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05th April 1998

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Company Law

Competitive economy through modern company law

British company law had evolved from Victorian times to become a patchwork of regulation that is immensely complex and seriously out of date. This was stated by the British Trade and Industry Secretary Margaret Beckett, according to a report by Jim Kelly and Jane Martinson in the London Financial Times.

In a wide ranging document entitled "Modern Company Law for a Competitive Economy" Ms. Beckett says that unless the system was improved British companies would fail in an increasingly global market.

According to the document, the report states, globalisation and the revolution in information technology had also put the old system under strain. Further, a disorderly mixture of piecemeal reform is blamed for making the law "increasingly bulky" and difficult to follow.

The trade and industry secretary says, "In a number of areas the present arrangements are holding back rather than facilitating competitiveness, growth and investment".

She has also observed that the law was difficult for business people to understand, especially those in small and medium-size enterprises and that "its rules are inclined to be too detailed and regulatory".

But a new law will not be forthcoming till 2002. A White Paper outlining the proposals is, according to the F.T report expected in 2001. There will be extensive consultations from all sections of the business community.

The document, published to coincide with a corporate governance conference suggested that governance was best regulated by codes rather than law. But it pointed out three areas where "some legal underpinning" might be needed, one of them being the issue of directors' duties.

The F.T. report says that corporate governance experts expect the notion of "fiduciary duty" to be expanded to include responsibility for more than the shareholders' interests.

The document identified several areas of concern. They included over-regulation, (the present rules about the maintenance of capital are costly and over prescriptive) complexity of the present law (provisions for public and private companies and small and large companies are mixed up) the present law is backward looking and can impede efficiency (Companies House should be able to allow electronic filing and it should be possible for votes at AGMs to be registered electronically by those not attending).

Coincidentally 48 hours before Margeret Beckett made her observations a document entitled "Sooner Sharper and Simpler" was published by the Centre for Tomorrow's Company. It dealt importantly with the future of annual accounts of Companies.

This is stated in a report also in the London Financial Times by Jim Kelly.

Questions are asked in the document: Should annual reports be about the past or the future? Should they be written for shareholders or stake holders? Why are they published long after the preliminary results?

Kelly says that when such fundamental questions remain unanswered "It is no surprise to find the future of the annual report in doubt". He goes on to say "it is the conventional wisdom that the annual report in doubt . He goes on to say "it is the conventional wisdom that the annual report - a product of the industrial revolution will be swept away in the information age."

But, says Kelly, there comes an optimistic note. The Centre's report not only finds that people want and use the annual report, but it sets out a clear practical framework in which it can develop.

The writer takes up the dispute between the "stewardship" view of the accounts - a historical record of performance - and the modern view that sees the record as a sophisticated aid to future investment. Kelly says that Mark Goyder, director of the Centre believes stewardship is about securing the future from the basis of the present.

On the question for whom the report should be written for according to Goyder, says Kelly, the primary audience is the shareholder but the secondary audience is the stakeholder groups.

Goyder adds that good relationship between the two, and showing each how they contribute to shareholder value is the 'foundation for sustainable success."

Goyder, says Kelly, is looking for performance criteria that can be used to set targets in non-financial areas, building a wide picture of risk in a company. The annual report should highlight targets and identify whether the company has hit them.

Goyder says that such information can provide the basis for dialogue with shareholders and stockholders. The question arises how can this dialogue take place. And this is how modern technology comes into the picture.

Kelly says that "the internet provides a great opportunity, but so do more mundane mediums.

It is pointed out that Birmingham Midshires, the building society that is one of the backers of the Centre prints directors home telephone numbers in the annual report.

The report suggests, says Kelly, that the annual report should strip out much reporting on statutory and obligatory disclosure and produce a"core document" that talks directly to various groups.

Detailed financial accounts along with other obligatory disclosures, could be published separately along with other specialized information published voluntarily such as environmental reports or social audits.

Eventually, the report states, the core document could be published with the preliminary results.

Concluding his observations Kelly says "this image of the annual report taking stock not just of the past but of future opportunities and risks is an attractive one. In the world of internet it may be that shareholders, analysts, institutional investors, commentators, employees and the rest will crave a document that freezes the avalanche of information for a single moment.

Fiscal Policy

Transparency of government operations

Fiscal Transparency - public openness in government structure and functions, fiscal policy intentions, public sector accounts, indicators, and forecasts - is widely regarded as fundamental to sound economic policy and has drawn increasing attention from policy makers in recent years.

Notably, the IMF's Interim Committee's 1996 Declaration on Partnership for Sustainable Global Growth stated that "It is essential to enhance the transparency of fiscal policy by persevering with efforts to reduce off-budget transactions and quasi-fiscal deficits."

Occasional Paper No. 158, Transparency in Government Operations, by George Kopits and Jon Craig, addresses many of the aspects of transparency in government operations.

