague to be applicable, since it is quite possible to be outrageously irresponsible without breaking any laws, whatsoever. It follows then that, in our view, a Global Standard, which is an excellent idea to begin with, can only be meaningful if enforceable by some form of global law.
How can this happen in a Westphalian World, designed around national sovereignty ? This is a tricky question and, as a former OECD ambassador, I am well aware of its complexity. However there are at least three plausible solutions which should be explored:


(1) Create a new IGO with direct authority on private actors. One model could be the UN Security Council. The idea of creating a Security Council for the Economy, for the Environment or for Health, among others has already aroused some interest. It would mean that the rule making, once approved by the member states could then be implemented with sanctions for non- compliance. A second model could be the International Criminal Court, which has the authority to prosecute individuals without the permission of national governments. An equivalent International Economic Court could be envisioned with powers to impose penalties on offending economic actors.


(2) Endow one or more existing IGOs with direct authority over private sector agents, in order to enforce the agreed upon Global Standard. If the first solution is too cumbersome, existing IGOs could be given the same authority. This could be done by treaty or agreement allowing the IGOs to take direct measures against offending private sector agents based in the signatory states.  The candidate IGOs which could be entrusted with that task could be the IMF, the OECD and the WTO or some combination of all three.


(3) Simultaneously enact identical corporate social responsibility legislation in all signatory countries, fully enforceable by national states. This proposal is the least complicated to implement and is advocated by the John Bunzl among other in the Simultaneous Policy Movement. Each sovereign country would enact identical laws, because subtle differences in wording could be exploited by cunning lawyers to create loopholes. The effectiveness of this  approach will also depend on its inclusiveness. If some major players are absent then it will obviously fail.

We have become One Interdependent World which obviously requires global standards, to be effectively managed. But without appropriate enforcement mechanisms these standards are unlikely to go beyond the status of wish lists.

Looking Beyond the G8

Posted by 180396 Jul 23, 2009

- by Guy Ryder, General Secretary, International Trade Union Confederation

 

As John Evans commented last week, the G8 Finance Minsters’ “Lecce Framework” for a “Global Standard of Common Principles of Propriety, Integrity and Transparency of International Economic and Financial Activity” provides a welcome focus on intergovernmental regulation via instruments that govern private sector conduct. We too believe it vital that the OECD Guidelines for Multinational Enterprises should therefore be comprehensively incorporated into the Framework, rather than merely referenced as at the moment.

 

Looking beyond the G8, the G20 is to hold its next Summit in Pittsburgh in September. The “Charter for Sustainable Economic Activity”, being prepared by a G20 Task Force and due to be discussed at Pittsburgh, needs to be comprehensive in scope and incorporate development, environmental and social instruments, including most importantly the “decent work” agenda and the relevant labour standards of the International Labour Organisation (ILO).

 

We would emphasise the particular importance of labour and social standards in providing overarching principles to prevent recurrence of the current crisis. The Global Charter could help pave the way for stronger, fairer and cleaner global economic growth but it must go beyond economic and trade issues if it is to deliver on that potential. 

 

Increased financial regulation is essential but it is not enough on its own - the political message of the London G20 Summit was that financial regulation PLUS employment creation is the new name of the game. The Global Jobs Pact negotiated by the ILO in Geneva in June was a promising step in the right direction and governments need to ensure that there is no return to the ‘business as usual’ approach that brought about this crisis. 

 

There is need for a new model of economic development, one that rebalances the economy between the financial and the real, between labour and capital; and between industrialised and developing countries.

 

This requires that the G20 in Pittsburgh should press ahead with global governance reforms and support a paradigm shift in the model of economic growth that puts people first.  Hence it is essential that decent work elements concerning employment, labour standards, social protection and social dialogue receive strong support from governments in the context of the G20 Charter discussions.  That way, the Global Standard can provide the basis for a broadly-supported and comprehensive response to the multiple governance failures that brought about the current crisis.

 

 

John Evans, General Secretary TUAC (Trade Union Advisory Committee to the OECD)

 

The Report of the Finance Ministers’ Deputies to the G8 Finance Ministers meeting, held in Lecce in June 2009, called for “a rethinking of the foundations of the global economic and financial system” in the light of the “worst crisis since the Great Depression”. Given the appalling human cost of the crisis - a probable 60 million more people unemployed globally and an extra 230 million pushed into extreme poverty - trade unions can only concur.

 

Beyond the re-regulation and more effective supervision of financial markets and institutions, such rethinking must also encompass the rules and oversight of the market system more generally. As a result trade unions are closely following the development of the G20 and G8 initiatives aimed at preventing excesses of the market and ensuring more balanced economic development.

