Governance for Young Leaders Understanding Corporate Governance Djordjija Petkoski World Bank Group March 23 2004 by mct20122

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									Governance for Young Leaders:
   Understanding Corporate
         Governance
                 Djordjija Petkoski
                 World Bank Group
                   March 23, 2004
              dpetkoski@worldbank.org
                   www.csrwbi.org




World Bank Institute   Djordjija Petkoski   1
       (dpetkoski@worldbank.org)
 World Bank Group Priorities

•Poverty Alleviation
•Good Governance
•Good Investment Climate




           World Bank Institute   Djordjija Petkoski   2
                  (dpetkoski@worldbank.org)
      Poverty and Developing
             Countries

Today:
• 3 billion people (survive on) under $2/day
• 1.2 billion people (survive on) under $1/day




             World Bank Institute   Djordjija Petkoski   3
                    (dpetkoski@worldbank.org)
                             Population Growth
                                     Growth in Population
                       9
                                                                  8
                       8                         7
Population (billion)




                       7
                       6         5
                       5
                       4
                       3
                       2                          1               1
                                 1
                       1
                       0
                              2000            2025               2050
                                              Year
                           Developed Countries           Developing Countries
                                 World Bank Institute   Djordjija Petkoski      4
                                        (dpetkoski@worldbank.org)
    Power of the Private Sector
• The output measure of the GDP is the sum
  of value added by all sectors in society
• Typically 80% is from the private sector (in
  market economies)
• Private sector is the principal engine for
  growth
• Collectively the dominant force in the
  economy with significant influence
             World Bank Institute   Djordjija Petkoski   5
                    (dpetkoski@worldbank.org)
                 Increased Powers of MNCs
     COUNTRY/          GDP/SALES

1
     CORPORATION
     USA
                         ($ Million)
                         8,708,870
                                                     Major Players
2    Japan               4,395,083           • Companies command significant
5    UK                  1,373,612             economic influence
11   Mexico                474,951
14   Australia             389,691
                                             • Business is the principal motor
23   General Motors        176,558
                                               for growth and development
24   Denmark               174,363
25   Walmart               166,809
27   Ford Motor Co.        162,558           • However, investment in the
28   DaimlerChrysler       159,985             developing world remains small
29   Poland                154,146             compared to industrialized
31   Indonesia             140,964             countries
37   Mitsui                118,555
38   Mitsubishi            117,765
40   GE                    116,630           • Investment flows represent both
42   Portugal              107,716             capital flow and also the needed
43   Royal Dutch/Shell     105,366             skills and know-how to compete
 Ranking based on corp. sales data from
 Fortune, July 31, 2000, and GDP data from
                               World
 World Bank Development Report 2000.Bank Institute      Djordjija Petkoski        6
                                        (dpetkoski@worldbank.org)
                   FDI Flows
• With an excess of savings, many developed
  countries are in a position to be net capital
  exporters
• Suffering from scarce capital and higher risks,
  developing countries offer higher returns on
  investments
• In 2000, $240 billion FDI went to emerging
  economies
• Over 4 times that of international aid

               World Bank Institute   Djordjija Petkoski   7
                      (dpetkoski@worldbank.org)
                Net capital flows to emerging
                market economies, 1994-2003
         200


         150


         100                                                                 Net FDI
US$ bn




                                                                             Net portfolio
          50                                                                 investment


           0
           94

                95

                     96

                          97

                               98
                                     99

                                           00

                                                01

                                                     02

                                                          03
          19

               19

                    19

                         19

                              19
                                   19

                                         20

                                              20

                                                   20

                                                        20




         -50                                                         Source: IMF, World Economic Outloook, April 2002
                                                     Forecast
                                   World Bank Institute     Djordjija Petkoski                           8
                                          (dpetkoski@worldbank.org)
  More Equitable Growth Depends
• On the signals provided to the private sector
  by
  –   The government
  –   Civil society
  –   Investors
  –   Employees
  –   Consumers
• On the character of the private sector iteself
              World Bank Institute   Djordjija Petkoski   9
                     (dpetkoski@worldbank.org)
                 Reputation
• Reputational capital
  – $52 bn. for Coca-Cola
  – $12 bn. For Gillette
  – $11 bn. For Eastman Kodak


  Critical for brand names such as Nike and
  Shell

             World Bank Institute   Djordjija Petkoski   10
                    (dpetkoski@worldbank.org)
           Impact of Media
• The CNN world—real time information
• Easy access to news from around the world
• Power of visual images

Businesses and governments are subject to
 relentless scrutiny.

            World Bank Institute   Djordjija Petkoski   11
                   (dpetkoski@worldbank.org)
      Questions for Companies
• what are the kinds of impact which companies in
  various sectors can have on poverty?
• what kinds of activity constitute best practice in
  this area?
• is a company aware of its impact?
• is it doing something about it?
• if not, what are the issues the company needs to
  face, and what can we say to them about
  what is being done by other companies in the
  sector?
               World Bank Institute   Djordjija Petkoski   12
                      (dpetkoski@worldbank.org)
    Businesses’ Contribution to Society
•     Indirectly through growth;
•     Business operations influence the extent to
      which growth is equitable;
•     Directly through
     –   the incomes and jobs they generate
     –   producing products that serve the needs of the poor
     –   the opportunities they provide for increasing incomes
         through their marketing and purchasing
         arrangements, employment and training policies
     –   their contribution to local communities through the
         provision of social services and infrastructure.
                  World Bank Institute   Djordjija Petkoski   13
                         (dpetkoski@worldbank.org)
                      But First….
• Main function of the business
   – create wealth for their shareholders
   – maximize profits

• Profits start by adding value

• The profit motive, and the resulting value created for
  shareholders, is aligned with the need to sustain growth in
  order to reduce poverty.



