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

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

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

Why Corporate Governance Matters to WBG? zdevelop conducive business environment zfoster competitiveness zincrease foreign and local investment zsupport anti-corruption and better public governance efforts Corporate governance is a essential tool to

What Is Corporate Governance? The basics: zFairness zTransparency zAccountability zResponsibility

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

OECD Principles Main focus: internal aspects of publicly traded companies in well regulated markets zRights of shareholders zEquitable treatment of shareholders zRole of stakeholders zDisclosure & transparency zResponsibilities of the board

Focus on Internal Mechanisms NOT Sufficient Common problems in developing and transition economies: zLack of transparency zUnderdeveloped institutions zCorruption zWeak enforcement, and zSporadic voluntary compliance. Opportunities for rent seeking ==> large divergence of private and social returns.

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

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

Standards (e.g., Accounting & Auditing) Laws / Regulation Financial Sector Debt Equity Markets Competitive Factor and Product Markets Foreign Direct Investment Corporate Control Regulatory 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. Shareholders Core Functions Operates Board of Directors Management Reports to Appoints & Monitors Private Stakeholders Reputational 1/ Agents Accounting Lawyers Credit Rating Invst. Bankers Financial Media Invst. Advisors Research Corporate Governance Analysts Internal Incentives and External Discipline External Internal

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

…but globalization is bringing harmonization Countries and companies compete: zon price and quality of goods and services; zfor financial resources in global capital markets; zon the quality of their workforce; zon their reputations; and z(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..

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

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

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

Global Corporate Governance Forum zBroaden the debate in an inclusive way beyond the OECD countries zRespond to country needs for reform and marshal resources & expertise

What can the World Bank and its Partners can offer? zConvening power zLocal to Global zGlobal Partnerships zPolicy and Transaction links zWide ranging expertise zFinancial Resources