The Importance of Corporate Governance

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The Importance of Corporate Governance CMA
Corporate Governance Conference Muscat 21 April
2008 Mr Martin Kinsky Managing Director
Markets DFSA
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• Agenda
• What is corporate governance?What does it look
  and feel like?
• Why does corporate governance matter how does it
  add value? What can happen if you do or do not
  have it?
• How do you implement it?

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Corporate Governance Defined
Corporate governance is the system by which
companies are directed and controlled.
Source Sir Adrian Cadbury, UK Combined Code

• 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.

Source OECD Corporate Governance Principles, 2004
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Shareowners
Appoint and dismiss
Act as agents for
Provide capital to
Report to
Regularly report to
Directors
Managers
Oversee
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External and Internal Framework Affecting a
Companys Corporate Governance
External Laws, regulations

• Mandatory
• Civil Law
• Company Law
• SpecializedSecurities, BankingLaw
• Listing rules
• Voluntary
• National corporate governance code

Internal company documents

• Articles of Association
• Corporate governance code
• Code of ethics or conduct
• Board charter
• By-laws/charters/ToRs on (i) board Committees
  (ii) general assembly (iii) corporate
  secretary (iv) internal auditor, etc.
• Policies and procedures on (i) dividends (ii)
  information disclosure (iii) enterprise risk
  management (iv) internal controls (v) internal
  audit procedures etc.

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The Look Feel of Corporate Governance
The five key elements ofgood corporate governance
Good board practices
Appropriate Control environment processes
Strong regime of disclosure and transparency
Protection of (minority) shareholder rights
Strong commitment to corporate governance reforms
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The Pillars of Corporate GovernanceAs put forth
in the 2004 OECD Principles of Corporate
Governance
Accountability
Fairness
Transparency
Responsibility
And while corporate governance issues will vary
from company to company, these principles hold
true for all companies.
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Important to Distinguish Corporate Governance
From Other Concepts
Corporate governance ? corporate/financial
management
Corporate governance ? corporate social
responsibility or business ethics
If management is about running the business,
corporate governance is about seeing that it is
run properly. All companies need managing and
governing.
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Why is the World Talking AboutCorporate
Governance?

• Corporate failures
• Executive greed
• Economic stagnation
• Globalization
• Privatization
• Internal awareness of business case, i.e.
  creating long-term growth shareholder value

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Benefits of Implementing Corporate
GovernanceFrom the corporates perspective
Optimizes Operational and Financial Efficiency
Improves Access to Outside Capital
Shareholder Value Competitiveness
Improves Valuation and Lowers the Cost of Capital
Builds/Improves the Companys Reputation and Trust
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Benefits of Implementing Corporate
GovernanceFrom the investors perspective

• Corporate governance can provide for higher
  returns on investment
• For example Calpers biggest return came from
  its investment in corporate governance funds
  aimed at turning around failing companies.

Guess how?
by pressuring Boards
Guess by how much?
by 69
Source CalPERS, 2005
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Benefits Over Long Run Thought to Outweigh Costs

• Corporate governance related costs
• Staff, e.g. a corporate secretary, independent
  directors
• Structures, e.g. committees
• Disclosure, e.g. annual and quarterly reporting,
  IFRS accounts
• Control, e.g. publicly recognized external
  auditor, internal controller and auditor
• ? One firm said that it costs 200,000 per month
  to implement SOX.

However, benefits from implementing corporate
governance generally thought to outweigh costs
over long run
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Without Good Corporate Governance

• Too much power is centred on one individual
  without proper oversight e.g. Enron
• You enter markets that you do not understand and
  fail to properly set strategy and manage your
  risks e.g. Northern Rock
• Board fails to ensure controls are robust or
  question the unusual or the unrealistic e.g.
  Barings
• Poor disclosure and transparency becomes
  commonplace e.g. WorldCom
• Shareholder rights are mistreated e.g. Parmalat

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Hawkamah was created as a Regional institute to

• Bridge the Corporate Governance gap
• Assist the countries and companies of the region
  in developing sound, home grown and globally
  well integrated CG frameworks
• - Coordinate and sequence the designing, and
  implementation of CG reforms
• - Monitor the outcomes of CG policies at the
  public and private sector level.
• Founded in partnership between OECD, IFC, CIPE,
  UAB, YAL and DIFC
• Hawkamah-ICG will serve as a platform for
  regional co-operation, based on a concrete agenda
  for measurable and time-bound action, aiming to
  raise awareness of national, regional and global
  initiatives and build a coalition for reform,
  Joint Declaration OECD-UAE, 2006.