It discusses the major issues surrounding fiscal transparency and examines the IMF's role in promoting transparency in government operations, Kopits spoke with the IMF Survey about the study.

IMF Survey: What aspects of transparency does your study deal with?

Kopits: The study deals with openness towards the electorate and financial markets over practically the entire spectrum of public sector activity, including behavioral, administrative, regulatory, accounting and forecasting aspects. In each of these areas, our study identifies good practices and, wherever possible, provides country examples.

A fundamental issue is the clear demarcation between the public and private domains, as reflected in, for example conflict-of-interest rules for public officials and in freedom-of-information legislation.

Likewise, it is important to hold an open legislative debate on the government's budget proposals, accompanied by estimates of tax expenditures and of the cost of quasi-fiscal operations conducted by non financial enterprises or by financial institutions on behalf of the government.

Our study calls for a set of clear public accounts and forecasts that rely on accrual-based recording - supplemented by cash flow data - with consistency between the budget statement and the government balance sheet.

The latter, if critical for determining the magnitude and composition of public sector indebtedness, should be published along with data on unfunded contingent liabilities and commitments.

For any government, it is essential to issue periodic statements of its policy goals and quantitative targets, supported by realistic and well-documented short term forecasts, plus medium to long-term scenarios - to determine, respectively, the appropriateness of the fiscal stance as well as the sustainability of policies or the need for structural reforms.

IMF Survey: What are the arguments for and against fiscal transparency?

Kopits: The arguments in favour of fiscal transparency heavily outweigh those against it. Over time, lack of transparency in government operations tends to be destabilizing, to create allocative distortions, and to exacerbate inequities.

Although it is difficult to provide conclusive proof, the study presents some evidence of a positive relationship between fiscal transparency and overall economic performance.

In each major region, one can find that countries with a relatively high degree of fiscal transparency, usually associated with greater fiscal discipline, have been able to achieve higher growth and greater stability than comparable countries within that region.

Such diverse countries as Botswana, Chile, Denmark, and New Zealand stand out as exhibiting both fiscal transparency and robust economic performance. On the other hand, the recent crisis in Southeast Asia illustrates that high growth is not sustainable without sufficient transparency - concerning, for example, the extent of government-directed or guarantee lending.

This is not to deny that in certain well-circumscribed cases - when premature disclosure of sensitive statistical information or policy measures would confer unintended windfall gains on some groups or weaken the effectiveness of those measures - there might be justification for a temporary departure from transparency.

IMF Survey: Is fiscal transparency the primary means of establishing good governance?

Kopits: Fiscal transparency can be viewed as a necessary, but not sufficient means to good governance. Indeed, in countries where the government is required to report its policy intentions and activities frequently to the public and where its dealings with private suppliers and financial institutions are subject to open procurement rules, periodic, reporting, and audits, there is hardly any room for mismanagement or corruption.

By contrast opaque accounting practices, close - that is less than arm's length - relations between public officials and enterprises or banks, or proliferation of unreported quasi-fiscal activities - such as those arising from government-directed bank lending - are all signs of insufficient public accountability, which tends to breed private rent seeking in the public domain.

IMF Survey: Have you found any trends or priorities in the move towards greater transparency?

Kopits: Among the many countries that have made progress toward transparency, none has been as impressive as the breakthrough in the economies in transition where, until recently, fiscal policy had been conducted in virtual secrecy. In the transition economies, as in a number of developing economies, it is essential to delineate clearly the boundaries between the public sphere and private interests through continued institution building.

These countries also need to step up the timely dissemination of detailed and reliable government accounts and projections.

As the advanced economies, for the most part, meet these basic transparency requirements, their priority lies in publishing transparent and comprehensive indicators of fiscal sustainability and promoting and open debate over reform options to restore or maintain sustainability.

IMF Survey: What is the IMF's role in promoting transparency in government operations?

Kopits: The IMF has contributed to fiscal transparency in member countries in a number of ways: in the context of Article IV consultation, the World Economic outlook exercise, program design and negotiations, technical assistance, development and application of statistical standards, and publication of consultation reports and research studies. The most recent initiative to enhance transparency, including in the fiscal area, is the creation of the Special Data Dissemination Standard (SDDS), which makes macroeconomic data on member countries, available through the World Wide Web.

IMF Survey: Some observers have suggested developing a rating system that would rank countries according to their degree of transparency. Would such a system be useful; if so, who would benefit most from it?

Kopits: Some broad assessment of the degree of transparency across countries would be potentially useful for encouraging the adoption of good practices by governments and for contributing to fiscal discipline and to the credibility of fiscal policies.

Ultimately, the countries in question would stand to benefit the most from such a system: voters and financial markets would signal early on their approval or disapproval of a given policy stance, rather than through a rapid - often devastating - reversal in sentiment in response to a sudden revelation of a heretofore covert deterioration in public finances and thus in fundamental macroeconomic conditions.

