Developing Corporate Governance Codes of Best Practice Toolkit Baku, Azerbaijan January 2009

Why develop codes: The Paradox  Codes SHOULD not be a substitute for legal deficiencies ↳ Yet they are part of the overall regulatory environment which means we need to make sure that they don’t contradict with existing laws  Compliance with codes tends to be voluntary ↳ Yet it is important to ensure compliance – or otherwise what is the point of developing them?  Codes should reflect the needs and realties of the local market to be effective ↳ But should also follow international guidelines and best practices – or otherwise they will not be appealing to international investors

Toolkit II- Overview A thoroughly designed instrument created to provide users with practical tools, relevant examples and international best practice to help craft and implement corporate governance codes.

Examples from the Middle-East and North Africa 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)

Volume One: Rationale  Why focus on corporate governance on the national level?  Types of best practice codes  The environment of codes of best practice  Complying with codes  Why are codes useful?

Volume two: The Process  From practical experiences, the Toolkit puts a lot of emphasis on the process;  The process of drafting codes, is as important as the codes themselves;  The process can solve many of the issues on the effectiveness of codes. “ In our experience, Toolkit II and especially the process volume was extremely useful for developing our corporate governance code. We used it as our guiding reference to know whether we are on the right track or not.” Project Manager National Moroccan Corporate Governance Task Force

Volume Two: Process of Developing Corporate Governance Codes Interest/Will Initiating the process Getting Started Engaging Stakeholders Drafting the Code It’s only the beginning Module 1 Module 2

Process of Developing Corporate Governance Codes Interest/Will Initiating the process Getting Started Engaging Stakeholders Drafting the Code It’s only the beginning

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

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

The Role of Government The Lead Organization The Crafting Committee or the Task Force Government 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  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.

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

The Role of Private Organizations and Professional Associations The Lead Organization The Crafting Committee or the Task Force Private Organizations  Legal profession;  Accounting profession;  Auditing profession;  Directors institutes;  Shareholder associations. Professional 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.

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

The Role of Business Community and Financial Sector The Lead Organization The Crafting Committee or the Task Force Business Community and Financial Sector 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.  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.

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.

Dealing with Conflicts

Process of Developing Corporate Governance Codes Interest/Will Initiating the process Getting Started Engaging Stakeholders Drafting the Code It’s only the beginning

Be clear on why develop a code  Develop clear terms of reference;

Develop a Master Schedule

Process of Developing Corporate Governance Codes Interest/Will Initiating the process Getting Started Engaging Stakeholders Drafting the Code It’s only the beginning

Engaging Stakeholders

Process of Developing Corporate Governance Codes Interest/Will Initiating the process Getting Started Engaging Stakeholders Drafting the Code It’s only the beginning

Drafting the Code  Don’t reinvent the wheel ↳ International codes, industry specific guidelines, etc  Assessing the country’s corporate governance framework and reform needs ↳ World Bank ROSC, OECD roundtables, EBRD country assesments, etc  Selecting the main drafter  Integrating consultation

Thank You ! Finally, Codes are means to an end….. But not the end themselves Hassan El-Shabrawishi Global Corporate Governance Forum Telephone