Corporate Governance

Reforms
Why governance Reforms? Why
Now?

1
 Why Governance Reforms?
Why now?
•  International deregulation of financial markets
•  Increasing scale and activity of corporations
•  Growth of investment institutions
•  Effective monitoring necessary for security of
investments
•  Recognition that governance matters for
accountability, performance and attracting capital.
•  A general trend in society towards openness,
transparency and disclosure.
 Why governance?, Why now?

Bernie  Ebbers  
Kenneth  Lay   CEO  Worldcom  
Chairman  Enron  
   

Jeff  Skilling  
CEO  Enron    
 Why governance?, Why now?

Geoff Dixon &

Margaret Jackson

CEO James
Hardie
Peter Macdonald

Rene Rivkin
Cycles of Governance
 Cycles of Governance
•  Corporate Governance crisis and reform is essentially
cyclical .
•  Waves of corporate governance reform and increased
regulation occur during periods of recession, corporate
collapse and re-examination of the viability of regulatory
systems .
•  During long periods of expansion, active interest in governance
diminishes, as companies and shareholders become again
more concerned with the generation of wealth, than in its
retention .
(Clarke, T. (2004). Theories of Corporate Governance, Routledge.
CORPORATE  GOVERNANCE  TRENDS  IN  
EMERGING  MARKETS  
Second  Middle  East  and  North  African  Forum  on  
Corporate  Governance  

7
 Well Governed Company Does Make
a Difference
The premium investors would pay for
a well-governed company in different countries and regions:
45 41
39 38
40
Average premiums

35
30
30
25
20
15 12
10
5
0
Morocco Egypt Russia Eastern Europe U.K.

Source: McKinsey Global Investor Opinion Survey - June 2002

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 BASIC MODELS
•  Principle-Agent problem based on the
separation of ownership and control.
•  Solution to corporate governance issues is
to strengthen disclosure of listed
companies.
•  Enforcement of rules (US) is key.
•  Compliance with principles (UK) is key.

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 Basic Model Assumes Key Institutions
Function Well
•  Transparency -- or full disclosure of financial and
key performance information
•  Laws/Regulations preventing Conflicts of interest
involving boards of directors and managers
•  Procedures for bankruptcy
•  Property rights
•  Contract enforcement – legal system
•  Corruption and theft – legal system

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Source:  The  World  Bank  Group  
 Drivers of Corporate Governance
Reform

•  Asian Financial Crisis

•  Russian Currency Collapse and
Privatization
•  Corporate Governance Failures in US and
Europe

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 Asian Financial Crisis

"The Asian financial crisis showed that even

strong economies lacking transparent control,
responsible corporate boards, and
shareholder rights can collapse quite quickly
as investor's confidence erodes.

M.R. Chatu Mongol Sonakul,

former Governor of the Bank of Thailand
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 Corporate Governance in the U.S.:
Efforts in The Post Enron Era
•  The Sarbanes-Oxley Act – imposed stronger
requirements for corporate disclosure and refined
financial reporting for public companies.

•  New York Stock Exchange – new rules set by

the NYSE strengthened the role of independent
directors

•  NASDAQ – new rules set by NASDAQ

addressed directors compensation and filing
requirements

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 Abuse of
minority
shareholder
rights

Asset
stripping CorrupBon  

Corporate
Governance
Failures

Weak Insider-trading
legal and
institutions Self-dealing
Problems
with
security
exchanges 15
 Developing Countries Need
Institutional Reforms
Corporate governance systems depend upon a
set of institutions (laws, regulations, contracts,
and norms) that create self-governing firms as
the central element of a competitive market
economy. These institutions ensure that the
internal corporate government procedures
adopted by the firms are enforced and that
management is responsible to owners
(shareholders) and other stakeholders.

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 Sample CG Projects
•  Russian Institute of Directors – New Egyptian Institute
of Directors
•  Romanian Corporate Governance Code
•  Kenya Private Sector Corporate Governance Trust
•  Association of Development Financing Institutions in
Asian and the Pacific (ADFIAP)
•  Middle East Regional Corporate Governance
Roundtables
•  Colombian Chamber of Commerce.

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 Strategy for CG Reform
1.  Initial Assessment and Advocacy
2.  Outreach and Institutional
Development
3.  Capacity and Institutional
Development
4.  Consolidation

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 Initial Assessment and Advocacy

•  Assess corporate governance failures

•  Rate country standards v. best practice,
•  Adapt OECD principles
•  Build awareness at senior business and
policy levels,
•  Identify stakeholders,
•  Create broader public demand for reform
•  Public education campaigns

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 Outreach and Institutional
Development

•  Develop corporate governance codes and

internal control mechanisms
•  Foster shareholder activism
•  Improve regulatory and enforcement
frameworks
•  Create informal corporate governance
promotion networks within civil society,
business, and regulatory bodies.

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 Capacity and Institutional
Development
•  Training and certification programs for managers
and directors
•  Establishment of Institutes of Directors
•  Create corporate governance ratings systems for
investors
•  Training for financial intermediaries.

