the ifc corporate governance methodology: application...
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THE IFC CORPORATE GOVERNANCE
METHODOLOGY:Application to Financial
Institutions
Investor and Corporate PracticeCorporate Governance Department
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Investor and Corporate Practice
Mike Lubrano
• Evaluates client companies• Uses methodology &
set of tools and practices• Helps clients implement
best practice• Technical assistance• Global Leadership (OECD,
CIPE, National Leaders)\• Director Nominations• Share Voting
• ROSC assessments• IFA / OECD liaison• Cross-support• Operational work• Best Practice papers • Implementation design
• Multi-donor trust fund• Awareness raising• Sponsor research• Promotes government
reform and private sector self-help
• Develops toolkits
Corporate Governance
Policy Practice
Global Corporate
Governance Forum
Phil Armstrong
IFC / World Bank CG Department (CCG)Teresa Barger
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Investor and Corporate Practice (CCGCP)
• Service Unit for IOs and Clients• Develops Tools - IFC CG Methodology• “Global Leadership”
– OECD Collaboration / Roundtables– Global Corporate Governance Forum
• Technical Assistance– Gov’ts; Market Participants; Clients– Support to PEPs
• IFC-Nominated Directors• Share Voting
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IFC Portfolio – Types of Companies
• Approximately 250 New Commitments Per Year; 1500 Portfolio Companies
• Existing Publicly-Listed / Unlisted Companies (All Industrial Sectors and Financial Sector)
• Unlisted Founder / Family Controlled Enterprises (Board = Shareholders = Managers)
• Privatizations and Newly-Privatized• Three-way Joint Ventures (Board =
Shareholders Meeting)
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Why Does IFC Care About CG?
• Portfolio Performance– Poor Governance Increases Risk– Improving Governance is a Value Proposition
(Private Equity Funds; BCR; Hikma)• Development Mission (Sustainable
Development – Along with Social, Environmental,and other Elements of Sustainability)
• Reputational Risk / Reputational Agent
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Support for The Value Proposition
• S&P, Moody’s and Fitch > CG Explicit Part of Credit Rating (BCR Upgrade)– Reflects Increasing Empirical Evidence
• Experience of Activist Institutional Investors– CalPERS Governance Portfolio
Performance• Listing Requirements • CG Funds• IFC is in a Unique Position to Test the
Governance Thesis in Emerging Markets
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Developing a Workable Methodology
• Create a Common Definition/Vocabulary• Be Consistent with the IFC Mission:
Sustainability / Value Added• Tailored to Institution’s Unique and
Diverse Portfolio• Fit with Existing Operating Procedures
(Project Prep and Decision Meetings)– Bank Evaluation Model / Due Diligence
• Usable and Accessible to IOs (website)• Avoid Formalism / Box Ticking
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CG is a Natural Fit for IFC• Participation in Governance Worldwide in All
Types of Companies, Industries – Access to Data– Skills, Experience to Deliver
• “Grass Roots”/PEP Projects– Bank Governance Projects in Ukraine and Russia
• Capital Markets Development Focus• Global Partners
– OECD– Global CG Forum / Private Sector Adv. Group– Regional Partners– National advocacy, business schools, training institutes
• IFC-Nominated Directors
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What is a Workable Definition for Us?
OECD Principles Provide an accepted/supported Framework:
• Financial Stakeholders (e.g., Shareholders)
• Checks and Balances (Boards of Directors)
• Control Environment• Transparency and
Disclosure
A Practical Investment-Driven Definition
Distinguish from:• Corporate Citizenship• Corporate Social
Responsibility• Socially Responsible
Investing• Other Elements of
Sustainability• Political Governance• Business Ethics• Anti-Corruption / AML
(But CG does reinforce all of these!!!)
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AN ACADEMIC DIGRESSION
“The Modern Corporation and Private Property”(1932) – Berle & Means
• Separation of Ownership and Control
• Principal / Agent Problem• Managers vs. Dispersed
Shareholders
(Most apposite in US/UK)
Reality of Emerging Markets
• Concentrated Ownership
• Concentrated Business Elites
• Management Selected by / are Controlling Shareholders
• Family Identification(Similar to Continental
European Patterns)
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Governance of Banks/FIs is Special
• Governance of Banks / FIs Goes Deeper into Operations than in Commercial Companies– Delegation of Authority / Power to Bind– Nature of the Assets
• Hence a Greater Concern for Adequacy of Controls, Auditing, Reporting and Oversight– Implications for Role, Structure and
Composition of the Board
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Banks/FIs vs. Commercial Companies
• Opacity of Assets (Loan Quality) – Transparency / Reporting Requirements
• Regulation / Gov’t Intervention– For Good Reasons and Bad– Distort Incentives
• Ability to Quickly Change Risk Profile• Ability to Hide Problems• Boarder Stakeholders
(Depositors/Policyholders)• Systemic Risk• Role in Economy (Savings Allocation)
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Banks/FIs – Areas of Special Attention
• Risk Identification and Management– Operational, Asset/Liability, Market
• Controls; Independent Checks and Balances; Quality of Information
• Int. / Ext. Reporting• Related Party Lending• Asset Quality
– Credit– Portfolio Review
• Compliance• AML / CFT
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FIs – The Structural Dimension
• Role of the Board– Balance of Strategic and Oversight Roles– Defining Role of Board vs. Management– Executing Board’s Responsibility; Committee Structure– Management vs. Board vs. Mixed Committees
• Accountability / Checks at Key Functions– Credit– Compliance– Portfolio / Asset Quality– Risk Management– Accounting / Auditing,Controls, Int/Ext Reporting
• Responsibilities of Boards, Bd. Committees, Management at Holding and Sub. Levels
• Human Resource Limitations May Drive Structure, Procedures!!!