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We Serve

• Government Ministries and Agencies
• Central Banks and Regulatory Agencies
• Banks and Financial Institutions
• Listed Companies, Capital Market Authorities,
  Stock Exchanges
• Family Owned Enterprises
• State Owned Enterprises
• Private sector institutions
• Media
• Academia

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Activities

• WHAT WE DO
• Provide technical assistance on regulatory and
  firm levels to develop the optimal corporate
  governance environment
• Conduct CG assessments and prepare CG improvement
  plans
• Provide advisory services
• Conduct consultations with various stakeholders
• Develop and implement training programs Board
  Development Programme, Board Secretary Programme
• Serve as a knowledge centre and clearinghouse for
  corporate governance best practices from the
  region and beyond.
• Monitor Report on the state of corporate
  governance

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Hawkamahs approach
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Strategic Partners

• Regional Partners
• Dubai International Financial Centre
• UAE Ministry of Economy
• Yemen Ministry of Finance
• Emirates Securities and Commodities Authority
• Oman Capital Market Authority
• Union of Arab Banks
• Abu Dhabi Chamber of Commerce and Industry
• Dubai Chamber of Commerce and Industry
• Jordanian Corporate Governance Association

• International Partners
• Organisation for Economic Co-operation and
  Development (OECD)
• World Bank-International Finance Corporation
• WB Global Corporate Governance Forum
• Institute of International Finance (IIF)
• Financial Services Volunteer Corps (FSVC)
• INSOL (Insolvency Professionals)
• Information Systems Audit and Control Association
  (ISACA)
• Center for International Private Enterprise
• Amsterdam Institute of Finance

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Regional Task Forces

• Hawkamah has launched a series of regional task
  forces, aiming to build momentum for corporate
  governance reform in the region.
• Regional Task Force on Corporate Governance of
  Banks with the OECD (implement the policy
  recommendations from the policy brief)
• Regional Task Force on Corporate Governance of
  State-owned Enterprises with OECD, World Bank and
  MENA Countries (assess state of corporate
  governance of state-owned enterprises and build
  momentum for SOE CG agenda)

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Regional Task Forces

• Regional Task Force on Insolvency and creditor
  rights with OECD, World Bank and INSOL, the
  Insolvency Professionals (assess insolvency
  regimes in the region with the aim towards
  modernization, and build a network of insolvency
  professionals in the MENA Region)
• Regional Task Force on Corporate Governance of
  Insurance Industry with the AFIRC, Arab Forum of
  Insurance Regulatory Commission (develop a policy
  brief for increased corporate governance
  implementation in the industry)

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A New Regional Initiative Mudara, the
Institute of Directors

• Complements Hawkamahs work with corporations and
  institutions
• Mission is to network and develop professional,
  effective, knowledgeable and competent directors
  for the MENA region
• Build independent and qualified director capacity
• Representing interests of Boards and directors
• Membership from private and public sector
  organisations, and aspiring directors and senior
  academics,
• Services offered include
• Training and certification programs
• Networking activities, forums, seminars and
  conferences
• Information advisory and ancillary services
  (Board Appointments)

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Hawkamahs Corporate Governance Assessment
Methodology (1 of 2)

• Initial Contact
• Sign Mutual Non Disclosure Agreement
• Company Self Assessment
• Board Buy-in Needed
• Initial understanding of the company
• Corporate Governance Review
• Meetings with key governance stakeholders
• Benchmarking Exercise
• Board Engagement to Understand Their CG Vision

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Hawkamahs Corporate Governance Assessment
Methodology (2 of 2)

• Corporate Governance Improvement Program
• Design a CG improvement program consistent with
  Board vision
• Ensure Board and Executives Buy-in
• Documentation and Implementation
• Develop/fine tune charters
• Develop Board programs
• Re-Assessment
• Assess success and challenges with program

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