 

The “Charter for Sustainable Economic Activity”, being prepared by a G20 Task Force and due to be discussed at the Pittsburgh G20 Summit in September, needs to be comprehensive in scope and incorporate economic, financial, development, environmental and social instruments, including most importantly the “decent work” agenda and the relevant labour standards of the International Labour Organisation (ILO).

 

The G8 Finance Minsters’ “Lecce Framework” for a “Global Standard of Common Principles of Propriety, Integrity and Transparency of International Economic and Financial Activity”, which appears to be designed to be one chapter of the Charter, brings together international instruments that govern private sector conduct. The Framework focuses on corporate governance, market integrity, financial regulation and supervision, tax cooperation, and transparency of macroeconomic policy and data. While these elements are necessary, they are not sufficient. Trade unions consider it essential that the Lecce Framework, in view of its focus on the private sector, incorporate the ESG (Environment, Social and Governance) standards on which private sector conduct must be based, if we are to achieve a shift to a new paradigm of economic development. The OECD Guidelines for Multinational Enterprises should therefore be comprehensively incorporated into the Framework, alongside other relevant OECD instruments – at the moment they are merely referenced in the Deputies’ report for Lecce.

 

These instruments have the potential to send a strong political message on the political priority given to the social and labour dimension of governance and development and provide a sustainable framework within which to strengthen inter-institutional cooperation and overall policy coherence. However, their actual impact will depend on their effective implementation, including the strengthening of existing instruments (the building blocks), achieving buy-in from governments and the adoption of a rigorous monitoring mechanism.

by Alberto Mazzoni - Professor of Commercial Law, Catholic University, Milan

 

The “Lecce Framework” of June 13, 2009 has once more confirmed the common intention to overcome the regulatory deficit showed by the actual financial crisis by way of setting or reinforcing common principles and standards on conduct of international business and finance. This intention must be supported by new ideas and proposals but must also build on existing initiatives, since a number of international standards and standard-setting bodies do already exist, and shall mainly focus on five sectors: a) corporate governance, b) market integrity, c) financial regulation and supervision, d) tax cooperation, and e) transparency of macroeconomic policy and data.

 

The general approach of reinforcing governance by starting from the recognition of a wider and more influential role of soft law is to be shared. However, there are a number of issues that need to be carefully evaluated, since the real question seems to be what kind of governance we are ultimately aiming at.

 

In the first place, it is well-known that the reason why the Financial Stability Forum (FSF) – now transformed into the Financial Stability Board (FSB) – was created was exactly to reinforce international standards and coordinate standard-setting bodies under the same umbrella, so as to have a consistent implementation system. Indeed, the FSF selected a list of existing standards which were thought to be of key importance for the prevention of international crises, promoted their implementation and mechanisms for review, and also required the IMF and the World Bank to sit together in a joint exercise to assess whether States would adequately consider these as precondition for development and stability. In short: we had already attempted to go the way we are now re-advocating, but the attempt has proven to be unsatisfactory, or at least not sufficient.

 

In the second place, the five selected sectors of intervention all require different tools and governance mechanisms. They indeed touch upon very diversified matters and require involvement of different actors. For each of them a distinct analysis of what governance should mean may be required. Anti-money laundering schemes, for instance, might require a combination of soft and hard law, cooperation among tax authorities but also banks and supervisory authorities. On a quite different level, corporate governance would involve analysis of companies structures and the interaction between corporate law and the law of the market, involving not only different authorities but also different economic and legal approaches.

 

Finally, macroeconomic data and objectives do inevitably share a common ground with some aspects of financial regulation, but we should never forget that macroeconomic policies of States require to be coordinated under different parameters than regulation of behaviour of private actors. In these contexts, the role of international organizations such as the IMF and the World Bank may have to be more political and more conscious of the need of global cooperation among States than that of a mere warden or custodian of the respect of international standards.

 

The main purpose of these brief and heterogeneous comments is to stress that in fact, behind the label of “international standards”, “regulation” and even “governance”, lay a number of articulated alternatives that need to be carefully weighed. What I am saying is that it is not the mechanism as such which has to be discussed – after all, the mechanism or the panoply of mechanism as such has been in place since long -, but rather the oil that we intend to pour into such mechanism.

 

For this, I would spend a few considerations on what “soft law” exactly is: standards are not simply “non-binding” instruments. They should be the result of a bottom-up formation of rules, made out of general agreement among all relevant actors. They should be so generally shared that their force reside in their inherent capability to persuade rather than to be imposed. Assuming that this quick definition of the essence of soft law is shared, it implies that standards can only work if they are perceived by all relevant stakeholders as their-own, and as representing a common set of values that deserve to be shared.

 

This is not an easy task in such a complex world as the one we live in. However, a full involvement of certain communities that may be effective conscience builders at the international level may lead to results easier to accept. This might mean to start reconsidering a larger involvement of international organizations and a diversification of tasks.

