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U.S. Business Model a Tough Sell Overseas

Scandals: Many foreign markets are rethinking the idea of America as fiscal standard-setter.


Carolyn Brancato was supposed to advise the top officials of the oil-rich sultanate of Oman on how to clean up their stock market. Instead she found herself fielding offers of condolence.

"Everyone was dressed in their robes and talking about Enron and I thought to myself, wait a minute, I'm in the wrong movie," said Brancato, director of the Global Corporate Governance Research Center at the New York-based Conference Board, a business think tank. "These other countries have had to prove that their capital markets are good and honest and we've taken it for granted in the U.S. Unfortunately we now have to prove it ourselves."

Corporate America's fall from grace has been swift and brutal, but it has been particularly humbling for people like Brancato, on the front lines of a campaign to convince foreigners that the quickest path to fiscal righteousness was replicating the U.S. model of corporate openness, independent directors and outside auditors. Those efforts are increasingly running into roadblocks as corporate improprieties pile up like a freeway collision and spooked foreigners pull their wealth out of U.S. markets.

Around the world, the architects of the global economy are rethinking the idea that the U.S. should be the undisputed standard-setter for everything from executive compensation to accounting. They point to the problems of Enron Corp., WorldCom Inc. and Xerox Corp. as the dark side of a Western-style capitalist system that rewarded greed and short-term gain and turned high-flying chief executives into celebrities.

"I have been a student of capital markets for 40 years and an individual investor for almost as long, and in that period I have never seen the collapse of faith in American corporations that I see today," said Linda Tsao Yang, the former U.S. ambassador to the Asian Development Bank and an organizer of the Asia Corporate Governance Assn.

"I still believe the American model works, but I have to work much harder to persuade others in Asia to share my faith."

The cries of hypocrisy are particularly loud across the Pacific Ocean, where the 1997 Asian economic meltdown inspired U.S. officials to preach on the need to stamp out crony capitalism and tighten up regulation of their markets.

"There are some Japanese that are taking delight in this, saying that the U.S. really doesn't have a very good system despite the U.S. trying to proselytize and tell others they should adopt the U.S. system," said Glen Fukushima, a former U.S. trade official and president of Cadence Design Systems Japan, a software firm.

Dogged by accusations of ethics violations tied to a Texas energy venture, President Bush has promised to address America's sinking credibility in a speech Tuesday on Wall Street. Corporate governance supporters argue the U.S. still has the toughest corporate ethics requirements and market regulations in the world and it is the failure of individuals--not the system--that is at the root of the latest wave of Wall Street scandals.

Investors still know more about U.S.-listed companies than those trading abroad. But with the world's stock markets in a freefall and the dollar losing 8% of its value in the last quarter, America is under pressure to move quickly to prove to the rest of the world that corporate governance is more than an empty slogan.

"No one believes anyone right now," said Erik Berglof, a fellow at the European Corporate Government Institute based in London and Brussels.

"A fundamental lesson of this is that the repercussions of one company making errors or misjudgments are tremendous. It affects the whole image of stock markets not just in the United States but goes much more broadly."

Berglof believes that there are basic rules of good corporate behavior that are universal, such as the need for better reporting and accountability to shareholders and independent oversight. But he also argues that key differences in culture and corporate ownership structures were overlooked during the rush to emulate the global superpower in the 1990s.

In the U.S., which boasts the world's most developed capital markets, publicly held companies dominate the Fortune 500. But outside the U.S. and England, the vast majority of companies have controlling shareholders, often families that tend to vote as a bloc. The government also owns major stakes of leading firms in many countries.

In recent years, U.S. institutional investors and officials sought to reduce the power of controlling shareholders, arguing that they were unresponsive to minority concerns. But such important shareholders can play a positive role if they wield their power wisely, according to Berglof.

Though firms controlled by families are notoriously close-mouthed and resistant to outside criticism, they face greater social pressure to protect their reputation than chief executives who owe their jobs to corporate boards.

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