The Role of Stakeholders In Corporate Governance

1. The Role of Stakeholders In Corporate Governance Dr. Demir Yener Center for International Private Enterprise Washington, D.C. Fourth Meeting of the Eurasian Corporate Governance Roundtable ‘The Responsibilities of Boards of Directors’ October 29-30, 2003, Bishkek, Kyrgyzstan

2. Purpose of the Presentation To discuss: • Objectives of the firm: Wealth Maximization • Responsibilities of the board • The role of stakeholdersin corporate governance

3. Stakeholders and Shareholders Primary Stakeholders • Shareholders • Boards of Directors/Managing Boards • Executive Management Other Stakeholders • Managers • Employees • Customers • Community at Large • Suppliers • Financial Institutions: Creditors • Environment in general

4. Internal Elementsof Corporate Governance External Elementsof Corporate Governance • Factors of Sound • Corporate Governance • Shareholders rights protection • Rights and responsibilities of Board of Directors and Shareholders • Quality of Disclosure • Monitoring • Effectiveness of the core management functions • Principal Factors • Stakeholders • Takeovers/acquisitions • Bankruptcy frameworks • Collateral and Foreclosure rules • Enterprise Restructuring • Investor and Creditors • Agents: Management • Enabling Environment • International Auditing & Accounting Standards (IAS&ISA) • Securities Markets Legal and Regulatory Frameworks (IOSCO) • Financial Sector Participants : investors, issuers, intermediaries (interaction between participants) • Financial Market Infrastructure and Architecture • Product and Factor Competitiveness • Foreign Direct Investments • Corporate Control (Corporate Governance: OECD Principles) • Enabling, prudentially regulated business environment, with creative incentive structure

5. Benefits of Corporate Governance • Good corporate governance has a positive effect on: • Share valuation • Risk assessment • Reduction of market volatility • Good Corporate governance can: • Reduce the cost of capital • Increase the pool of investors • Improve management accountability and performance

6. Efficient Ownership Sufficient concentrationofcontrol in a firm by owners to be able to monitor and influence management effectively.

7. The Goal of the Firm To maximize the wealth of its shareholders.

8. How To Determine Whether Corporate Governance Is Effective? Two tests • Is the corporation maximizing shareholder value? • Is the net present value of the corporation’s cash flows positive and is it being used or directed for the benefit of shareholders based upon their pro rata ownership interests? • If the corporation’s chief executive officer is not performing well, does the board of directors have the power to remove him?

9. Responsibility of the Board • In pursuit of the wealth maximization objective, boards must recognize the interests of all stakeholders. • No company ever survived that ignored the interests of its: • Customers • Employees • Suppliers

10. Four Values of Good Corporate Governance • Transparency • Accountability • Responsibility • Fairness

11. Linkages • The four pillars of corporate governance and the wealth maximization concept serve as the ‘aspirational benchmarks’

12. Investor Behavior • Investor behavior is characterized by the ‘fear and greed’ factors • Corporate governance is not an end in itself. • CG is about improving firm performance and assuring access to capital at a reasonable cost. • The end game of CG is achieving the most efficient allocation of the scarce resources the firm has available within its economic environment, and gaining access to the capital needed for growth and development

13. CG and Firm Performance • The linkages between good CG and firm performance is clear • Good CG will inspire investor confidence • Good CG will assure investors of a reasonable rate of return on their investment • Good CG will generate operational efficiency and increase the competitiveness of the firm

14. Price Discovery • Good CG will contribute to the further efficiency of the price discovery mechanism in determining the value of the firm. • This serves the purpose of wealth maximization concept • Improved CG will help resolve the problem of risk and help lower the cost of capital. Thus leading to an increase in the value of the firm.

15. Stick and Carrot • Effective CG will serve as the carrot if private sector is convinced that it will gain from good governance. IN this case, reform will happen. • IF private sector is not convinced, reform will be resisted. • This is the dilemma. • The main player in the maximization of wealth through good governance is the board.

16. Responsibilities of the Board and Performance • Independent oversight • Contestability • Labor relations • Corporate strategy • Corporate social responsibilities • Respecting stakeholders • Excellent performing managers • Attracting low cost capital • Increasing market capitalization

17. Conclusion • The Board has an important role to play in development and progress of the firm on behalf of its investors. • Maximizing the shareholder value is the long term objective of the firm. • Stakeholders play an important role in CG • A board, respectful of the legitimate expectations of all the stakeholders should benefit all parties in the long run.