 

For instance, there are international organizations or bodies having as their main scope the unification of law. These can produce international conventions but also model laws and principles. They already have strong partnerships with civil society, although their products are political in essence and pass through the Cabinets of States. Unquestionably, these institutions should be directly and intensely involved in the process of setting standards.

 

In parallel, judges, whether in national courts or in international contexts, should increasingly inject in their interpretation of the rules the awareness of the legal importance of commonly accepted legal standards.  The law has (and must resume full awareness of having) ethical foundations. The common standards are, in substance, a conscious compilation of a number of ethical foundations of the law.  As history tells us, judge-made law is often a better promoter of the socialization of ethical rules than the legislative attempt to crystallize them in technical rules.

 

Finally, a number of organizations, including the OECD, the IMF and the World Bank, provide technical assistance to States: this activity could and should be a powerful vehicle for the spreading of common principles and their absorption and appropriation by each addressee State, if only they could be better inserted in a consistent frame and gain a better reputation.

 

Indeed, the Lecce Framework declares to lay on three focal concepts: property, integrity and transparency. Each of these is a prism containing a plurality of meanings. A way to overcome the difficulties of the past could be to start asking what we exactly mean with each of these, what we mean to protect, how people could believe these are relevant to our living together, whereafter the task of shaping common standards and ultimately of identifying by whom they should be shaped in the different areas would be greatly clarified and facilitated in implementation.

 

 

 

 

Towards a Global Standard

Posted by 19218 Jul 16, 2009

Paul Hohnen is an Associate Fellow of the Royal Institute for International Affairs (Chatham House)

 

The attention which the 2009 G8 Summit gave to a Global Standard is to be welcomed.

 

First, because it is and will always remain the final responsibility of government to shape standards, whether legally binding or voluntary. Second, because the process offers an opportunity to review existing principles and standards and to identify how well these are implemented. Thirdly, to be effective, any new standards need to be legitimate and practical. This will require a high level of consultation with stakeholders, offering opportunities promote partnerships and learning.

 

Government responsibility:  In the last two decades, governments have largely left standards making in relation to responsible business conduct at the global level to the private and civil society sectors. A notable exception was the OECD Guidelines for Multinational Enterprises (MNEs), which were developed by OECD governments jointly with representatives of the business community and of employee organizations and enjoy a level of NGO support. The Guidelines have a number of characteristics that make them attractive. These include the fact that they: were specifically crafted to provide guidance and recommendations  on what constitutes good business practice (covering issues such as disclosure, employment and industrial relations, environment, consumer interests, and combating bribery); have global application (they have also been endorsed by a number of non-OECD countries and are used by a wide variety of companies in developing their own approach to sustainable development and corporate social responsibility);  and have a mediation mechanism.

 

There are now hundreds of general or sector specific standards offering guidance on what it is to be a good company. Some of these help companies understand what to do, and others how to do it. Many specifically reference or embrace government-agreed principles; others don’t.  Most represent an attempt to fill a gap in guidance on what is expected of business.  While healthy in terms of public participation, this development represents a challenge for governments. For example, private standards might redefine agreed government policy or displace government-agreed instruments. In still other cases, sensible standards might simply not be applied.

 

If governments want agreed international principles on responsible business practices to be widely respected, they need to go further. They need to build greater awareness of existing standards and to make improvements needed to ensure increased uptake. Government participation and leadership in this process has often been a missing element in global standards-making, and its return is timely.

 

Build on Existing Foundations: Many organizations have the sense that there are already too many standards in the market place. Others aren’t aware of the standards that already exist, including governmental ones. As a first step, the Global Standard process needs to define:

• what its specific goals are
• what organizations and/or sectors it will apply to
• what standards already exist and their strengths and weaknesses
• how a new Standard would complement existing standards.

 

Experience with privately-developed standards over the last decades suggests that standards that are too broadly defined do not meet the needs of modern organizations, which may need recognition in the form of assurance or certification.  Experience also suggests that governmentally-developed principles and standards, including OECD and ILO guidance, have not been as fully promoted as they could be.  Indeed, the G8 has committed to promoting such instruments as a high priority. (For a more detailed discussion of this point, see:  http://www.oecd.org/dataoecd/18/56/40889288.pdf)
Above all, experience shows that unless governments take a close and consistent interest in standards implementation, implementation is patchy. This has been the reason that some organizations have called for legally binding rules.

 

The Importance of Stakeholders:  Partnerships of business and non-profit organizations – sometimes with government involvement - have developed a wide range of standards. These include: the general guidance being developed by ISO on what it means for an organization to be ‘socially responsible’; the UN Global Compact’s ten principles, and the Global Reporting Initiative’s (GRI) sustainability reporting framework.  Organizations such as these have immense experience in the development. With the proposed expanded role of governments in the standards-making space, it will be crucial to engage the business and other organizations that will be using the Standard to ensure that it is practical, measurable, and implementation beneficial.

