Mike Lubrano Investor & Corporate Practice Corporate Governance Department Nov. 10, 2005
THE IFC CORPORATE GOVERNANCE METHODOLOGY:
MAKING THE BUSINESS CASE FOR CORPORATE GOVERNANCE
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International Finance Corporation Private Sector Investment Arm of the World Bank Group Approx US$14 Billion Invested in Private Companies in Developing Countries Investments in More Than 80 Countries
– All Legal/Corporate Law Traditions
Debt and Equity Investments Established in 1956
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IFC Portfolio – Types of Companies
Approximately 250 New Commitments Per Year; 1500 Portfolio Companies Existing Publicly-Listed / Unlisted Companies (All Industrial Sectors and Financial Sector) Unlisted Founder / Family Controlled Enterprises (Board = Shareholders = Managers) Privatizations and Newly-Privatized Three-way Joint Ventures (Board = Shareholders Meeting)
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Why Does IFC Care About CG?
Portfolio Performance
– Poor Governance Increases Risk – Improving Governance is a Value Proposition (Private Equity Funds; BCR; Hikma)
Development Mission (Sustainable Development – Along with Social, Environmental,and other Elements of Sustainability) Reputational Risk / Reputational Agent
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Support for The Value Proposition
S&P, Moody’s and Fitch > CG Explicit Part of Credit Rating (BCR Upgrade)
– Reflects Increasing Empirical Evidence
Experience of Activist Institutional Investors
– CalPERS Governance Portfolio Performance
Listing Requirements CG Funds IFC is in a Unique Position to Test the Governance Thesis in Emerging Markets
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Developing a Workable Methodology Create a Common Definition/Vocabulary Be Consistent with the IFC Mission: Sustainability / Value Added Tailored to Institution’s Unique and Diverse Portfolio Fit with Existing Operating Procedures (Project Prep and Decision Meetings) Usable and Accessible to IOs (website) Avoid Formalism / Box Ticking
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CG is a Natural Fit for IFC
Participation in Governance Worldwide in All Types of Companies, Industries
– Access to Data – Skills, Experience to Deliver
“Grass Roots”/PEP Projects Capital Markets Development Focus Global Partners
– – – – OECD Global CG Forum / Private Sector Adv. Group Regional Partners National advocacy, business schools, training institutes
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IFC-Nominated Directors
What is a Workable Definition for IFC?
OECD Principles Provide an accepted/supported Framework:
Financial Stakeholders (e.g., Shareholders) Checks and Balances (Boards of Directors) Control Environment (Audit, Transparency and Disclosure)
A Practical Investment-Driven Definition
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Distinguish from: Corporate Citizenship Corporate Social Responsibility Socially Responsible Investing Other Elements of Sustainability Political Governance Business Ethics Anti-Corruption / AML (But CG does reinforce all of these!!!)
AN ACADEMIC DIGRESSION
“The Modern Corporation and Private Property” (1932) – Berle & Means Separation of Ownership and Control Principal / Agent Problem Managers vs. Dispersed Shareholders (Most apposite in US/UK)
Reality of Emerging Markets Concentrated Ownership Concentrated Business Elites Management Selected by / are Controlling Shareholders Family Identification (Similar to Continental European Patterns)
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Making Methodology Useable by Staff
Break Governance Into Digestible Bits Company archetypes, paradigms (non-exclusive):
– – – – Listed companies Family- or Founder-Owned Unlisted Companies Financial Institutions Transition Economy Companies
Four attributes of effectiveness Four levels, from “acceptable” to “leadership.” We call this our Progression Matrix. This approach parallels the approach taken in the other areas of sustainability (social and environmental)
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Core Tool – Simple Progression Matrices
A Self-Assessment and Client Orientation Tool
LEVELS
1. Acceptable
2. Extra Steps
3. Major Contributions
4. Leadership
ATTRIBUTES
Commitment to Good Corporate Governance Structure and Functioning of the Board of Directors
Transparency and Disclosure Treatment of Minority Shareholders
PROGRESSION
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Fit with the Appraisal / Supervision Process
How should staff evaluate client companies and work with them to add value to their governance?
By following a series of steps -- from first impressions to follow-up -- that fit into existing appraisal / supervision patterns The time and effort involved in each step varies in nature depending on the type of enterprise – listed companies, family/founder firms, financial institutions, and companies in Transition economies (the paradigms). The intensity of project team effort depends on risk and opportunity.
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When We Focus on Corporate Governance
Risks and/or Opportunities – Financial Return and Development Impact Risks may be:
– – – –
attitudinal (little or no commitment to governance) financial/operational (weak controls) legal (weak compliance) reputational (negative image) attitudinal (strong commitment to governance) financial (access to capital/better valuations) legal (model codes/compliance/documentation) reputational (fulfilling IFC’s mission)
Opportunities (to add value) may be:
– – – –
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How We Work with Clients Assessment During Appraisal CG Improvement Programs Technical Assistance Communicating Good Practices to the Markets
– Companies Circle – IPOs
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CG Throughout the IFC Deal Process
Identify Issues; Engage Client
Evaluate, Articulate, Prioritize CG Risks and Opportunities
Structure Deal; Terms and Conditions; Pricing and Disbursement
Supervision; Monitoring; Support; Feedback; Lessons
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Sample Diagnoses - Responses
Concentrated Ownership Issues Minority Shareholder Mistreatment Founder/Family Business Issues Conflicts of Interest Ineffective Boards
– Poor Capacity – Passive Approach
Clearly Articulated Shareholder Treatment Policies Strengthen Boards Succession Planning Committees and other mechanisms to handle conflicts Audit Committees
– Internal Audit – Financial Professionals
Transparency
– Internal Controls – Audit Function
Accounting and Auditing Improvements
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THANKS!!!!
Mike Lubrano International Finance Corporation
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