Best Practice of Corporate Governance in Emerging Markets

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Best Practice of Corporate Governance in Emerging
Markets the IFC Experience
Solomon Adegbie-Quaynor Country Manager IFC
Nigeria NSE Corporate Governance Seminar 14
March 2007
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Table of Contents

• Overview of IFC
• Why IFC Cares About CG
• IFC CG Methodology
• Sample Success Story
• IFC CG Initiatives in Nigeria

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• Overview of IFC

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IFC Part of the World Bank Group
International Finance Corporation (IFC), 1956
International Bank for Reconstruction and
Development (IBRD), 1945
Multilateral Investment Guarantee Agency (MIGA),
1988
International Centre for Settlement of Investment
Disputes (ICSID), 1966
International Development Association (IDA), 1960
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50 Years IFC and the Private Sector

• IFC has grown from a special situations, project
  finance institution in 1956 to a global emerging
  markets leader
• In recent years, IFCs role has broadened
  significantly
• Innovative corporate lending, long-term
  relationships
• Local currency finance
• Derivatives and risk management products

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50 Years IFC and the Private Sector

• Global benchmark for environmental and social
  standards
• Ground-breaking investment climate research and
  programs for small and medium scale entreprises
• IFCs annual investments in Africa have risen
  fivefold over the past three years, to 700
  million in FY06

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IFC Fact Sheet

• Created in 1956
• Owned by 178 member countries including Nigeria
• Mandate Promote sustainable private sector
  development in developing countries
• Funded through its equity base and borrowing from
  the market
• AAA Rating
• IFC has invested in 3,300 companies in 140
  developing countries
• As at June 30, 2006, IFC had
• a net worth if US11.1 billion
• Portfolio of US21.6 billion

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IFC in Nigeria

• Office in Lagos since 1988
• As at June 30, 2006, IFC had a total investment
  commitment of US719 million.
• In 2006, commitments of US265 million, and we
  expect to by far surpass this in 2007.
• Nigeria is the first African country to be
  included in IFCs top 10 country exposures in its
  portfolio
• IFCs strategic priorities for Nigeria include
• Deepening investment/advisory services to
  domestic banks, other financial services, and
  capital markets development
• Infrastructure advisory and investment services,
  as well as select project development
• Supporting competitive manufacturing and services
  companies
• Supporting indigenous companies in oil gas
  sector
• Supporting the development of frontier sectors
  such as private healthcare and education, as well
  as agribusiness

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• Why IFC Cares About CG

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Why IFC Cares About CG

• Portfolio Performance
• Poor Governance Increases Risk Portfolio Risk
  Management
• Improving Governance is a Value Proposition
• Development Mission (Sustainable Development
  Along with Social, Environmental, and other
  Elements of Sustainability)
• Reputational Risk / Reputational Agent
• Critical Element for Capital Markets Development
  (A Key IFC Objective)

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A Workable Definition for IFC

• OECD Principles Provide an accepted/supported
  Framework
• Financial Stakeholders (Shareholders)
• Boards of Directors (Checks and Balances)
• Control Environment (Accounting, Controls,
  Internal and External Audit)
• Transparency and Disclosure
• A Practical Investment-Driven Definition

• Distinguish from
• Corporate Citizenship
• Corporate Social Responsibility
• Socially Responsible Investing
• Other Elements of Sustainability
• Political Governance
• AML
• (But CG does reinforce all of these!!!)

