implementing mechanisms to better align the interests of managers and owners/shareholders (for example performance contracts, stock options and ownership). Of course, idifferent types of corporate governance systems have been used to solve the principal-agent problem. For example, the United States and the United Kingdonn rely heavily on shareholders' actions in stock markets, Japan utilizes a bank-based system and Germany's framework is centered on institutional investors.<sup>9</sup> There is no obvious ranking as to which of these three, or any other, corporate governmnce system is best for promoting efficient corporations. ]3ut there is a clear consensus worldwide that all of the most successful corporate governance sysltems are centered on the judicious use of- market-based incentives. The OECD has recently devised a set of corporate governance principles that provide a useful guideline.'<sup>0</sup>

# Box 3: ][nternal **and** External Incentives **Determine Corporate Performance**

There are two categories of factors whose dynamic interplay dletermine the performance of the modem corporation: the "internal" incentive arrangements between owvners and managers, and the "external" factors that discipline and monitor the behavior of managers and ultimately the firm's performance. While internal incentives are _necessay_ to achieve corporate efficiency, they are _nol sufficient;_ external incentives must also be manifest.

(a) Internal Inceeitives. These include the structures and mechanisms by which the owners cause the managers to act for the goals set by the former, i.e., the internal "corporate governance" arrangements. This involves defining how the owners, the board of directors and managers interact with one another to fulfill the oNvners' objectives. The arrangements stipulate how various decisions will be made and who will be accountable for them. The principal decisions include owners' election of the board of directors, the naming of corporate officers, approval/disapproval of changes to the corporate charter, mergers/ acquisitions, increases and decreases in capital, major debt borrowings, disposal of assets, determination and deployment of retained earnings and dividends, and the setting of managerial pay. (b) External I[ncentives: These are factors that are not usually under the direct control of owners (although they can have some indirect influence on them). They include the extent of product market competition (including the ability for the _fmn_ to affeci: market prices and for new competitors to enter and exit the market); the functioning of equity and debt markets (including the effectiveness of the "market for corporate control" and of threats of banknrptcy or liquidation for value-subtracting firms); the corporation's legal obligations, including monitoring of financial accounts through independent audits; and the competitiveness of the labor market (including the market for managerial and entrepreneurial talent).

_Source:_ Broadman (1996).

_Associations._ In Uzbekistan, as epitomized in the case of the 56 "trade associations"-which dominate key sectors--corporate governance practices are, in general, not fully based on market incentives. It appears there is often little distinction between the role of government as policy maker and regulator, on the one hand, and business shareholder (owner) and manager, on the other. Formerly sector ministries, associations were established in 1992-3 by Presidential Decrees, and have charters approved by the Cabinet of Ministers; typically they are not registered as companies under the Company Law. Although the famctions of associations vary from sector to sector, they include lobbying to advance "4members"' interests; rationalizing output, pricing, investmntrt, distribution, input, and foreign exchange allocation decisions; and operating akin to holding companiies. For three case studies of associations, see Box 4. Figure 1 provides an organizational chart of Uzbekneftegaz, the oil and gas association.

> 9 See Aoki and Kim (1995). OECD (1999).

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