 

The Lecce Framework opens a Pandora’s box of questions and challenges. But in doing so, it offers the opportunity for a new level of global discussion on how best to harness the powers of the market to achieve a more sustainable and equitable globalization.

 

by Giovanna De Minico, Professor of Public Law, University of Naples “Federico II”, ordinary member of Conseil Superior of the Communications.

 

 

I would like to start by saying that though I share the basic spirit of this initiative and its twelve principles, I would moderate an excess of enthusiasm because the successful outcome of the regulatory action depends on its successive implementation. In fact, such generic principles do not go beyond the mere manifestation of intentions, therefore their ability to restore the confidence of the savers in the Financial market will be conditioned by how the political rule-maker will convert them into punctual rules of conduct for the Financial industry, if our Europe, which is not a State, is able to identify a unitary decisional author.

Therefore, the challenge is only at the start.

Let me raise two criticisms against the 12 principles: the first concerning the method, the second the substance.

The first: that posing an unmodifiable common framework by member States has not been attained because of the nature of the principles: soft, not binding rules, which enable to steer the future behaviour of political rule-makers. The latter can comply with them or not, but it must be clear that they will not be forced to implement them. Once again Europe seems unable to go beyond the mere manifestation of intent: the European financial acts offer a good example of ignored moral suasion. 

The second: there are two criticisms, which are not directed towards the twelve principles but rather towards the future legislator. 

The first concerns the space to be granted to the self-regulating different systems of financial markets, which today are too ample and lack a binding legal framework; this has allowed the private interest governments to contend for the operators through light rules and corporative supervision. Contrarily to some American literature, I do not believe that the plurality of Self Regulatory Organizations (SROs) will be ex se able to promote a regulatory race oriented to the top while lacking minimum quality standards, which the SRO regimes must satisfy. These rules should anticipate self-regulation in order to ensure that its exit is compatible with the common good. The 12 principles do not state this; consequently this must be stated by an unmodifiable binding source by the self-regulation of SROs. A common design should also be required of each SRO in such way as to ensure a diffused and balanced participation of the different regulated classes in its rule-making because asymmetrically composed boards have already produced unilaterally oriented rules.

My last objection concerns consumer protection. The only attention to this theme in the 12 principles is the short reference to information transparency, but nothing is said about the presence of the State.  

On my opinion, the State should assist consumers by promoting an updated, intelligible, clear and reliable information flow, thereby allowing the consumers to choose the investment product. Public intervention is not aimed at replacing investors in the assessment of a given investment proposal, assuming that this judgment should remain their exclusive responsibility in line with the “attention calling” method.

The final step of enforcement should provide adequate sanctions for the infringement of the rules; these sanctions should be designed by a single law-maker, observing the parameters of assurance, inflexibility and timeliness of the sanction. The costs generated by the violation of rules should in all cases be higher than the costs of compliance. Only if this equation is applied by the law-maker, the effectiveness of the rule would be enhanced. While concerning the judiciary remedies, the class action should be available in order to offer European collective protection, which has been almost ignored by the member States.

Special attention should be paid when – as in the EU plan - the system multiplies the levels of supervision rather than streamlining them. A sanction must be provided for at each level – i.e. State and supranational – where controls or supervisory duties are not carried out.  If not, the proliferation of agencies would go hand in hand with a watered-down responsibility, or even with the impossibility of laying on anyone the responsibility for a conclusive decision. This wide concept of enforcement would also call for a cross-border single reference figure for Aquilian liability, to which supervisory Authorities should be subjected in the event of non-fulfilment of their institutional tasks. While the European experience has provided for the accountability of the Authorities only in the event of torts committed with malice or gross negligence.

Since there is still a long way to go, I would tend to be less optimistic and more pro-active towards legislators in the future, if  the world Leaders' intent to restore consumer confidence and market effectiveness is to be considered real.





Roger McCormick - Director, Law and Financial Markets Project, London School of Economics

 

 

            Prior to the Crisis, London’s success (and the stability of the UK financial system) was built upon the relationship between market participants, those who regulate them, and those responsible for the laws that apply to market transactions. This will remain the case. Although any successful marketplace needs more than just a reliable legal system, if it does not have that as a foundation, it will not last for very long. Bad laws, which may threaten the reliability of bargains entered into in good faith or expose honest businesses to unacceptable hazards, cause risks to arise which, ultimately, can drive markets away. Although the financial markets will tolerate a degree of legal risk, it is rarely welcomed and generally only accepted, grudgingly, if it is unavoidable. The need for vigilance in this area has been intensified as new, fundamentally important, laws have been enacted, in some cases as a matter of urgency, in response to the Crisis.