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Business Case for Good Governance (or Why Should
Companies Care About CG?)
Provides Access to, Lowers Cost of Capital
Improves Operational Efficiency Manages Risk
Value Added
Improves the Companys Reputation
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• IFC CG Methodology

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IFC Portfolio Types of Companies

• Approx. 300 New Deals Per Year / 1500 in
  Portfolio
• Existing Publicly-Listed / Unlisted Companies
  Commercial Companies
• Financial Institutions
• Unlisted Founder / Family Controlled Enterprises
  (Board Shareholders Managers)
• Privatizations and Newly-Privatized
• Greenfields Three-way Joint Ventures (Board
  Shareholders Meeting)

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IFC Corporate Governance Methodology

• Organized along OECD Principles
• Integrates our Regional Learning and Experience
  White Papers
• A Series of Tools to Analyze Governance Risk and
  Opportunity
• Value-Added Focus
• Making the Business Case for Corporate Governance
• Five Paradigms of Companies
• Tools Fully Integrate with IFC Operating
  Procedures (Due Diligence)
• Applied in All Investments
• Staff Training Program
• Value Proposition Understanding Governance
  of Clients and Adding Value Manages Our Financial
  and Reputational Risk

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(Some) Corporate Governance Problems

• OECD Markets
• Dispersed ownership agency problems between
  shareholders and managers
• Empire building of CEOs
• Excessive remuneration (stock options)
• Insider trading
• Defense mechanisms (poison pills, staggered
  boards)
• Non-disclosure of information (manipulation with
  SPEs)
• Internal control problems (independence of
  auditor)

• Emerging/Transition Economies
• Concentrated ownership agency problems between
  controlling and minority shareholders
• Ineffective Boards
• Poor Capacity
• Passive Approach
• Low independence
• Conflicts of Interest RPTs
• Minority Shareholder mistreatment, especially in
  change of control situations
• Succession / Family Business Issues
• Transparency / Internal Controls / Audit Function

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Sample Responses

• Clearly Articulate Shareholder Treatment Policies
• Strengthen Boards (e.g., composition and
  procedures)
• Introduce Board Committees and Other Mechanisms
  to Handle Conflicts and Related Party
  Transactions
• Introduce Audit Committees
• Internal Audit
• Financial Professionals
• Strengthen Internal Controls and Risk Management
• Improve Accounting and Auditing

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• Sample Success Story

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Success story BCR (1)

• Banca Comerciala Romana (Romania)
• US1 billion book value
• Two failed privatization attempts in 2002
• Management and board indistinguishable
• Risk management and internal controls systems
  weak

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Success story BCR (2)

• IFC/EBRD Tailored Corporate Governance Program
• Introduced Two-Tiered Board Structure
• Management of the Supervisory Board
• Redrafted Charter
• Amendments to Banking Law
• Audit Compliance and Compensation Committees
• IFC and EBRD-nominated directors
• Active engagement at Shareholders Meeting

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Success story BCR (3)

• Rating Agency Upgrades
• Board effectiveness
• Professionalization of Shareholders Meetings
• Improvement of Risk Management and Internal
  Controls
• IFC-sponsored Resident Advisor to Internal
  Controls Unit
• Transparency sufficient to privatize
• Transaction closed on October 12th 2006
• IFC receives 758 million (US950 million) for
  its shares
• IRR of the investment (including dividend
  distributions) is estimated at 157

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• IFC CG Initiatives in Nigeria

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Market Initiatives / Advisory Services

• Legal / Regulatory Reforms
• Nigeria IFC advised CBN on Post-Consolidation CG
  Code (2006)
• IFC Global Corporate Governance Forum
  co-sponsoring the PACFCG, implementing ROSC
  recommendations, training programs for IoDs,
  BoDs, standard setting (codes)
• Nigeria Banking Sector CG Survey roll out April
  2007
• Pipeline 3 years CG Advisory Services Program
  for Nigerian Banking Sector (including
  regulatory)
• Value Proposition Public and Private
  Infrastructure is Critical to Credible Governance
  Improvement

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Conclusions

• Corporate governance adds value to private
  companies
• IFCs portfolio performance improves if
  governance is adhered to.
• Corporate governance considerations are an
  integral part of all investment deals that IFC
  pursues (explicitly or implicitly)

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Thank YouFor more info www.ifc.org/corporateg
overnance