                   World Bank Institute   Djordjija Petkoski   14
                          (dpetkoski@worldbank.org)
              A Short History
• Corporate governance - a new name for an old
  problem

―[B]eing managers of other peoples’ money but their
   own, it cannot well be expected that they should
   watch over it with the same anxious vigilance with
   which …[they] frequently watch over their own.
   Negligence and profusion, therefore, must always
   prevail more or less in the management of the
   affairs of a company.‖
- Adam Smith, Wealth of Nations (1776)
               World Bank Institute   Djordjija Petkoski   15
                      (dpetkoski@worldbank.org)
         A Narrow Definition
Corporate governance can be defined as ―the
 system for direction and control of the
 corporation.‖
   - Sir Adrian Cadbury, The Report on the
  Financial Aspects of Corporate Governance, 1992




             World Bank Institute   Djordjija Petkoski   16
                    (dpetkoski@worldbank.org)
           A Broad Definition
―Corporate governance is… holding the balance between
 economic and social goals and between individual and
 communal goals. The governance framework is there to
 encourage the efficient use of resources and equally to
 require accountability for the stewardship of those
 resources. The aim is to align as nearly as possible the
 interests of individuals, corporations and society. The
 incentive to corporations is to achieve their corporate aims
 and to attract investment. The incentive for states is to
 strengthen their economics and discourage fraud and
 mismanagement.‖
- Sir Adrian Cadbury(1999). ―Corporate Governance: A Framework
for Implementation‖. World Bank

                World Bank Institute   Djordjija Petkoski        17
                       (dpetkoski@worldbank.org)
         Principles of Corporate
              Governance
•   Transparency
•   Accountability
•   Fairness
•   Responsibility
    -- The Business Sector Advisory Group on
      Corporate Governance (1998)


               World Bank Institute   Djordjija Petkoski   18
                      (dpetkoski@worldbank.org)
             Some Debates

• Shareholder versus stakeholder models
• Private versus public roles in controlling
  corporations
• One size fits all versus tailor-made




             World Bank Institute   Djordjija Petkoski   19
                    (dpetkoski@worldbank.org)
               Global Drivers
• Rise of institutional investment - ―other peoples’
  money‖
• Privatization – the corporation dominates the
  economy
• Deregulation/Liberalization – competition and
  mobile money
• Crisis and scandals – no market is immune


               World Bank Institute   Djordjija Petkoski   20
                      (dpetkoski@worldbank.org)
  Examples: Why we need Corporate
            Governance
• Russian Oil Firms
Market Value       Estimated Actual Discounted Ratio
                   Value

Firm A:            $50 bn.                        556 times less
$90 mn.
Firm B:            $600 bn.                       30 times less
$20 bn.
               World Bank Institute   Djordjija Petkoski           21
                      (dpetkoski@worldbank.org)
         Corporate Governance
Investors are Willing to Pay More For a Company
     With Good Board Governance Practices
  120

  100
                                                          No
                                                          Yes
   80

   60

   40

   20         83                81                  89
    0
        Latin America   Europe/US         Asia


 Companies are willing to pay 18 % to 28% more for
 better governance.
                    World Bank Institute   Djordjija Petkoski   22
                           (dpetkoski@worldbank.org)
            Investors interests
            Beyond the Balance Sheet
• Ethical and responsible business behavior
• Corporate Codes of Conduct
• New ideas and Information Technology
• Western Business Practices
• Environmental, energy efficiency, health and safety
  standards
• Workplace issues: compensation, benefits and training
• Volunteerism, charitable giving and community
  activism
• Rule of law
               World Bank Institute   Djordjija Petkoski   23
                      (dpetkoski@worldbank.org)
               Competitiveness




                                          Corporate
 Corporate                                  Social
Governance                              Responsibilities




                                                 Leadership
                                                    and
                 Business
                                                   Values
               Conduct/Ethics


     World Bank Institute   Djordjija Petkoski                24
            (dpetkoski@worldbank.org)
        Importance of Ethics
“The best chance you have of making a
 big success…is to decide from square
 one that you are going to do it ethically”
                   - Alan Greenspan
    Chairman, Federal Reserve Board



            World Bank Institute   Djordjija Petkoski   25
                   (dpetkoski@worldbank.org)
       Importance of Ethics
“There is no such thing as business
 ethics….There’s just ethics; and we all
 have to practice them every day in
 everything we do.”
                            – Peter Drucker



           World Bank Institute   Djordjija Petkoski   26
                  (dpetkoski@worldbank.org)
   Private Sector Perspective
  ―Corporate Social Responsibility is not a
cosmetic; it must be rooted in our values. It
must make a difference to the way we do
our business.”

                 Group Managing Director



           World Bank Institute   Djordjija Petkoski   27
                  (dpetkoski@worldbank.org)
―You cannot talk about CSR unless you love
  your people and your country‖

 A student from Moscow, in opening remarks for a meeting
 on Russian Future Leaders and CSR, with Mrs.
 Wolfensohn.




              World Bank Institute   Djordjija Petkoski   28
                     (dpetkoski@worldbank.org)
Raising CSR IQs




 World Bank Institute   Djordjija Petkoski   29
        (dpetkoski@worldbank.org)
                  Thank You
                Djordjija Petkoski
            Lead Specialist, World Bank
             dpetkoski@worldbank.org
                 www.csrwbi.org




World Bank Institute   Djordjija Petkoski   30
       (dpetkoski@worldbank.org)

								
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