 

            The regulatory regime in the UK is complex and its “architecture” is currently a matter of intense political debate. Whatever the architecture, regulated financial institutions are not only governed by laws (as we all are) -- they are also bound by ‘rules’ (some of which are expressed as very broad principles), told what to do by ‘directions’ and ‘requirements’, expected to be steered by ‘guidance’, protected by ‘safe harbours’ (but potentially damned by other ‘evidential provisions’), and required to comply with an ever-increasing number of codes of conduct. And that is just in the UK. The appropriate multiplier can be applied, depending on the number of jurisdictions in which a regulated business has activities.

 

Is there now a risk that, following the Crisis, we will over-regulate – in an attempt to react to every conceivable link in the causation chain that led to the Crisis? This risk may be exacerbated (in the UK) by the desire of the FSA to correct the impression that it had an unduly “light touch” approach to regulation in the past – an impression that some feel owed more to a desire to promote London as a financial centre than to the substance of how it actually fulfilled its role. It is crucially important to proceed carefully with the reform agenda, linking change, wherever possible, to significant Crisis causes rather than mere “sine qua non” links in the causation chain.

 

It is also important that zeal for change does not cause us to lose sight of how important legal risk is for the financial markets (and how it may be triggered inadvertently by poorly thought out new laws or regulations). It is indicative of the importance of legal risk that in the “War Game” exercise carried out by the UK regulatory authorities in 2004, to simulate risks to the financial system, the trigger event in the exercise was an imaginary unfavourable decision of the European Court of Justice: a classic example of legal risk. The simulation assumed that the ruling of the court “created a behind-the-scenes run on banks that were heavily exposed to the property sector” according to the Financial Times report of the exercise.

 

 

The events that led up to the Crisis and the various responses of government and others in its early phases have had clearly had an impact on legal risk. The Crisis has, for example, resulted in new legislation (the Banking Act 2009), giving the authorities the right to exercise so-called “stabilisation powers”  that can result in the effective confiscation of either shares in banks or the assets of the banks themselves. This law also gave rise to important technical concerns about, for example, the impact on netting arrangements of using the stabilization powers to transfer some (but not all) of a bank’s assets to another institution..

 

 

 

The Crisis has raised concerns about the effectiveness of governance regimes in banks and other financial institutions and, especially, the effectiveness of non-executive directors. It has, generally, triggered widespread demands for more effective regulation in a great many areas, including, possibly, “direct product regulation”. On a more technical level, it has demonstrated the inadequacy of the general corporate insolvency regime for dealing with the complex issues that arise when a high profile international financial institution gets into financial difficulties and has raised some issues of particular complexity in the context of the insolvency of investment banks. The combined effect of the changes in the bank insolvency regime in the UK, the likely changes in governance rules and the fact that (for the time being at least) so many major banks have large public sector shareholders goes to the heart of what kind of legal animal a bank actually is.

 

 

 

Bank insolvencies triggered by the Crisis have also caused market participants to re-think some of the standard provisions in documentation that had tended to be based on the assumption that the collapse of a bank as well known as, say, Lehman Brothers was, in practice, “unthinkable”. Documentary legal risk is still with us.

 

 

The various “Ponzi” schemes and other frauds exposed by the Crisis have had their own legal risk consequences and spawned a great deal of related lawsuits. The Crisis has tended to expose a number of “Ponzi” frauds because the downturn has forced many investors to seek the return of capital invested rather than simply enjoy the above-average “income”. Indeed it is thought that the publicity generated by Madoff may have caused other investors to ask questions leading to the exposure of comparable frauds. The scandal is also thought to have inflicted reputational damage on the hedge fund industry, which shrank by 1,200 funds to just over 9,050 funds between mid-2008 and mid-2009.

 

 

 

Litigators are by nature imaginative. A legal action has, for example, been brought recently by various “green groups” against the UK Treasury to require it to use the government shareholding in RBS to force the bank to give financial support only to projects that satisfied certain environmental and human rights standards.

 

 

 

 

Whenever significant amounts of money are lost, disputes are likely to follow if the making of a claim (preferably against a deep-pocket target) has the remotest chance of resulting in some recovery – even after an out-of-court settlement. The Crisis is no exception to this general rule of behaviour. As with the Madoff affair, criminal charges also tend to be on the agenda and heightened regulatory scrutiny is inevitable.

 

 

 

At the time of writing the tsunami of litigation, criminal proceedings and regulatory action shows no signs of abating. Not only has the Crisis made certain kinds of claim virtually inevitable, it has also worsened the reputation of banks (which was not very high in the first place) to the point where they are “fair game” for any reasonably inventive litigant who can find an ambitious lawyer prepared to take a risk on a contingency fee arrangement.