IMF Survey: Is a follow-up study planned?

Kopits: The fiscal affairs Department is currently engaged in an effort to develop guidelines on good practices in fiscal transparency that could be suggested for member countries. The design of such guidelines will need to take into account each country's technical and administrative capacity, for example, to collect fiscal data or to prepare reliable forecasts to implement them.

IMF Survey

EU says ready to lend Asia helping hand

LONDON, April Thursday European governments promised on Thursday to help Asia out of its financial crisis as long as governments in the region agreed to keep their markets open and pursue economic reforms. As leaders from the 15 members of the European Union prepared to meet their counterparts from 10 Asian nations, host country Britain pledged practical support to help Asia recover from a year of economic turmoil.

"The message is clear. We in Europe are not fair weather friends. Asia's problems are Europe's problems," said Trade and Industry Secretary Margaret Beckett. She was speaking at a business forum running parallel to the 25-nation Asia-Europe Meeting (ASEM). With the EU exporting more than the United States to east Asia, Beckett said European firms needed to work closely with their Asian partners to help them adjust to changed economic times.

Previewing what was likely to be one of the main European messages at the three-day ASEM summit, she said Asia's response to its problems had to be based on a commitment to open markets. "What would do great damage would be a return to protectionism as a means for dealing with current difficulties. It is increasing transparency and openness that will guarantee long-term prosperity," she said.

European ministers bridle at suggestions they have not done enough to tackle a crisis that forced Indonesia, Thailand and South Korea to resort to International Monetary Fund-led bailouts totalling more than $100 billion. French President Jacques Chirac said he was convinced that after a period of adjustment the region would bounce back from the crisis, which did not mean the end of the "Asian Miracle".

In an article for Asian newspapers, Chirac said Asia could expect a show of support from Europe at the summit, which was due to get under way on Thursday evening with an informal dinner hosted by British Prime Minister Tony Blair. EU ministers sees the summit as a chance to claw back some of the political lead that the United States has established in tackling the Asian crisis.

They want recognition for the fact that the EU provides more funds than the United States to the IMF and plan to underscore their commitment to Asia by launching an ASEM trust fund at the World Bank. The fund would provide grants to analyse the social and financial effects of the crisis and pave the way for World Bank loans. While the EU is ready to contribute to rescue packages, Portuguese Foreign Minister Jaime Gama said it should demand political changes in Asia in return.

"If they (EU states) do not want to continue pouring money down the drain and want to take care of taxpayers' money...they need to make demands on those who receive it," he told Reuters in Lisbon.

Workers charter

Employers avoid national labour advisory council

Sri Lanka's top employers have decided not to participate in discussions of the National Labour Advisory Council, The Employers Federation of Ceylon said.

Though a meeting was called last Thursday to discuss a draft bill to implement the workers charter.

A committee appointed by the Labour Ministry to draft a code of industrial harmony also met in March and decided not to pursue the issue. Ken Balendra, Armyne Wirasinha and Franklyn Amerasinghe were in the commitee.

The Ceylon Chamber of Commerce, the Federation of Chambers of Commerce and Industry of Sri Lanka, the Sri Lanka Apparel Exporters Association, the National Chamber of Commerce, the F.T.Z.

Manufacturers Association, the Exporters Association of Sri Lanka, the Ceylon National Chamber of Industries and the Employers Federation of Ceylon,met on March 31 to discuss these issues and wrote to the ministry of labour.

The letter said;

1. In April 1996 Employers put forward some concerns with regard to the proposed Bill.

These included issues such as the rigid rules with regard to recognition of Trade Unions; the fact that the Industrial Disputes Act now provides for collective bargaining with employees who do not belong to a Trade Union which is their right, the unreasonableness in expecting all employers irrespective of size to hold domestic inquiries with rigid timeframes, and many others, which were incorporated in joint submissions made on the 8th April, 1996 tendered to the Minister of Labour.

2. The President appointed a Task Force on Employment immediately after this. The terms of reference quite sagely and appropriately,brought together the issues of investment, job creation and Union rights. The Task Force included officials of the various Ministries including the Ministry of Labour and representatives of the private sector.

The Task Force made certain recommendations which if included would have made considerable changes in the Labour Law which would have benefitted the country as a whole.

An effort was also made to have a balanced approach to the vexed question of Union recognition.

3. The latest Bill drafted by the Ministry ignores the recommendations of the Task Force appointed by the President and whilst keeping to the earlier Bill- by and large - has now gone one step further away from reality, by introducing a new section which not only makes the provision of letters of appointment compulsory in prescribed trades but also requires all those in employment to be issused with such letters within three months of an appointed date to be announced.

