D. Petkoski, World Bank InstituteWorld Bank Group

Corporate Governance and Strategy Distance Learning Course Video Conference

November 15, 2001

Corporate Social Responsibility, and Sustainable Competitiveness--

An Integrated Approach

“Bolstering the ties between companies and the communities in which they operate is crucial if economic

and social development are really to succeed.”

James D. Wolfensohn

Davos, Switzerland

January 31, 2000

Corporate Governance +

Corporate Social Responsibilities +

Business Ethics = Competitiveness (through people)

The Main EquationCG+CSR+BEC

Competitiveness

Corporate Governance

Corporate Social Responsibilities

Business Ethics

Leadership and

Values

Why An Integrated Learning Program?

The Tyranny of Either/Or

Maximizing

Shareholder Value

Company Choice

Contributing to Social and Environmental Improvement

Financial Capital

Debt• Commercial bank loans and bond purchases -

private and sovereign debt

Portfolio Investment• Publicly traded companies

(very few in developing countries)• More liquid and thus, more volatile

Foreign Direct Investment• Bigger impact due to increased access to

markets, technology and management know-how

What Does This Mean to You?

Previously investors focused on conventional investment risks:

Financial Return on Investments Political Stability/Efficacy Regulatory Policy Financial Structure

Currently investors are paying greater attention to:

Corporate Governance and Social Responsibility

Why We Need Corporate Governance?

Because weak corporate governance limits investments in corporations, thus

limiting growth and development

… And the effectiveness of corporate governance cannot be taken for granted.

Why We Need Corporate Governance?“Grabbing Hands” of Insiders

An oil company skimmed over 30% of revenue, while stiffing its workers on wages, defaulting on tax payments…destroying the value of minority shares...

An Example of a Russian firm…

Another Example of Russian firms…

Why We Need Corporate Governance?“Grabbing Hands” of Insiders

Market Estimated Discounted

Value Actual Value Ratio

Firm A $90mil $50bil 556 Times Less

Firm B $20bil $600bil 30 Times Less

Why We Need Corporate Governance?“Grabbing Hands” of Insiders

The strength of private “grabbing hands” is measured by the difference in the share prices of voting and non-voting shares within a country

For example, the difference is 5% in the US, 13% in the UK, 45% in Israel, 32%-45% in Korea, 82% in Italy and higher in the Czech and Russia.

And such concerns are echoing across other developing countries, making it more difficult to raise capital to fund future investment projects...

Corporate GovernanceInvestors’ Perspectives*

Latin America - 70% of respondents had invested in LA• 90 respondents with an estimated US$1,650b+ assets under

management

Europe/US - 95% of respondents had invested in EU/US• 42 respondents with an estimated US$550b+ under

management

Asia - 82% of respondents had invested in Asia• 84 respondents with an estimate $1,050b+ assets under

management

*McKinsey Investor Opinion Survey 2000

Corporate GovernanceInvestors’ Perspectives*

75% - Board practices are at least as important as financial performance

80% - Would pay more for shares of a well-governed company then for a poorly governed company with comparable financial performance

Premium differs by country and whether the

investor is local or foreign.

*McKinsey Investor Opinion Survey 2000

Corporate GovernanceInvestors Are Willing to Pay More For a Company With Good Board Governance Practices

0

20

40

60

80

100

120

Latin America Europe/US Asia

NoYes

83 81 89

Would be willing to pay a premium

7178

78

79

79

79

82

82

82

82

82

82

84

84

88

88

89

89

89

90

91

82

Italy

Venezuela

Belguium

Switzerland

Spain

Japan

Argentina

US

Indonesia

Brazil

Mexico

Average premium

2227.2

27.6

18.5

19.6

20.2

18

18.2

19.2

19.8

20.2

20.8

21.2

17.9

18.3

24.9

27.1

20.2

22.9

25.7

21.5

24.2

Italy

Venezuela

Belguium

Switzerland

Spain

Japan

Argentina

US

Indonesia

Brazil

Mexico

Average premium

2227.2

27.6

18.5

19.6

20.2

18

18.2

19.2

19.8

20.2

20.8

21.2

17.9

18.3

24.9

27.1

20.2

22.9

25.7

21.5

24.2

Italy

Venezuela

Belguium

Switzerland

Spain

Japan

Argentina

US

Indonesia

Brazil

Mexico

Corporate GovernanceInvestors Agree On the Important Board Tasks

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Evaluate performance of the board

Evaluate Mgmt. Development processes

Establish independent corporate leadership

Determine executive compensation plan

Communicate with other stakehlders

Communicate with shareholders

Manage CEO succession

Maintain legal and ethical practices

Evaluate Sr. Mgmt. Performance

Monitor and evaluate corporate performance

Monitor and evaluate long-term strategy

Not Important Very Important

AsiaEurope/USLatin America

Investors’ Interests Beyond the Balance Sheet

Ethical and responsible business behavior Corporate codes of conduct New ideas and information technology Western business practices Environmental, energy efficiency, health and safety

standards Workplace issues: compensation, benefits and

training Volunteerism, charitable giving, and community

activism Rule of law

Socially Responsible InvestmentGoing Beyond Corporate Governance

Funds that pass multiple, broad-based social or ethical screens, e.g., community involvement, environment, employee relations, product-related issues, and workplace practices