 

 

 

There have been many “responses” to the Crisis from regulators, governments, supra-national authorities and others. Everyone has had a chance to “have their say” and few have resisted the opportunity. In some cases, the responses have tended to reflect a pre-existing political agenda. In the UK, the very nature of the regulatory system has become a party political issue. The responses reflect the passions that the Crisis has aroused. This is hardly surprising, at least at the political level. However, the contribution of lawyers to finding the best road forward needs to be in the best traditions of the profession: analytical, objective and dispassionate. That contribution should also, perhaps, be a little more forthcoming than has been the case to date?

Prof. Valerio De Luca, Visiting Fellow, London School of Economics, Department of Law.

President, International Academy for Economic and Social Development, Rome-Luxemburg.

 

 

The current global financial crisis, actually determined by financial engineering innovation and by deregulation policies, is collectively believed to have caused the “Wall Street” slump.

  In this way, the free-market paradigm collapsed from the inside – meaning by free-market a mechanism able to self-regulate and generate well-being and development for all. The practice of economics has reflected this ideological focus and has sought to remove values and morality from economic discussions rather than seeking to integrate these concerns into creating a more effective and just financial system. This world view has created a society in which short-term economic and personal gains are made at the expense of others and have the effect of creating an individualism lacking recognition of the shared rights and responsibilities necessary to create a society respecting the dignity of all people.

  How do we, living in a world at risk caught in an age of global financial innovation, respond to the differing needs of individuals and institutions ?

How should the financial sector respond not only to the current crisis but to the wider needs of the people it serves ?  Does business has a duty to society that goes beyond the creation of profits?

And finally does open market capitalism remain our best hope for creating wealth that benefits all aspects of society ? These questions strike at the root of what we “belived”, as an ideology, for at least a quarter of a century under the name of the “Washington Consensus”.     

  The capitalist system is at its heart about trust. There has been a massive breakdown of trust: trust in banks, trust in business, trust in financial system, trust in politicians, trust in regulators, trust in media. If we are to restore trust and confidence in the markets, we must therefore address what is at its roots a moral question. The new paradigm of “capitalism needs to integrate values with value”.

  This “surplus” goes well beyond the simple compliance to the laws or to the codes of conduct. As a matter of fact, without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. Market must not become the place where the strong subdue the weak and, therefore, the logic of profit must be directed towards the pursuit of the common good, for which the political community in particular must take responsibility. The commitments made at the G20 London Summit last  and at the G8 Aquila Summit call for the need of a new paradigm based on the redirection of the national and global financial and economic systems towards the ethical principles of justice, solidarity and common good. In particular, the challenge launched by the Aquila G8 Summit will be whether world leaders can construct a shared vision of a global legal standard that preserve the dynamism of market forces while taming their excesses.

  The “Aquila Consensus” toward a “Global Legal Standard” should be based on a “pluralism without relativism” and on the “min-max rule” : an agreement on a “minimum” fixed core principles  plus a “maximum” degree of openness to all the different cultures and values  (first of all , the asian values) to set  an inclusively and collaboratively  discussion both on the common interest (security, climate, poverty human rights, etc.) - and the “The Twelve Tables” on Propriety, Integrity and Trasparency.

  This cultural challenge is common to the third encyclical of Pope Benedict XVI – “Caritas in Veritate” that highlights a reconsideration of values, principles and rules for a new model of economic and social development, careful to the requirements of solidarity, respectful of human dignity and at the service of an integral, creative and sensible freedom. Quoting the Pope “Globalization is a multifaceted and complex phenomenon which must be grasped in the diversity and unity of all its different dimensions, including the theological dimension. In this way it will be possible to experience and to steer the globalization of humanity in relational terms, in terms of communion and the sharing of goods.” Within this context, the encyclical provides important indications to lead to a third way of a “human-faced” capitalism that places man at the centre in his personal and community component.

  Therefore, a “new paradigm of capitalism” is outlined, based on the primacy of the human person and on community principles, that actively involve all the sectors of the civil society in the implementation of objectives based on shared values and on the sense of the common good.

  A new start from primary community links to create a new alliance with the religious element of public life. This must be the common objective onto which building the sound base of a new model of development, well-founded and inclusive of the global financial system’s reform, to act as grounds for a human and integral development of people and to head towards a common future open to hope.

  To conclude with the Pope’s warning : “Development will never be fully guaranteed through automatic or impersonal forces, whether they derive from the market or from international politics. Development is impossible without upright men and women, without financiers and politicians whose consciences are finely attuned to the requirements of the common good. Both professional competence and moral consistency are necessary”.


 

by Vito Tanzi, Former Director, Fiscal Affairs Department, International Monetary Fund           

 

There was a time when countries operated much like isolated islands, with limited contacts among them. At that time, each country could establish and follow its own rules with little concern about the impact that these rules might have on others. There was no need to coordinate the  rules because cross-countries spillovers were not important. This is clearly no longer the world we now live in. Spillovers have become common and often highly significant, as was shown by the recent financial crisis, that was a disastrous example of these international repercussions.    

