Global Corporate Governance Forum Developing a Code of Corporate Governance Philip Armstrong Presentation to Bahrain

1. Global Corporate Governance Forum Developing a Code of Corporate Governance Philip Armstrong Presentation to Bahrain Delegation Washington DC, June 2006

2. 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

3. Influencing International Dialogue • United States  Financial Reporting/Controls • Sarbanes-Oxley Act • New York Stock Exchange/SEC • United Kingdom • Higgs Report  Non-executive Directors • Smith Report  Audit Committees • Proposed new company law • Various regulations for pension funds & investment managers • European Commission Strategy for Corporate Reforms • OECD Guidelines for Global Standards • Basel and Global Financial Markets Standards • Numerous measures for Sustainability Reporting • Emerging Markets, Integrated Reporting and Disclosures  King Report

4. The Current Debate…… “A key lesson from the recent scandals is that the checks on the system simply have not worked. The honor code among CEO’s didn’t work. Board oversight didn’t work. Self-regulation was a complete failure. But one thing has worked: law enforcement.” Eliot Spitzer New York State Attorney “You can’t prosecute your way to a healthy corporate culture.” Deputy U.S. Attorney General James Comey Chair of the President’s Corporate Fraud Task Force “The areas in which law will be necessary are two: disclosure and the ability of shareholders to exercise their ownership rights. Without sufficient disclosure, the investor is unable to make sensible and informed judgments about the issues.” Alastair Ross Goobey Former Chairman, International Corporate Governance Network

5. 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 • …..set standards on a particular issue or circumstances • Code should NOT be a Substitute for Legal Deficiencies! • Understand the Distinction (and Implications) between ….. • ….a voluntary initiative, e.g. UK, The Netherlands, South Africa • ….an official commissioned process, e.g. Germany, Mauritius • Understand “Leverages” that will Support Adherence (Enforcement?) • Understand Market Framework and Policy Priorities

6. Setting the Frame of Reference • Identify the Institution to Coordinate the Process • Determine Composition of Review Body • …..ensure it has the necessary credentials and authority • …..select chairman, ensure appropriate credentials and credibility • …..appoint secretariat and/or project leader (convenor) • …..select committee members • …..identify research requirements and resources, if necessary • …..establish scope and timetable • Some Important Points to Consider • …..ensure committee members have institutional reference • …..fully brief committee members on expectations/commitment • …..meet with key regulators who will be expected to enforce the Code • …..don’t reinvent the wheel, contact other similar initiatives • Look at International and Regional Networks • ….for sources of information and guidance • ….as a reference point for consultation and sharing of experience • Informing the Media

7. Setting the Work Program • Develop Clear and Agreed Timetable with Key Milestones • …..articulate framework of the proposed code • …..commence research on similar initiatives and gather material • …..set templates on which to base draft contributions • …..define key issues to be covered in the code formulation process • Establish Task Teams and Break-up Core Components of Review • …..appoint chairman for each task group (from main committee) • …..appoint convenor for each task group • …..select task team members, drawn from institutional reference points for review • …..distribute material useful to each task team • …..set timetable for each task team based on primary timetable • Key Points in the Primary Timetable • …..set meetings schedule for the full process (even if indicative only) • …..set dates for when first reviews should be available for consideration • …..set dates for follow up process and initial draft of entire code • …..determine key points when the review subject to public consultation • …..fix date for when the code to be finalised and released • Carefully Consider Consultation Process (Local, and International?)

8. 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 • …..don’t be trapped by specific public policy agendas • 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” (but 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

9. Role of the Project Leader/Coordinator • Example Provided taken from King Report Exercise (South Africa) • Must be Good Communicator….. • …..work closely with the committee chairman • …..coordinate activities with the secretariat • …..develop good working relations with task teams, researchers • Preferably Should have a Good Network • …..well connected with institutions involved in the project • …..develop network of research sources, locally and internationally • …..have access to regional and international experts (?) • Should have Close Eye for Detail • Must Remain Objective throughout Process • …..no vested interests, guided by the objectives of the review • Must be Prepared to Negotiate Difficult Issues

10. Tasks to be Undertaken • Set Timetable and Determine Objectives of the Review • Map out Work Program • …..for the committee and key milestones • …..for the task teams with clear guidelines, targets • …..for the “core working group” and deadline for finalising the code • Establish Necessary Resources and Networks to Facilitate Drafting • Undertake Regular Liaison • …..with committee and committee chairman • …..with secretariat, researchers, other correspondents • …..with task teams and their leaders • …..with regulators and other official bodies • Distribute Useful Material to Support Process • Set Templates to Guide Structure of Content • Central Source for Collating and Editing Draft Content

11. Key Issues in the Process • Establish Modus Operandi • …..keep tight control of project timetable • …..ensure regular and clear communication to key parties • …..communicate, communicate, communicate! • Keep in Touch with Progress • …..provide interventions or facilitate support as necessary • …..remain available to all involved parties • …..remain in touch with ALL issues relevant to process! • Also follow policy and practice developments • …..domestic priorities and relevant international developments • Use Technology to Expedite Distribution, Consultation • Keep ALL Copies of Edited Drafts • …..in case of disputes on content and dealing with vested positions! • Ensure Strong, Reliable Secretariat Back-up • Maintain Record of All Sources of Reference, Research

12. Some Lessons …… • Keep a Record of How Content Accepted or Rejected • …..maintain a matrix of key issues • …..record from whom submissions received in this connection • …..detail of how the committee/editors responded (with reasons) • Consider Funding Issues early in the Project • …..payments for research • …..costs of communication, correspondence, dissemination • …..costs of media engagement • …..sources from whom funding can be obtained • If Consulting Support Required, Consider Implications • Editing, Negotiating Changes, Finalising….. • …..are very time consuming, don’t underestimate • Manner of Final Publication, Dissemination = Critical! • …..work does not end at this point, often only the beginning

13. Steps after Code in Place • Put in Place a Process to Review Implementation • …..possibly no more than once a year, e.g. Germany • …..or, regular reviews more to give guidance, e.g. South Africa • …..or, de-commission the body and hand over to regulator, e.g. U.K. • Preferable to Place Custody of Code with an Institution, e.g. IoD • …..can institute guidelines and standards for market guidance • …..run awareness workshops • …..develop training programs for directors and managers • …..maintain website and access to the code and guidelines • Useful to Comment on Areas Outside of the Code • …..shortcomings in laws or regulations that require to be remedied • …..recommendations for further legislative interventions • Ensure that Code Covers Only Aspects that Can be Supervised • …..don’t be over ambitious!

14. Board Governance Framework Shareholders • Board of Directors • Achievement of strategic objectives and value creation • Fulfil responsibilities and duties in law and prescribed functions Chairman Strategy Board Meetings Information and Communication Corporate Policies & Procedures Board Operations Key areas of responsibility Company Secretary Board Governance Instruments Reporting &Disclosure Monitoring and Evaluation Board Committees CEO & Management Governancesystem and controls Audit Committee Remuneration Committee OtherCommittees Executive Committee Internal Controls & Assurance Combined Assurance Model Source: KPMG, 2004 Internal Audit External Audit Other Assurance Providers Management

15. Thank You ! “…the substance of good corporate governance is more important than its form; adoption of a set of rules or principles or of any particular practice or policy is not a substitute for, and does not itself assure, good corporate governance.” The Business Roundtable, USA Philip Armstrong +1 202 458-9114 parmstrong@ifc.org Marie-Laurence Guy +1 202 473-9327 mguy@ifc.org www.gcgf.org