Seeks to provide shareholders with long-term total return

Is rapidly expanding with assets over $2.1 trillion

in the United States

Socially Responsible InvestmentDomini Social Fund Performance

Corporate Social ResponsibilityCitizens’ Expectations of Companies*

Make Profit, Pay Operate Improve Society

Taxes, Create Jobs Between Set Higher Ethical

Obey Laws Two Positions Standards

In % In % In %

Australia 8 43 45

Canada 11 45 43

United States 11 53 35

Great Britain17 42 39

Mexico 25 26 35

Russia 28 23 23

Japan 32 18 33

Germany 33 31 34

South Africa 35 23 34

China 44 22 31

* The Millennium Poll on Corporate Social Responsibility, 2000

Corporate Social ResponsibilityCan Business Do Well By Doing Good?Dow Jones Sustainability Group Indexes (DJSGI)

Global Investment Index of Sustainable Companies

Outperformed the broader Dow Jones Global Indexes (DJGI) on the 5, 3, and 1 year periods

This has focused attention on Corporate Management in general

Corporate Social ResponsibilityCan Business Do Well By Doing Good?The Millenium Poll on Corporate Social Responsibility, PriceWaterhouseCooper, 2000

Company ReputationCompany Reputation

60% of consumers form their impression of a company based on labor practices, business ethics, 60% of consumers form their impression of a company based on labor practices, business ethics, social responsibility, environmental impactsocial responsibility, environmental impact

Consumer DemandConsumer Demand

66% of consumers want companies to focus on societal goals in addition to financial performance66% of consumers want companies to focus on societal goals in addition to financial performance

Legal and Civil PenaltiesLegal and Civil Penalties

75% of consumers hold companies responsible for avoiding bribery and corruption, avoiding child 75% of consumers hold companies responsible for avoiding bribery and corruption, avoiding child labor, preventing discrimination, protecting worker health, not harming the environmentlabor, preventing discrimination, protecting worker health, not harming the environment

Direct Financial EffectsDirect Financial Effects

21% of consumers in the past year report rewarding or punishing companies based on social 21% of consumers in the past year report rewarding or punishing companies based on social performance.performance.

Corporate Social ResponsibilityCan Business Do Well By Doing Good?*

In organizations with formal codes of business ethics, ethics training, and a formal reporting mechanism, employees:

• Observe Less misconduct

• Experience less pressure to compromise standards

• Are more likely to report observed misconduct

• Are more satisfied with their company

• Are more satisfied with their job

• Rate their company higher compared with competitors

* National Business Ethics Survey, Ethics Resource Center, 2000

Why Business Ethics?Why Business Ethics?What Do All These Names Have in Common?What Do All These Names Have in Common?

NBC, Sears, General Electric, Westinghouse, Salomon Brothers, Dow Corning, Pfizer, American Express, Hertz, NYNEX, Northrop, Teledyne, Lockheed, Arthur Andersen, Ernst & Young, Price Waterhouse, Alleco, Drexel Burnham Lambert, A. H Robbins, Gitano Group, Cendant, Archer Daniels Midland, Texaco, Mitsubishi, Nike, Prudential, Shell, Union Carbide, Hudson Foods, BCCI, Barings, Maxwell Communications, Sumitomo, Dow Chemical, United Way of America

Why Business Ethics?Financial and Reputational Risks to the Corporation

Assets not used for intended purposes

Non-compliance with laws and regulations

Corrupt behavior, poor business practices

Shareholder activism – boards, senior management areheld accountable

Employee responses: impact on quality and productivity “Exit, Voice and Loyalty”

International TrendsEthical Issues of Corporate Governance

Making management accountable to shareholders

Creating and maintaining adequate control systems

Ensuring Board oversight of corporate management

Ordinary decency–fairness, honesty–are Ordinary decency–fairness, honesty–are

central ethical principles of corporate governancecentral ethical principles of corporate governance

International TrendsEnsuring Management AccountabilityOECD, ICC, Russian Chamber of Commerce, Hong Kong EDC, Gulf OECD, ICC, Russian Chamber of Commerce, Hong Kong EDC, Gulf Centre EE, U. S. Federal Sentencing Guidelines, OAS, TI, Ethics South Africa Centre EE, U. S. Federal Sentencing Guidelines, OAS, TI, Ethics South Africa

Written code of ethics, business practice standards, prioritized values clearly communicated to provide broad and specific guidance

Senior executive/management, oversight and reporting, visible commitment by organizational leaders

Formal mechanisms, e.g., helpline/hotline, to report suspected instances of improper conduct Staff encouraged to make reports Disciplinary, corrective actions are taken Fair and consistent enforcement

Regular communication/training on the standards, business practices, values of the organization

Internal and external auditing and monitoring, ethical work culture assessments/surveys, regular review of policies, procedures, business practices