The Role of a Corporate Governance Task Force

Based on: Developing Corporate Go e a ce Codes of Best ased o e e op g Co po ate Governance o est Practice Toolkit - Global Corporate Governance Forum

Presented By : Hassan El-Shabrawishi - Consultant ElGlobal Corporate Governance Forum International Finance Corporation

Yemen, February 2008

Who We Are
Founded in 1999 by World Bank Group and OECD IFC DFO/Multidonor Facility since July 2005 Forums purpose:
Promote global, regional and local CG reform initiatives Improve institutional framework for good corporate governance Facilitate improved CG practices in developing countries

Our donors:

Corporate Governance Defined p

Corporate governance is the system by which companies are directed and controlled.
Source: Sir Adrian Cadbury, UK Combined Code

Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. determined
Source: OECD Corporate Governance Principles, 2004

The System by Which Companies are Directed and Controlled

Shareholders

Regularly report and update Monitor and guide

Managers

Directors

Important to Distinguish Corporate Governance From Other Concepts

Corporate governance corporate/financial management
Accountability Accountability and and Supervision Supervision

Corporate Corporate Governance Governance Strategic Strategic Management Management Corporate Corporate Management Management

Executive Mgmt. Executive Mgmt. g -Decision and C t l D i i d Control- Decision and Control Operational Mgmt. Operational Mgmt.

Source: Robert Tricker,Corporate Governance, 1984 Source: Robert I. Tricker, Corporate Governance, 1984

Corporate governance corporate social responsibility or business ethics

If management is about running the business, corporate governance is about seeing that it is run properly. All companies need managing and governing.

Put Differently, Corporate Governance means

P/E

At the national level Corporate Governance Means

Increased access to financing Higher firm valuation Greater growth potential Reduced risk of fi R d d i k f financial crises i l i Better relations with other stakeholders

What Are Corporate Governance Codes of Best Practice?

Corporate governance codes of best practice are sets of nonbinding recommendations aimed at improving and guiding the governance practices of corporations within a countrys specific legal environment and business context. They may be generic in scope, they may be drawn up for specific groups of scope companies, or they may address a specific aspect of corporate governance such as disclosure or board practices; Concerned with raising the standards beyond legal requirements corporate requirements, governance codes of best practice are by nature voluntary, yet various incentive mechanisms may encourage corporate compliance with essential provisions of the code; Corporate governance codes of best practice are just one element of the legal framework in which businesses operate.

Why draft a code?

At the national level they contribute to raising standards as well as driving reform efforts; At the corporate level, codes serve as a benchmark for monitoring and implementing corporate governance practices and policies; i l ti t ti d li i Many countries have now adopted Corporate Governance Codes of best practice to restore and sustain investor confidence; p ; Following this trend and the examples of Egypt, Oman and the UAE, countries from the MENA region are now engaging in the development of corporate governance codes.

Examples from the Region

1. Egypt: code for state-owned enterprises issued by the Egyptian Institute of Directors (status: passed) 2. Egypt: code for listed companies is to be reviewed by Egyptian Institute of Directors ( (status: in p process of constituting task force) g ) 3. Jordan: code for listed companies issued by the Jordan Securities Commission 4. Lebanon: code targeted to small and medium enterprises (status: passed) 5. Lebanon: code for listed companies (status: in process) 6. West Bank & Gaza: code for listed companies ( p (status: in p process) ) 7. Saudi Arabia: code passed as a regulation by the Capital Market Authority, which now forms part of the stock exchanges listing requirements (status: passed) 8. United Arab Emirates: regulation issued by the Emirates Securities Commission Authority (status: passed) 9. United Arab Emirates: code i 9 U it d A b E i t d issued b th Ab Dh bi S d by the Abu Dhabi Securities M k t ( t t iti Market (status: passed) 10. United Arab Emirates: listing rules issued by the Abu Dhabi Securities Market (status: passed) 11. 11 Bahrain: code for listed companies (status: in process) 12. Morocco: code for listed companies (status: in process) 13. Tunisia: code for listed companies (status: in process) 14. Algeria: code for family and state owned enterprises (status: in process)

Framework of Code Formulation

Global Standards

OECD [capital markets] & Commonwealth [emerging markets] ICGN standards and recommendations
Country Standards

United Kingdom [Combined Code], South Africa [King II], etc.

Industry Initiatives

Resources, forestry, banking, etc.

Investor Standards

Hermes, CalPERS, Morley, TIAA-Cref, ABI, etc.

Regulatory Standards

NYSE, JSE, ASX, London, etc.

Corporate Policies and Standards

Source: Recommendations by Phil Armstrong, Head of GCGF June 2006

Initiating and Leading The Process

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
B Business Co ommunity an nd F Financial Se ector Private Or rganizations s

The Initiator

No single type of organization is best suited to initiating or developing a corporate governance code. Virtually every possible combination has resulted in the adoption of quality codes. What is essential is that all interested parties be involved in the process and represented on the crafting committee committee.

