The Role of Stakeholders In Corporate Governance

1
The Role of Stakeholders In Corporate Governance

• Dr. Demir Yener
• Center for International Private Enterprise
• Washington, D.C.
• Fourth Meeting of the Eurasian Corporate
  Governance Roundtable
• The Responsibilities of Boards of Directors
• October 29-30, 2003, Bishkek, Kyrgyzstan

2
Purpose of the Presentation

• To discuss
• Objectives of the firm Wealth Maximization
• Responsibilities of the board
• The role of stakeholders in corporate governance

3
Stakeholders and Shareholders

• Primary Stakeholders
• Shareholders
• Boards of Directors/Managing Boards
• Executive Management
• Other Stakeholders
• Managers
• Employees
• Customers
• Community at Large
• Suppliers
• Financial Institutions Creditors
• Environment in general

4

• Enabling Environment
• International Auditing Accounting Standards
  (IASISA)
• Securities Markets Legal and Regulatory
  Frameworks (IOSCO)
• Financial Sector Participants investors,
  issuers, intermediaries (interaction between
  participants)
• Financial Market Infrastructure and Architecture
• Product and Factor Competitiveness
• Foreign Direct Investments
• Corporate Control (Corporate Governance OECD
  Principles)
• Enabling, prudentially regulated business
  environment, with creative incentive structure

5
Benefits of Corporate Governance

• Good corporate governance has a positive effect
  on
• Share valuation
• Risk assessment
• Reduction of market volatility
• Good Corporate governance can
• Reduce the cost of capital
• Increase the pool of investors
• Improve management accountability and performance

6
Efficient Ownership

• Sufficient concentration of control in a firm by
  owners to be able to monitor and influence
  management effectively.

7
The Goal of the Firm

• To maximize the wealth of its shareholders.

8
How To Determine Whether Corporate Governance Is
Effective?

• Two tests
• Is the corporation maximizing shareholder value?
• Is the net present value of the corporations
  cash flows positive and is it being used or
  directed for the benefit of shareholders based
  upon their pro rata ownership interests?
• If the corporations chief executive officer is
  not performing well, does the board of directors
  have the power to remove him?

9
Responsibility of the Board

• In pursuit of the wealth maximization objective,
  boards must recognize the interests of all
  stakeholders.
• No company ever survived that ignored the
  interests of its
• Customers
• Employees
• Suppliers

10
Four Values of Good Corporate Governance

• Transparency
• Accountability
• Responsibility
• Fairness

11
Linkages

• The four pillars of corporate governance and the
  wealth maximization concept serve as the
  aspirational benchmarks

12
Investor Behavior

• Investor behavior is characterized by the fear
  and greed factors
• Corporate governance is not an end in itself.
• CG is about improving firm performance and
  assuring access to capital at a reasonable cost.
• The end game of CG is achieving the most
  efficient allocation of the scarce resources the
  firm has available within its economic
  environment, and gaining access to the capital
  needed for growth and development

13
CG and Firm Performance

• The linkages between good CG and firm performance
  is clear
• Good CG will inspire investor confidence
• Good CG will assure investors of a reasonable
  rate of return on their investment
• Good CG will generate operational efficiency and
  increase the competitiveness of the firm

14
Price Discovery

• Good CG will contribute to the further efficiency
  of the price discovery mechanism in determining
  the value of the firm.
• This serves the purpose of wealth maximization
  concept
• Improved CG will help resolve the problem of risk
  and help lower the cost of capital. Thus leading
  to an increase in the value of the firm.

15
Stick and Carrot

• Effective CG will serve as the carrot if private
  sector is convinced that it will gain from good
  governance. IN this case, reform will happen.
• IF private sector is not convinced, reform will
  be resisted.
• This is the dilemma.
• The main player in the maximization of wealth
  through good governance is the board.

16
Responsibilities of the Board and Performance

• Independent oversight
• Contestability
• Labor relations
• Corporate strategy
• Corporate social responsibilities
• Respecting stakeholders
• Excellent performing managers
• Attracting low cost capital
• Increasing market capitalization

17
Conclusion

• The Board has an important role to play in
  development and progress of the firm on behalf of
  its investors.
• Maximizing the shareholder value is the long term
  objective of the firm.
• Stakeholders play an important role in CG
• A board, respectful of the legitimate
  expectations of all the stakeholders should
  benefit all parties in the long run.