Preparing the Corporate Governance of [company] for a Domestic and/or International IPO

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Preparing the Corporate Governance of company
for a Domestic and/or International IPO

• presenter
• Investor and Corporate Practice
• Corporate Governance Department
• International Finance Corporation
• place, date

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Outline

• Business Case for Corporate Governance
• Investor Expectations
• Shareholder Rights
• Board of Directors
• Transparency and Disclosure
• Family Business Issues
• LSE / NYSE/ NASDAQ Standards Compared
• What IFC Can Do for You

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Corporate Governance Defined
Corporate governance refers to the structures
and processes for the direction and control of
companies. IFC
Corporate governance involves a set of
relationships between a companys management, its
board, its shareholders and other stakeholders.
Corporate governance also provides the structure
through which the objectives of the company are
set, and the means of attaining those objectives
and monitoring performance are determined. OECD
Corporate Governance Principles, 2004
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Narrow View of Corporate Governance

Shareholders
Represents and report to
Report transparently to
Elect and dismiss
Provide capital to
Regularly report and update
Monitor and guide
Directors
Managers
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Why Corporate Governance Matters
Provides Access to, Lowers Cost of Capital
Value Added
Improves Operational Efficiency
Improves the Companys Reputation
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Corporate Governance and Corporate Management
Corporate governance corporate/financial
management interest
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Shareholder Rights 1/2

• Protection of minority shareholders in charter,
  by-laws, governance code
• Adequate notice and agenda of all shareholders
  meetings
• Ability to participate and vote meaningfully at
  shareholders meetings (e.g., cumulative voting
  for directors)
• Actions requiring shareholder approval (e.g.,
  dividends fundamental transformations equity
  compensation)

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Shareholder Rights 2/2

• Fair treatment regarding information disclosure
  (all material shareholder agreements, conflicts
  of interest, etc.)
• Disclosure of beneficial ownership of all classes
  of shares
• Clarity in rights of different classes of shares
  - voting rights vs. economic rights
• Equitable treatment in changes of control (e.g.,
  tag-along rights)

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Board of Directors - Objectives

• Add Value
• Vision, Strategy, Experience, Energy
• Identification of Key Risks Oversight of Risk
  Management
• Accounting, Audit, Control Environment
• Market / Operational Risk
• Growth-Orientation / Entrepreneurial Cos.
• Help Plan, Oversee Execution of Corporate
  Transformation
• Meet Market / Investor Expectations
• Compliance with UK, Sarbanes/Oxley, etc.

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Board of Directors - Composition

• Seven to Eleven Members/Strong Independent
  Component
• Separate Chairman and CEO Roles
• Regular Calendar/Agenda of Meetings
• (6-8 per Annum)
• Independent Directors
• No Connection with Management / Controllers
• Independent Minded
• Minimum Requirements (local standards) plus
  Companys Own Definition

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Board of Directors - Composition

• Entrepreneurial / Transformational Orientation
• Committees Responsible for Oversight in Key Areas
  (Audit Governance Remuneration)
• Mix of Professional Skills / Experience
• International Financial Markets
• Audit Committee Expertise
• Director Education

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Director Responsibilities

• Duty of Loyalty
• Duty of Care
• Responsibilities to Shareholders
• Activities as Directors (Duties)
• Conflicts of Interest
• Adequacy of Control Environment
• Adequacy of Disclosure

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Audit Committee - Role

• Improvement of Control Environment
• Accounting Policies and Procedures
• Internal Controls
• Internal Audit
• Integrity of Companys Financial Reporting
  Internal and External Auditing Functions
• Selection / Evaluation / Independence /
  Compensation of the External Auditor

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Audit Committee - Composition

• At least 3 Independent Members of the Board
• All Must be Financially Literate
• At Least One an Audit Committee Financial
  Expert (i.e., an experienced CEO, CFO,
  accountant, auditor, etc.)