4. The employers collectively feel that no proper consideration is being given to their difficulties in maintaining discipline in workplaces. Reference is made to a request made by Hotel employers on the 9th January, 1998 for an essential services order in consequences of disruption which took place during the festive season in December.

The consequences of such an order would only be that as an essential service a Union would be obliged to give written notice of strike action and nothing more.

The Ministry referred the matter to the Commissioner and despite written reminders, to date, no views have been expressed by either the Ministry or Labour Department nor a discussion held. In the meantime, at a leading Hotel, in a high security area, employees were up on the roof a few days ago.

Mixed blessings for coconut imports

A government decision to allow the import of coconuts, to overcome a shortage in local production, has received mixed blessings from the trade which is however in a quandary as to the proposed source of supply. Last week, Plantations Industries Minister Ratnasiri Wickramanayake told a press conference that the government would allow the import of coconuts from Thailand to service a shortage for dessicated coconut producers. While most traders welcomed the move, they were however not so sure whether Thailand is the right source of supply. "If we are importing coconuts, we should get them from either Vietnam, Indonesia or the Philippines," one dealer said. "Did the minister make a mistake in naming Thailand as the source?" he asked.

A spokesman for the Minister Wickremanayake confirmed he referred to Thailand in the import of coconuts. At the Thai embassy in Colombo, a diplomat - dealing with trade and commerce- said the government had not approached them with regard to coconut imports. But he promised to get back to this correspondent if they had any news on the issue.

According to official statistics, Thailand has 377,000 hectares of land under coconut cultivation compared to Sri Lanka's 419,000 hectares of coconut land. Thailand produces an average 1.1 billion nuts against Sri Lanka's 2.5 to 2.7 billion nuts per year, and most of it is believed to be for local use. Trade sources said that they were unable to confirm, immediately whether Thailand exported nuts. A spokesman for the Coconut Products Association in the Ceylon Chamber of Commerce said that the decision to import coconuts was taken by the government in consultation with the private sector. "At that time, there was no mention of the source of supply," he said, adding that Indonesia appeared to be the best source in terms of prices. Thedessicated coconut industry has come to a complete standstill due to a shortage of nuts for its use. Officials said that the 60-odd registered mills are either working at 20-30 percent of its total capacity or have been shut down.

"There are many more unregistered ones which are struggling to survive," the spokesman said. In the past two years, Sri Lanka's dessicated coconut exports have been around 60,000 tonnes annually and this year, exports are expected to fall to between 47,000 and 50,000 tonnes.

The shortfall in coconuts for dessicated coconut production is mainly due to a crop shortage and high coconut prices, which are now fetching between six to eight prices at the farmgate. Trade sources said that Sri Lanka's dessicated coconut export prices were much higher - because of high local costs - than other world suppliers like the Philippines and Indonesia.

The spokesman at the Chamber's coconuts section said that the imports would be allowed free of duty but government permits were to be given on the basis of scale.

To ensure proper quarantine, imports will be allowed on the basis of each import consignment being taken straight to the desiccated coconut processing factory. "We are hoping to import nuts that are de-husked and the shells will be destroyed through burning at the site," the spokesman said. He conceded that the decision to import coconuts came just close to the May to August production season when supplies would be in plentiful, raising questions as to whether it is the right time to allow imports. "But we are going through this crisis too often and at least we must try it out and see."

The net benefit of imports,apart from servicing the desiccated coconut industry, would be a price fall in nuts for household use.

Another executive at a top coconut trading house said he felt the decision would have negative impact as "we are almost into the cropping season." "If at all there is a major shortfall, it would be after June," he noted, adding that if the imports scheme worked, then it could be implemented again in the period around December when shortages occur.

India Expo promotes SAFTA

India Expo '98, the first ever exclusive India Trade Exhibition, will be held at the Sri Lanka Exhibition and Convention Centre (SLECC) from April 18 to 21. The exhibition which is jointly presented by Intertrade Lanka and Right Media Expositions in association with the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) focuses on the concept of commemorating the golden jubilee of Sri Lanka and India.

About 50 Indian companies from 20 industries will participate at the trade fair.The Vice President of the SAARC Chamber of Commerce and Industry (SCCI), Macky Hashim said India Expo '98 would provide an ideal platform to Indian trade and industry to consolidate and boost bilateral trade between the two countries.

He noted that exhibitions of this nature could play an important role in achieving the goals of the South Asian Free Trade Area (SAFTA)

He added that FCCISL which had embarked on an exhaustive promotional drive would organise one-to one meetings between the exhibitors and potential buyers and agents, as most of the firms are unrepresented in Sri Lanka.

Automobiles, transport equipment, household and electrical appliances, office equipment, consumer goods, fabrics, cosmetics and toiletries , handicrafts, construction equipment, packaging materials and other items will be on display. Indian Expo will be an annual event in Sri Lanka, the organisers say.

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