• GFM/CCGCP Bank Governance Toolkit
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Making Methodology Useable by IOs
Break Governance Into Digestible Bits• Company archetypes, paradigms (non-exclusive):
– Listed companies– Family- or Founder-Owned Unlisted Companies – Financial Institutions– Transition Economy Companies
• Five attributes of effectiveness.
• Four levels, from “acceptable” to “leadership.” We call this our Progression Matrix. This approach parallels the approach taken in the other areas of sustainability (social and environmental).
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Fit with the Appraisal / Supervision Process
How should staff evaluate client companies and work with them to add value to their governance?
By following a series of steps -- from first impressions to follow-up -- that fit into existing appraisal / supervision patterns
The time and effort involved in each step varies in nature depending on the type of enterprise – listed companies, family/founder firms, financial institutions, and companies in Transition economies (the paradigms).
The intensity of project team effort depends on risk and opportunity.
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Core Tool – Simple Progression MatricesA Self-Assessment and Client Orientation Tool
1. Acceptable 2. Extra Steps 3. Major Contributions
4. Leadership
Commitment to Good Corporate Governance
Structure and Functioning of the Board of Directors
Control Environment
Transparency and Disclosure
Treatment of Minority Shareholders
LEVELS
ATTR
IBU
TES
PROGRESSION
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Making it Accessible: The Website
Home Page
Why CG? IFC’s Approach IO Tools Resources
4 Types of Company• Listed companies• Family companies• Financial institutions• Transition economies
Six Steps:1. First Impressions2. Client Self-Assessment3. CG Review / Decision Mtg4. Addressing the Risks and
Opportunities 5. Documentation/
Implementation6. Supervision
• Instruction Sheets• Why CG?• Progression Matrices• Information Request
Lists • Independent Director
Definition• Model CG
Improvement Programs• Supervision Checklist
• By Topic• By Country• OECD Principles• IFC-nominated directors• Share Voting (to come)
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When to Focus on Corporate Governance
Risks and/or Opportunities – Financial Return and Development Impact
Risks may be:
• attitudinal (little or no commitment to governance)
• financial/operational (weak controls)
• legal (weak compliance)
• reputational (negative image)
Opportunities (to add value) may be:
• attitudinal (strong commitment to governance)
• financial (access to capital/better valuations)
• legal (model codes/compliance/documentation)
• reputational (fulfilling IFC’s mission)
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Support – IFC CG Unit
• Philosophy– CG is a Core Capacity of All IOs– No Swarm of Experts; CCG should be Hub of Best
Practice / Support Unit
• Role of Investor and Corporate Practice– Collector/Analyzers/Disseminators of Experience– Technical Support
• “If we can’t, we have friends who can!”
– Investment Team Members in Special Cases– “United front against window dressing”– Develop metrics – Reinforce Business Case
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CCG Services to Investment Depts.
Tool Shop Technical Advisor Team Member
CG Unit Role Guidance on website and tools
Review questionnaire responses; Advise on follow-up and project docs; Desk work; Unlikely to involve field visits
CG unit staff assigned to project team prior toappraisal; participation in field work
Our products Trainings; Case Studies; Responses to questions concerning the methodology
Memos at key deal junctures, (e.g., after steps 2 and 3); Expertise on esoteric topics; Clearinghouse for consultants
Full, formal CG review, recommendations; negotiations with client; CGIP
Project team commitment
Send CG unit copies of CGIP and CG sections of project docs; Do not include CG unit in project team
Send CG unit copies of CGIP and CG sections of project docs; Do not include CG unit in project team
Treat us just like any other member of the project team (or better)
Examples Any one of 250 deals per year
Davivienda; Central Castilla; Carvajal; HipNal
Odebrecht; CPFL; Dewan; Bavaria; BCR; Sakhr
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How IFC works with clients on Governance
Use the CG Tools
• CG Progression Matrices
• Instruction Sheets
• CG Information Request Lists
• Why Corporate Governance?