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Audit Committee - Activities

• Regular Schedule of Meetings
• Periodically Meets Separately with CFO, External
  Auditors Chief of Internal Audit
• Follows-up Management Letters All Reported
  Deficiencies in Controls
• Receives and Reviews Periodic Reports on
  Implementation of Control Environment Improvements

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Audit Committee and Internal Control Environment

• Responsible for the Boards Duty to Ensure the
  Adequacy/Integrity of Internal Control
  Environment
• Staffing
• Manuals
• Procedures
• Standards

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Governance Committee

• Develops and Oversees Implementation of Corporate
  Governance Improvement Program
• Recommends Boards Committee Structure
• Nomination of Independent Directors
• Recommends Independence Definition
• Manages Conflicts of Interest
• Written Policy, Ethics Code, Board Review
  Approval of Related Party Transactions
• Reviews and Revises Governance Policies /
  Compliance with UK, Sarbanes - Oxley, and Listing
  Rules on Corporate Governance
• Evaluates Board Effectiveness

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Transparency and Disclosure

• The corporate governance framework should ensure
  that timely and accurate disclosure is made on
  all material matters regarding the corporation,
  including the financial situation, performance,
  ownership, and governance of the company.
• OECD Principles

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What to Disclose

• Disclosure should include, but not be limited
  to, material information on
• Financial and operating results company
  objectives
• Shareholder agreements
• Major share ownership and voting rights
• Remuneration policies information about board
  members
• Related party transactions foreseeable risk
  factors
• Issues regarding employees and other stakeholders
• Contents of any corp. gov. code or policy and its
  implementation
• Material off-balance sheet items

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Transparency and Disclosure - Procedures

• Information should be prepared and disclosed in
  accordance with high quality standards of
  accounting and financial and non-financial
  disclosure.
• An annual audit should be conducted by an
  independent, competent, and qualified auditor in
  accordance with the International Standards of
  Auditing.
• External Auditors should be accountable to the
  shareholders and owe a duty to the company to
  exercise due professional care in the conduct of
  the audit.
• Channels for disseminating information should
  provide for equal, timely and cost-efficient
  access to relevant information by users.

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Benefits of Disclosure 1/2

• Good corporate disclosure is often regarded as
  one of the leading indicators of good corporate
  governance. There is a growing body of evidence
  that supports the view that high standards of
  transparency and disclosure can have a material
  impact on the cost of capital.
• Standard Poors

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Benefits of Disclosure 2/2

• The Report of the Special Committee of the
  American Institute of Certified Public
  Accountants on Financial Reporting (1994)
  identified lower cost of equity to be the biggest
  benefit of disclosure.
• Lower transaction costs
• Reduced error in earnings forecasts
• Higher demand for a companys securities
• Enhances stock market liquidity

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Benefits of Family Control

• Long-term view in decision-making (consistent
  with investors)
• Possibility of unconventional strategy
  (flexibility)
• Desire to build a business for future generations
  (sustainability)
• Commitment of family management to their company
  (continuity)
• the family business edge (profit)

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Special Challenges for Family Companies

• Need to Distinguish Family Relationships and
  Company Relationships (True Separation is
  Impossible)
• Especially financial relationships and accounts
• Informality of governance policies
• Common understandings may not be so universally
  held or understood
• Weakness of control environment
• Challenges only increase as the family grows More
  Complex with Succeeding Generations

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What does IFC Look for in Family Company
Governance?

• Ways to work with family businesses to maximize
  the benefits of family ownership while addressing
  the potential pitfalls
• Governance models that ensure
• Accountability / Transparency
• Continuity
• Efficiency
• Fair treatment of stakeholders (like us)
• Ambiguity is always the enemy

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And Now the Specific Issues IFC Analyzes

• Succession Planning
• Family Employment
• Family Salary-Earners vs. Dividend Receivers
• Incentivating Non-Family Managers
• Treatment of Outside Financial Stakeholders
• Formalities - They Do Matter
• Familys Long-Term Role as Shareholder (Share
  Retention/Voting)

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Listing Requirements Compared Additional
Corporate Documents
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Listing Requirements Compared Board Practices
Composition
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Listing Requirements Compared Board Practices
Committees
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Listing Requirements Compared Disclosure
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Listing Requirements Compared Transparency
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Listing Requirements Compared Minimum Float and
Shareholder Rights
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Listing Requirements Compared Exceptions and
Limitations
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Beyond Compliance Where IFC Helps

• Governance is a Journey, Not a Destination
• A Companys Governance Should be Tailored to its
  Own Reality / Needs and those of its Investors
• Communicating Good Governance to the Markets is a
  Challenge
• Transparency
• Reputational Agents

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IFC A Natural Partner

• IFCs Reputation (BCR, Hikma, etc.)
• Experience in Corporate Governance Worldwide in
  All Types of Companies, Industries
• Grass Roots/ PEP Projects
• 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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Thank you!!!

• www.ifc.org/corporategovernance