CHAPTER FIVE 5. Corporate governance 5.1 Overview 134 481. The African Peer Review Mechanism (APRM) notes that good economic and corporate governance, including transparency in financial management, are essential for promoting economic growth and reducing poverty. Good corporate governance is about the ethical principles, values and practices that facilitate securing an acceptable balance between economic and social goals on the one hand and between individual and communal objectives on the other. The aim is to align, as closely as possible, the often diverse interests of individuals, corporations and society within a framework of sound governance for the common good of the country as a whole. The emphasis is on accountability, transparency, responsible operations, efficiency and effectiveness. 482. The current global economic crisis can largely be ascribed to weaknesses in corporate governance at the level of individual financial institutions, mainly in the United States of America (USA) and in other major industrial countries. Excessive exposure to high-risk financial assets, such as subprime bonds, led to the accumulation of massive potential losses in these institutions. Failure to observe basic corporate governance principles and shortfalls in regulation and oversight have all been singled out for blame. Irresponsible operations, such as the transferring of risk exposures by banks to ‘special-vehicle institutions’, the selling off of ‘collateralised bond obligations’ to finance houses and other institutional investors, and the provision of ‘credit default swaps’ by insurance companies fuelled the financial and economic crisis. Excessive lending by banks, the explosive growth of hedge funds and the market for financial derivatives, together with a culture that offered big rewards to managers for short-term profits, all contributed to the eventual collapse. Similar weaknesses in corporate governance were subsequently exposed among manufacturers (like the automobile industry) and in other sectors of the economy. 483. The importance of effective corporate governance has become, more than ever before, a key issue of discussion among world leaders. Examples are the recent meetings of the International Monetary Fund (IMF), the meeting of the World Economic Forum in Davos in January 2009 and the G20 leaders’ summit in April 2009. 484. It was initially thought that developing countries would be less affected by the emerging crisis. However, it soon became evident that all countries around the world were exposed to the adverse consequences of the weaknesses of corporate governance in the more developed countries. Low-income countries, such as Lesotho, were drawn into the global recession because of their integration in the world economy and the importance of international trade, foreign capital inflows