 

     

Some observers might still believe that an "invisible hand" operates globally, so that there is no need for any international cooperation: let the markets operate freely, without any coordinated rules, and the world welfare will be maximized. In spite of the many benefits that globalization has brought to the world, it has produced a growing number of opportunities, especially for enterprises operating globally, to take unfair advantage of differences that exist in rules, regulations, and other characteristics across countries.         

 

 

It would be naïf,  in  today’s world,  to expect that countries could be made to follow identical and precise rules in different markets, such as the financial market, the labor market, and other markets. It would also be naïve to expect that identical rules or laws could apply to the governance of corporations, tax systems, and other areas in different countries. However, it should be possible to agree on a broad set of principles that, like the ten commandments, could give some useful guidance to the activities and the actions of governments and to the various global economic operators. These principles would have the character of "soft laws". If followed, they might, over the long run, help promote a process of amalgamation of rules , regulations, and formal laws to achieve better coordination of economic activities among countries. 

 

    

Within the Global Standard 12-point proposals (followed up in the "Lecce Framework"), there is that of "tax coordination". The text states that: "Tax evasion and avoidance are harmful to society as a whole, and companies and all business entities…should fulfill their fiscal duties…". It would be difficult to disagree with this principle. Two points need to be made with respect to it.

The first is that the statement does not call for tax harmonization but for tax coordination among countries. Calling for tax harmonization would have been unrealistic. Thus, countries will continue to have the tax systems that they wish, provided that these systems do not specifically include features aimed at shifting tax burdens on other countries; or attracting unfairly to them the tax bases of other countries, as now happens with unfair tax competition. 

 

 

The second point concerns the link between the tax principle and some of the other principles contained in the " Lecce Framework". Let us consider briefly some of these links. The link between tax evasion and bribery, especially in international business transactions, is rather obvious. It is often easy for a rich corporation to bribe a poorly paid employee of a tax administration, especially in poor countries. This has been a common problem and in some countries the companies paying bribes could even claim the bribe as a business expense against their taxable income. The payment of bribes, as well as the acceptance of bribes, should definitely be made criminal offenses by all countries. This would make the international playing field more even for multinational corporations. The link with money laundering is also obvious. The money to be laundered has, in most cases, avoided paying taxes. The link of tax evasion with bank secrecy and with the lack of timely and accurate information, regarding the activities of foreign companies and individual investors, is also rather obvious.   

 

     

Globalization has changed the character of tax evasion. In today’s world, tax evasion has become progressively more a global, rather than a predominantly domestic phenomenon. There are estimates that hundreds of billions of dollars are evaded every years though global illegal operations. Some believe that these global, tax- avoiding operations may even have contributed to the financial crisis. A global standard that, over time, promoted better and better coordinated rules would reduce this problem.

The Netherlands welcomes the Lecce Framework and would like to congratulate the Italian government with this very timely initiative. With the current financial and economic crisis the world finds itself at the crossroads.

 

On the one hand the globalisation of markets is an enormous force for worldwide wealth creation.

 

On the other hand this market driven process is insufficiently balanced by global governance.

 

Therefore it fails to meet basic needs of certainty, equity and sustainability. As a consequence public support for open markets for trade and investment could fade away. The Lecce Framework recognizes that in today’s world there is no alternative to globalisation as a motor for growth and employment worldwide. It also considers that the interests of individual market players can coincide with those of the world community. This would demand that all actors live up to fundamental norms of propriety, integrity and transparency in economic relations. The Netherlands fully endorses the philosophy behind the Lecce Framework and is ready to co-operate with the Italian government to ensure its early implementation. This major contribution to turn the globalisation process into a win-win development deserves global support!

 

René Van Hell (Deputy Director, Directorate General for Foreign Economic Relations, Ministry of Economic Affairs)

At the G8 Summit in L’Aquila world leaders have reaffirmed the need for a broad agreement on the objectives of the Global Standard, including through the G20. This is a success! The OECD is committed to working to make further progress.

 

The relevance of the Global Standard has also been validated, over the past few days, by the wide range of contributors to this blog and your inputs have contributed to a lively discussion around the issues of propriety, integrity and transparency.

 

Thanks to all of you for your welcoming words, your timely ideas and suggestions.

 

The interest shown by the MBA community for the Global Standard is a very positive signal. The involvement of tomorrow’s managers in this discussion gives us hope for the future. It reinforces my conviction that tomorrow’s business practices can indeed be based on a new set of foundations, including enhanced accountability, transparency and responsibility.  I appreciate your sharing with us your “MBA oath”.