• Sample CG Improvement Programs
• Indicative Independent Director Definition
• Supervision Checklist
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CG Throughout the IFC Deal Process
Supervision;Monitoring;Support;Feedback;
Lessons
Structure Deal;Terms and Conditions;Pricing and
Disbursement
Evaluate, Articulate,Prioritize CG
Risks and Opportunities
Identify Issues;Engage Client
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How IFC works with clients on Governance
Step-by-Step Approach
• Step 1: First Impressions
• Step 2: Client Self-Assessment
• Open the Dialogue
• Step 3: Corporate Governance Review
• Articulate the Risks / Opportunities
• Step 4: Address the Risks and Opportunities
• Terms and Conditions
• Step 5: Documentation and Implementation
• Step 6: Supervision
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Step 1: First Impressions
Objectives:• To form an initial view on whether corporate
governance poses a special risk or exceptional opportunity for value-added.
• To select the governance paradigm (or mix of paradigms) to be applied to the company.
• To identify probable/preliminary priority issues and assess level of resources (if any) needed from IFC’s Corporate Governance Unit.
Tools: • Trained IFC Staff; Common Sense
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Step 2: Client Self-Assessment
Objectives:Introduce our Corporate Governance Methodology
Develop Governance Consciousness
Orient the client about our definition of, and approach to, corporate governance
Guide the client in assessing its own governance, using the Progression Matrices
Tools:“Why Corporate Governance?”
Corporate Governance Progression Matrix
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Step 3: Corporate Governance Review
Objectives:An informed analysis of the client company’s governance
On-site evaluation with the company’s senior managers
Help the company understand strengths and weaknesses of its own governance in a structured way
Decide whether the client needs to undertake a Corporate Governance Improvement Program
Identify any need for further resources, e.g., additional support from IFC’s Corporate Governance Unit
Tools:Corporate Governance Progression Matrix
Information Request List
Conscientious Department Directors!!!
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Step 4: Addressing Risks / Opportunities
Objectives:Reflect Assessment in Structuring of Deal
Terms and Conditions - A program of specific practical and meaningful improvements
Achieve client “buy-in”
Agree on a timetable and methods for implementation
Identify areas where IFC can help
Tools:Sample CG Improvement Programs
Numerous other Resources on specific topics or countries, e.g. Independent Director Definition, Exchange Listing Rules
Serious Department Directors!!!
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Sample Diagnoses - Responses
• Concentrated Ownership Issues
• Minority Shareholder Mistreatment
• Founder/Family Business Issues
• Conflicts of Interest• Ineffective Boards
– Poor Capacity– Passive Approach
• Transparency– Internal Controls– Audit Function
• Clearly Articulated Shareholder Treatment Policies
• Strengthen Boards • Succession Planning• Committees and other
mechanisms to handle conflicts
• Audit Committees– Internal Audit– Financial Professionals
• Accounting and Auditing Improvements
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Step 5: Documentation and Implementation
Objectives:
Memorialize what is agreed
Decide upon the appropriate form of legal enforceability of the CG Commitments
Identify need for continuing assistance
Tools:
Sample CG Improvement Programs; Company Codes; Term Sheets; Loan Covenants; Shareholders Agreements
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Step 6: Supervision
Objectives:Adherence to the agreed Terms and Conditions / Agreed CG Improvements
Identify further corporate governance assistance from IFC and outsiders (e.g., consultants, director sourcing/training, etc.)
Communicate Quality to the Markets: Disseminate good examples for wider development influence/impact
Feedback on effectiveness of the Methodology / Individual CG Improvement Program
Tools:• Supervision Checklist
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Bank Gov. Tool Kit Bank Gov. Tool Kit -- PurposePurpose
• To Complement the “Financial Institutions” Component of the IFC CG Methodology– GFM’s Non-Business Specific Questionnaire
• To Drill Deeper into Best Practices for Boards and Senior Management of Financial Institutions– Appraisal– TA Projects
• To Suggest Specific Paths for Improvement– More Value-Added
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Bank Gov. Toolkit - Phase One
• Board Charter• Audit Committee• Compensation Committee• Nomination/CG Committee• Risk Policy Committee• Code of Ethics
Completed
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Bank Gov. Toolkit - Phase Two
• CEO / President ToR• Chief Compliance Officer ToR and
Reporting• Chief Risk Officer ToR and Reporting• Head of Internal Audit ToR and
Reporting
• Training Module• Dissemination – CCGCP Website / GFM?
Completion Date – June 30, 2006
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The Methodology: What’s Missing?
• More Paradigms (Maybe; Suggestions?)• Better Tools (Require Constant Refining)
– Ownership Matrix– Bank Governance Toolkit
• Measurement of Effectiveness / Synthesis of Lessons of Experience (Feedback; OEG)– Are clients following through?– Is IFC following through?– Does it work?
• More Support/Resources for Staff and Clients (Definitely)
• Better Integration into Investment / Supervision / Credit / Compliance Processes (A Priority)
• Integration of CG / Directorships / Share Voting Systems in iDesk (A Must)