World Bank Group

1. World Bank Group World Bank / OECD Cooperation in Corporate Governance Mike Lubrano February 28,2000

2. WBG Mission: Alleviate poverty in client countries through its lending and advisory activities

3. Trends Two global trends: • Increasing role for the private sector in economic decision-making • Diminishing role of state and multi-lateral and official flows as providers of external finance to firms

4. Why Corporate Governance Matters to WBG? Corporate governance is a essential tool to • develop conducive business environment • foster competitiveness • increase foreign and local investment • support anti-corruption and better public governance efforts

5. What Is Corporate Governance? The basics: • Fairness • Transparency • Accountability • Responsibility

6. Definitions The common view: “Corporate governance is about maximizing shareholder value. It focuses on the relationships between managers and owners, with the board of directors ensuring that the corporation is managed in the shareholders’best interest.” Ira Millstein, World Economic Forum, Febrary 1998

7. OECD Principles Main focus: internal aspects of publicly traded companies in well regulated markets • Rights of shareholders • Equitable treatment of shareholders • Role of stakeholders • Disclosure & transparency • Responsibilities of the board

8. Focus on Internal Mechanisms NOT Sufficient Common problems in developing and transition economies: • Lack of transparency • Underdeveloped institutions • Corruption • Weak enforcement, and • Sporadic voluntary compliance. Opportunities for rent seeking ==> large divergence of private and social returns.

9. WBG’s Definition of Corporate Governance • Focus: all providers of external finance--not just equity finance: • From a Company’s perspectives: • maximizing VALUE subject to meeting the corporation’s financial and other legal and contractual obligations • AND • From a Public Policy perspective: • nurturing the spirit of enterprise while ensuring oversight and accountability in the exercise of power and patronage by firms

10. The Modern Corporate System INTERNAL FACTORS EXTERNAL FACTORS THE MODERN CORPORATION EFFICIENCY PROFITABILITY AGILITY

11. Internal Incentives and External Discipline External Internal Private Regulatory Shareholders Standards (e.g., Accounting & Auditing) Laws / Regulation Stakeholders Board of Directors Financial Sector • Reputational 1/ • Agents • Accounting • Lawyers • Credit Rating • Invst. Bankers • Financial Media • Invst. Advisors • Research • Corporate Governance Analysts • Debt • Equity Appoints & Monitors Reports to Markets Management • Competitive Factor • and Product Markets • Foreign Direct • Investment • Corporate Control Operates Core Functions 1/ “Reputational agents” refer to private sector agents, self regulating bodies, the media and civic society that reduce performance, diligence, information asymmetry, improve monitoring of the firms, and shed light on opportunistic behaviour.

12. There is no single model of corporate governance... • Internal & external dynamics create a range of corporate governance systems that reflect specific market structures, legal systems, traditions, regulations, and cultural and societal values. • The systems vary from country to country, from sector to sector, from company to company, and for the same company over time.

13. …but globalization is bringing harmonization • Countries and companies compete: • on price and quality of goods and services; • for financial resources in global capital markets; • on the quality of their workforce; • on their reputations; and • (increasingly) on their corporate governance regimes • Despite diversity of systems, globalization of markets is • producing a degree of convergence in actual operations and • governance practices -- to reduce risk to investors. • .

14. Focusing on Basic Reforms Countries that have made the most progress have tackled reform in the following areas: 1. Competitive markets 2. Transparency & disclosure 3. Financial discipline in the banking sector 4. Well-regulated equity markets 5. Legal, judicial and tax reforms 6. Institution building and human development 7. Internal governance mechanisms of corporations

15. CG Reform • We found that: • Reform is politically difficult but public-private partnerships can foster consensus for change • Large amounts of public and private resources are spent on a range of initiatives • Few benefit from linkages to other’s initiatives or transfer of experiences among practitioners • Significant economies of scale and scope can be achieved through better cooperation

16. Solution • Bring together players from developed, developing and transition economies and leverage actions and resources ==> a clearinghouse model • Capitalize on an optimum set of regulatory reforms -- but enforce them rigorously -- and focus on private voluntary actions

17. Global Corporate Governance Forum • Broaden the debate in an inclusive way beyond the OECD countries • Respond to country needs for reform and marshal resources & expertise

18. What can the World Bank and its Partners can offer? • Convening power • Local to Global • Global Partnerships • Policy and Transaction links • Wide ranging expertise • Financial Resources