Governm ment

Profe essional Asso ociations

Initiating and Leading The Process

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
B Business Co ommunity an nd F Financial Se ector Private Or rganizations s

The Initiator

No single type of organization is best suited to initiating or developing a corporate governance code. Virtually every possible combination has resulted in the adoption of quality codes. What is essential is that all interested parties be involved in the process and represented on the crafting committee committee.

Governm ment

Profe essional Asso ociations

The Role of Government

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
Only in a few cases has the g y government actually y played a leading role in developing a corporate governance code, preferring to keep a low profile in favour of the private sector; Regardless of its level of involvement, the government is often perceived to be an essential source of support.
In the United Kingdom, for example, staff from various government departments including the Department of Trade and Industry and the Treasury, were assigned to assist Derek Higgs in preparing the R th Report on the Effectiveness of N E t th Eff ti f Non-Executive Directors, issued i 2003 ti Di t i d in 2003.

Government

The Role of Private Organizations and Professional Associations

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
Private Or rganizations s

No single type of organization is best suited to initiating or developing a corporate governance code. Virtually every possible combination has resulted in the adoption of quality codes. What is essential is that all interested parties be involved in the process and represented on the crafting committee committee.

Governm ment

Profes ssional Assoc ciations

The Initiator

B Business Co ommunity a and Financia Sector al

The Role of Private Organizations and Professional Associations

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti

Private Organizations

Legal profession; Accounting profession; Auditing profession; Directors institutes; Shareholder associations.

Professional Associations

Brazils first code of corporate governance was initiated in 1995 by the Instituto Brasileiro de Governanca Corporativa (IBGC), a private, self-financed, independent institution.

The Role of Business Community and Financial Sector

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
Private Or rganizations s

No single type of organization is best suited to initiating or developing a corporate governance code. Virtually every possible combination has resulted in the adoption of quality codes. What is essential is that all interested parties be involved in the process and represented on the crafting committee committee.

Governm ment

Profes ssional Assoc ciations

The Initiator

B Business Co ommunity a and Financia Sector al

The Role of Business Community and Financial Sector

The Crafting Committee or the Task Force The L d Organization Th Lead O i ti
In many countries, they have been the first to recognize the potential of good corporate governance Some of these initiatives suggest that corporate governance codes need not necessarily b d d t il be developed by national bodies only and that directly interested parties may also take the initiative of introducing corporate g g p governance best practices.
Business Community and Financial Sector d Fi i lS t

The Turkish Industrialists and Businessmens Association (TUSIAD) initiated and led the development of the first corporate governance best practices code developed in Turkey. This organization is composed of senior executives of the major industrial and service companies in Turkey.

Forming the Crafting Committee

When developing a corporate governance code, it is preferable to have the support of the government as well as the business community. This does not mean that a corporate governance code should be enforced by way of statute, but it does mean that the code crafting committee and the various task teams that draft the code need to be handpicked so that business leaders, regulators such as stock exchanges, professional bodies such as lawyers and accountants, labor unions, and organized business such as chambers of commerce are all represented on the committee. Mervyn King, Chairman of the King Committee on Corporate Governance, South Africa

Forming the Crafting Committee

Consulting main stakeholders; Appointing a chairman; Appointing a project manager; Appointing the project team; Appointing a secretary and organizing secretariat services and meeting facilities; Securing funding; Organizing pre-meeting discussions between the chairman and individual members of the committee.

Identify Reasons for a Code

Be Clear on Rationale for Formulating a Code For example, is it to ..

..enhance established law and set higher business practices ..address particular standards in a specific sector ..reconcile domestic practices with international requirements ..meet shortcomings in regulation or law meet ..set standards on a particular issue or circumstances
Code should NOT be a Substitute for Legal Deficiencies! Be clear in making the Distinction (and Implications) between ..

.a voluntary initiative, e.g. UK, The Netherlands, South Africa .an official commissioned process e g Germany Mauritius an process, e.g. Germany,
Explore Leverages that will Support Adherence (Enforcement?) Consider Market Framework and Policy Priorities

Source: Recommendations by Phil Armstrong, Head of GCGF June 2006

General Principles to Consider

Voluntary or Paid Resources?
..generally a question of public duty for committee members ..task team members = depends ..if using academic resources, question of compensation might be relevant ..if using international research, often compensation is raised

Allow Time for Consultation with Authorities

..especially if some of the issues are sensitive pp y p public p policy agendas y g ..dont be trapped by specific p

Consider Potential for Conflict in the Committee

..often over issues reflecting vested interests ..hence, clear agenda and objectives must guide the process

Code should NOT be a Reflection of Status Quo Must Contain Aspirational Elements = raise the bar (Make sure to consult and discuss) Effective Formulation, Must also have Effective Dissemination
..useful to assist market in understanding requirements, implications ..should allow a transitional period to adapt new standards ..can assist buy in and give a more qualitative touch to the recommendations

Source: Recommendations by Phil Armstrong, Head of GCGF June 2006

Thank You !