 

The need to build upon and complement existing instruments such as the OECD Corporate Governance Principles, the OECD Guidelines for Multinational Enterprises and the Basel Committee Principles is also acknowledged. And of course, I have been pleased to read these comments because many of these are OECD living instruments that are bound to change and adapt as circumstances require. In this regard, I particularly welcome the important suggestions of IFAD’s President Mr. Kanayo Nwanze who reminds us of the potentially significant gains for poor countries from a well designed Global Standard.

 

At the same time, as Professor Schneider rightly points out, any efforts to create a Global Standard or a Lecce Framework should address the question of its added value. So what is the “plus” of the Global Standard that we would like to achieve?

 

Two broad themes emerge from your inputs:

  • One is a strong reminder that the well-being of businesses and the market conditions required to support their prosperity are in the interest of all stakeholders and of society as a whole.
  • The other is the call for a Global Standard that, while helping business players to remain connected world-wide, also reminds them that there are responsibilities and ethical rules to be met. Professors Khurana and Nohria summarise this well: “To put our global economic system on a path towards sustainable long term growth, business leaders must begin to embrace a way of looking at their role that goes beyond their narrow responsibility to the shareholders and includes a broader commitment to their duty as institutional custodians.”

 

Allow me a few words about the 12 Principles developed by the working group as input for these discussions. They are not written in stone. Rather, they constitute a first step towards a Global Standard, grounded in the notions of propriety, integrity and transparency that will help prevent a recurrence of future crises. Your comments are already providing food for thought and I encourage your continued feedback.

 

As Senator Gary Hart, Enrico Letta of the Italian Parliament and Professor Giorgio Napolitano have underscored, we face many common challenges. The movement towards a Global Standard provides a basis for common solutions, agreed openly, inclusively and collaboratively. The exchange so far is showing that this blog can indeed complement well the OECD’s efforts to work as a ‘hub for dialogue on global issues’.

 

I am looking forward to reading more of your comments in the coming days.

 

Thank you very much!

Even as we continue to perpetuate our respective national identities as Italians, Germans, English, or Americans, we must now take account of globalization in all its forms and the degree to which eroding national boundaries increase our identities as citizens of one community on planet Earth.  The movement toward Global Standards, in business, in politics, and in society, is both an acknowledgment of that common community and the recognition that we all share a responsibility to the global commons.  The 21st century is an age in which those things that unite us and that we share in common are now much greater than differences that have divided us for many centuries.  We have a common interest in security, in climate, in conservation of finite resources, in human rights, and most of all in the future of our children.  Our common humanity can only be pursued if we subscribed to common standards of propriety, transparency, and most of all integrity in all that we do.  We owe this much to ourselves and we owe much more to future generations.

 

Gary Hart

University of Colorado

U.S. Senator (Ret.)

By Kanayo Nwanze, President of the International Fund for Agricultural Development (IFAD)

 

The global food security crisis of 2008 led to a new and interesting development wherein land poor countries began to acquire large tracts of land in land-rich countries to invest in food production for their domestic markets. This phenomenon has often been labelled as “land grabs” and a number of commentators have pointed to the danger such investment may pose to poor farmers in developing countries.[1] As this phenomenon is likely to continue in the coming years – in part triggered by growing population pressures and climate change -- it is important that appropriate international guidelines or global standards are developed to govern such investments.

 

I believe that properly structured such land deals can lead to a potential win-win situation for all concerned. Properly handled such large foreign investments have the potential of supporting broader agricultural development in African countries by providing resources for investments in better roads, irrigation, technology and training. If done the right way, land deals can improve the lives of poor rural women and men. They can create jobs, infrastructure, and market access and help poor rural people lift themselves out of poverty.

 

Global standards to guide such investments should include the following elements:

 

o    The voices of poor rural people must be heard – including the most vulnerable, whose land tenure is often insecure.  The principle of free, prior and informed consent should be a cornerstone of government policy.

 

o    Governments in the land-rich countries need to provide a clear legal and regulatory framework in which foreign investors operate, and through which land deals can be monitored.

 

o    Innovative forms of collaboration between the large commercial farms and smallholder farmers should be encouraged. Foreign investors can provide investments for infrastructure, including roads and irrigation, the provision of fertilisers, seeds and other inputs, to enable the farmers to increase their production sharply.  In return, in a medium-term arrangement, the farmers would provide assured supplies on agreed market-related prices. 

 

IFAD is supporting a pilot initiative along these lines in Ghana.  Its lessons could serve as a model, which could be replicated and up-scaled in other countries

 



[1] IFAD and the FAO supported an important study on this phenomenon prepared by the International Institute for Environment and Development entitled "Land grab or development opportunity?
Agricultural investment and international land deals in Africa" (http://www.ifad.org/pub/land/land_grab.pdf)
It has also supported the FAO-led Voluntary Guidelines for Responsible Governance of Land and Other Natural Resources.

 

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