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Participatory and Coercive Reform Strategies

To introduce new industry, educational, safety and other standards, reformers can apply a variety of strategies that fall in two broad categories of reform:

1) participatory reform and 2) coercive reform. The Company Law Reform Bill in the UK illustrates a participatory legislative reform strategy which took over seven years to complete. Many stakeholders were involved in the design process of the law. Regulatory impact analyses were conducted in consultation with the business community while educational programs for lawyers, notaries, directors, etc. were developed during the drafting process. In Macedonia, USAID organized country-wide consultations for a new company law and developed educational programs as part of the process.


Coercive Reform Strategies: The introduction of the Sarbanes-Oxley Act (SOX) in the US is an example of a coercive reform strategy. As an emergency measure, stakeholders were hardly included in the standard setting process. It took a few months to draft and enact the Act. This approach works "better" in Western countries where regulatory functions can enforce the new standards. In the US, the Securities and Exchange Commission (SEC) employs thousands of regulatory specialists to enforce legislation, including the SOX. Although the acceptance of the SOX was low among the business community, the enforcement capacity in the US ensured that business leaders would comply with the new standards.

By definition, coercive reform strategies and "shock therapies" are less desirable for the introduction of new standards. In emerging markets, they may not work. The acceptance of reform initiatives is often low at the outset of new programs (see our article on red zones), and courts and regulators are often not sufficiently developed to enforce new standards. To induce change in business, safety, health practices and culture, both in the West and developing countries, additional demand-driven instruments are needed such as educational programs and self-regulatory initiatives that accompany legislative reform programs.

Participatory Reform Strategies: A priority in implementing new standards (such as legislation and regulation) in emerging markets is to ensure that the stakeholders are involved in the process of standard setting. It seems logical to have directors and managers participate in public debates and consultations on legislation that will directly affect them. Involvement of the private sector in drafting processes nevertheless has been often minimal in emerging markets. Laws are often drafted in isolation by law professors with limited private sector experience. Open consultations, regulatory impact assessments and public debates are rare.

The implementation of corporate governance systems, for example, in emerging markets undoubtedly requires regulatory reform. Although refinement of laws will continue to be necessary, the focus should be on the implementation and enforcement of modern standards. Formal training in business ethics, legislation, regulations and international standards are equally important to develop new generations of independent directors and business leaders. Self-regulation, director accreditation, continuing education and peer-to-peer consultation networks can be useful instruments to provide directors incentives to develop their skills and working procedures. This not only requires a considerable investment in time and resources, but also recognition of the limitations of coercive reform strategies in emerging markets and the importance of demand-driven programs that will provide incentives to the private sector to make changes in business attitudes and practices.

To read more on this topic, please see Working Paper - December 2006. Presented at the Jordan Securities Commission, Amman Jordan - Contents of Codes and Consultation Mechanisms Conference – IFC/WB Global Corporate Governance Forum.

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