The Role of a Corporate Governance Task Force

The Role of a Corporate Governance Task Force Based on: « Developing Corporate Governance Codes of Best Practice Toolkit» - Global Corporate Governance Forum Presented By : Hassan El-Shabrawishi - Consultant Global 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 Forum’s purpose: Promote global, regional and local CG reform initiatives Improveinstitutional framework for good corporate governance Facilitate improved CG practices in developing countries Our donors:

Corporate Governance Defined “Corporate governance involves a set of relationships between a company’s 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.” “Corporate governance is the system by which companies are directed and controlled.” Source: Sir Adrian Cadbury, UK Combined Code Source: OECD Corporate Governance Principles, 2004

The System by Which Companies are Directed and Controlled Shareholders Represents and report to Report transparently to Elect and dismiss Provide capital to Regularly report and update Monitor and guide Directors Managers

Accountability and Supervision Accountability and Supervision Corporate Governance Corporate Governance Strategic Management Strategic Management Corporate Management Corporate Management Executive Mgmt. - Decision and Control - Operational Mgmt. Executive Mgmt. -Decision and Control- Operational Mgmt. Source: Robert I. Tricker, Corporate Governance, 1984 Source: Robert Tricker,Corporate Governance, 1984 Important to Distinguish Corporate Governance From Other Concepts Corporate governance  corporate/financial management 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,CorporateGovernance means … P/E

At the national level – Corporate Governance Means • Increased access to financing • Higher firm valuation • Greater growth potential • Reduced risk of financial crises • Better relations with other stakeholders

What Are Corporate GovernanceCodes 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 country’s specific legal environment and business context. • They may be generic in scope, they may be drawn up for specific groups of 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 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; • Many countries have now adopted Corporate Governance Codes of best practice to restore and sustain investor confidence; • 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 process of constituting task force) 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 (status: in 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 issued by the Abu Dhabi Securities Market (status: passed) 10. United Arab Emirates: listing rules issued by the Abu Dhabi Securities Market (status: passed) 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

Private Organizations Professional Associations Business Community and Financial Sector Government The Initiator Initiating and Leading The Process The Crafting Committee or the Task Force The Lead Organization 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.

Government The Role of Government The Crafting Committee or the Task Force The Lead Organization • Only in a few cases has the government actually 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 Report on the Effectiveness of Non-Executive Directors, issued in 2003.

Private Organizations Professional Associations Government The Initiator Business Community and Financial Sector The Role of Private Organizations and Professional Associations The Crafting Committee or the Task Force The Lead Organization 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.

Private Organizations Professional Associations The Role of Private Organizations and Professional Associations The Crafting Committee or the Task Force The Lead Organization • Legal profession; • Accounting profession; • Auditing profession; • Directors institutes; • Shareholder associations. Brazil’s first code of corporate governance was initiated in 1995 by the Instituto Brasileiro de Governanca Corporativa (IBGC), a private, self-financed, independent institution.

Private Organizations Professional Associations Government The Initiator Business Community and Financial Sector The Role of Business Community and Financial Sector The Crafting Committee or the Task Force The Lead Organization 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.

Business Community and Financial Sector The Role of Business Community and Financial Sector The Crafting Committee or the Task Force The Lead Organization • 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 be developed by national bodies only and that directly interested parties may also take the initiative of introducing corporate governance best practices. The Turkish Industrialists’ and Businessmen’s 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 • …..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 • 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 • …..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” (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 !

The Role of a Corporate Governance Task Force