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 Consolidation
•  Further strengthen shareholder rights groups
and Institutes of Directors,
•  Risk ranking by ratings agencies.
•  Reports on Standards and Codes (ROSC) – on
going evaluation
•  Legal and institutional enforcement

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 Benefits To Society
•  Helps create competitive, modern and
healthy companies

•  An effective tool against corruption

•  Helps attract investment

•  Helps foster healthy competition

•  Helps prevent banking crises

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 Are all corporate
Governance systems
Similar?
Diversity in Corporate Governance

•  National, regional and cultural differences

•  Ownership structure and dispersion
•  The industry and market environment of the
corporation
•  Firm size and structure
•  Life cycle variations including origin & development,
technology & periodic crises and new directions
Levels of Governance (Dawson 2004)

• Business Ethics/Principles
• Procedures/Processes
• Practices/Behaviour
 The governance of private companies
and other corporate entities
The Governance of family-controlled companies

•  The evolution of family firms

•  The challenge of introducing non-family experts
•  The challenge of succession to the next generation
•  The challenge of management and non-management
family shareholders
•  The creation of a family council
 The governance of private companies
and other corporate entities
The Governance of private equity firms

•  Raise  capital  from  insBtuBonal  investors,  banks,  and  other  financial  

insBtuBons,  and  from  rich  individuals    
•  Investors  subscribe  to  a  fund  managed  by  a  firm,  becoming  a  limited  
partner  
•  Funds  can  be  locked  in  for  long  periods  
•  Risk  is  high    
•  PotenBal  to  lose  enBre  investment  
•  Investors  expect  high  returns  
•  Some  private  equity  funds  spread  risk  by  invesBng  in  other  private  
equity  funds  (fund  of  funds)  
•  Managers  also  invest  their  own  money  in  their    funds  
•  Private  equity  insBtuBons  acquire  control  of  listed  companies      
•  Many  well  known  listed  companies  privaBzed  by  private  equity  
 The governance of private companies
and other corporate entities
The Governance of private equity firms - criticisms

•  Notoriously secretive
•  Do not publish information history, ownership, management or
investment strategy
•  Only disclose companies in the fund to their investors
•  Dilute stock markets by 'privatisation'
•  Private equity firms are relatively unregulated
•  Privatisation avoids public company disclosure requirements
•  Calls for more transparency and greater disclosure
 EXAMPLE: THE ASIA REGION
Many  reforms  since  1997–1998   …  but  
 
•  Government  led  iniBaBves   •  Compliance  with  leVer  not  spirit  
–  Enhanced  authority  for   of  law  
regulators  
–  Strengthened  board   •  Focus  on  structure/process;  less  
independence   aVenBon  paid  to  changing  
–  Improved  disclosure  standards   behaviour  
–  Stopping  audiBng/consulBng    
linkage   •  Enforcement  lagging  
 
•  Private  sector  acBviBes   •  Shareholders  sell  rather  than  
–  Thailand:    InsBtuBonal  Investor   challenge  
Alliance  
–  Singapore:    SecuriBes  Investors   •  Lack  of  qualified  professionals  
AssociaBon  
–  Individual  companies:  Infosys   •  Uneven  progress  across  the  
and  others   region  

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 PROGRESS ACROSS THE REGION ON SOME
ISSUES
Independent  director  and  audit  commi/ee  requirements  
1997   2003  
Independent   Independent  
directors?   Audit  commiVees?   directors?   Audit  commiVees?  
China   ü   ü  
Hong  Kong   ü   ü   ü  
India   ü   ü  
Indonesia   ü   ü  
Malaysia   ü   ü   ü   ü  
Philippines   ü   ü  
Singapore   ü   ü   ü   ü  
South  Korea   ü   ü  
Taiwan   ü   ü  
Thailand   ü   ü  
 Source:  Asian  Corporate  Governance  AssociaBon     31
 A NUMBER OF EXEMPLARY
COMPANIES
•  Complies  with  10  corporate  governance  codes  
•  Reconciles  financial  statement  to  8  accounQng  standards  
•  Board  with  majority  of  independent  directors,  with  wholly  
independent  commiUees  

•  Received  numerous  corporate  governance  awards  

Other  leaders  of  the  pack  in  Asia  

Hong  Kong   Korea   Malaysia   Thailand   Singapore  

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 ENFORCEMENT LAGS FORMAL RULES
1  =  lowest,  100  =  highest   Enforcement  
Rules,  regulaQons/  
adopQon  of  IGAAP  
1   20   40   60   80   100  
Singapore  

Hong  Kong  

Malaysia  

India  

South  Korea  

Taiwan  

Thailand  

Philippines  

China  

Indonesia  
 Source:  Asian  Corporate  Governance  AssociaBon   33
KEY CHALLENGE IN MANY EMERGING MARKETS
IS BUILDING EFFECTIVE SUPPORTING
INFRASTRUCTURE

How  can  you  pursue  …   When  …  

 
•  Greater  disclosure  and   •  Regulators  do  not  have  
transparency   sufficient  human  and  
financial  resources  
•  More  independent  directors  
•  Contracts  are  difficult  to  
•  Long-­‐term  outlook   enforce  

•  Foreign  investment   •  CorrupBon  is  rife  

•  Judicial  system  not  
working  

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 GOVERNMENTS AND COMPANIES MUST
MOVE FORWARD SIMULTANEOUSLY
World-­‐class  corporate  
governance  

Basic  governance  structure   • Build  a  strategic,  value-­‐

and  processes   added  board  
• ConstrucQve  engagement  
with  investors  and  
• Secure  adequate  board  
stakeholders  
Mindset  change   independence  
anies
 
• Create  independent  board   • High  quality  of  financial  
Comp and  non-­‐financial  
commiUees  
• Embrace  strict  accounQng  norms   disclosure  
• Realize  importance  of   • InsQtute  risk  management    
good  corporate   structures  
governance   Market  discipline  
 
Quality  of  rules  and   • Well-­‐developed  equity  
enforcement   and  bond  markets  
• Takeover  market  
• Enhanced  remedies  for  
• Disclosure/lisQng   shareholders  
Stability  and   requirements  
nts   • Strong  regulators  and  
ov e rnme predictability  
G vigorous  enforcement  
• ProtecQon  of  minority  
• Rule  of  law   shareholders  
• Corporate  and  securiQes  
legislaQon  
• Check  on  corrupQon   35