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Progress ReportJuly–December 2011

Supporting Corporate Governance Networks in Latin AmericaThe Companies Circle annual meeting, followed by the Corporate Governance Roundtable, set policy priorities and promoted good practices in the region.

Training of Trainers (ToT) Showcases Forum’s Flexibility in Local DeliveryBangladesh’s ToT focused on family-owned companies, Indonesia’s targeted bank board directors, and Nigeria’s piloted a “mentored” approach to developing trainers.

Development Finance Institutions (DFIs) in Southern Africa Improve Governance

Keeping ScoresAzerbaijan develops the corporate governance scorecard. IFC reviews top Vietnamese firms.

The First Training of Corporate Governance Mediators in Egypt

Good Governance of Family-Owned Businesses is Critical to Emerging MarketsInterviews with prominent economist Joseph Fan and with Daiki Suemitsu of Japan’s Ministry of Finance.

“I find it strange that owners...leave their belongings in the hands of all-male boards...”Kristin Holter and Paulina Beato, Members of the Private Sector Advisory Group, share their thoughts on gender diversity. Focus publication presents male viewpoint on women on boards.

Pension Funds and Governance Challenges in Emerging Markets Analysis by Philip A. Armstrong, Head, Global Corporate Governance Forum.

About the FoRum

ouR DoNoR PARtNeRs

JAPAN

the Global Corporate Governance Forum is the leading knowledge and capacity-building platform dedicated to corporate governance reform in emerging markets and developing countries. the Forum offers a unique collection of expertise, experiences, and solutions to key corporate governance issues from developed and developing countries.

the Forum’s mandate is to promote the private sector as an engine of growth, reduce the vulnerability of developing and emerging markets to financial crisis, and provide incentives for corporations to invest and perform efficiently in a transparent, sustainable, and socially responsible manner. In doing so, the Forum partners with international, regional, and local institutions, drawing on its network of global private sector leaders.

the Forum is a multi-donor trust fund facility located within IFC, co-founded in 1999 by the World bank and the organisation for economic Co-operation and Development (oeCD).

Global Corporate Governance Forumbetter Companies, better societies

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Although the Global Corporate Governance Forum develops global tools and resources, it tailors implementation to each country’s or region’s particular needs and conditions. The Forum works with local partners to translate and otherwise adapt training materials, and it relies on an extensive network of local offices of IFC Advisory Services to deliver advisory assistance and develop its institution and capacity-building programs. It facilitates local networks and centers of expertise to ensure sustainable development and adoption of locally relevant good corporate governance practices. Below are just a few examples, presented in more detail further in this newsletter.

other organizations to have sustainable impact. In the Southern African Development Community, the Forum’s work helped local partners — development finance institutions from 11 countries —develop capacity for training their own board directors and managers. It also equipped them with the knowledge and tools necessary to promote policy reforms in their own countries.

Worldwide, the Forum’s signature board leadership “training the trainers” (ToT) program emphasizes business sectors most relevant to the local economies. In South Asia, for example, recent ToT emphasized family-owned or family-controlled businesses. ToT in Indonesia and neighboring countries focused on the banking sector and nonbanking financial institutions. Flexibility with local delivery also allows the Forum to experiment with new approaches. For instance, a new “mentored” ToT is being piloted in Nigeria, with very encouraging results.

Global Products, Local solutions

In Latin America, the Forum works closely with the Organisation for Economic Co-operation and Development and the IFC Advisory Services to develop and strengthen corporate governance networks. The Latin American Corporate Governance Roundtable brings together policymakers, regulators, stock exchanges, corporate governance institutes, and private sector stakeholders to promote corporate governance reforms in the region. To provide private sector input into the work of the Roundtable and to demonstrate to other companies in the region

how good governance benefits company performance, the Companies Circle brings together a group of leading Latin American companies that have adopted good corporate governance practices.

In South East Asia as well as Europe and Central Asia, task forces — typically made up of local business leaders, regulators, stock exchanges, stakeholders, investors, and others — are developing scorecards after countries have adopted corporate governance codes. The Forum also supports country-level projects through regional events where corporate governance champions from the private and public sectors can exchange experiences and good practices. These initiatives draw from a global knowledge pool, with members of the Forum’s Private Sector Advisory Group providing counsel.

The Forum’s approach emphasizes building the capacity of institutes of directors and

TUNISIA: TRAINING INITIATIVE TO BOLSTER ECONOMIC DEVELOPMENT

the Forum is working with IFC and L’Institut Arabe des Chefs d’entreprises, a tunisian business training network, to promote sound corporate governance practices in tunisia that will help companies improve performance and attract investment. IFC will partner with the institute over the next three years to build its capacity and expertise, and to provide training sessions for tunisian banks and companies on implementing good corporate governance practices. the program will also help government regulators develop and implement stronger corporate governance codes.

Forum’s toolkits and publications have been translated in many languages to facilitate local application.

WINTER 2012 A Progress Report2

snapshot of Forum’s Capacity building ActivitiesJuly-December 2011

Map Legend:tot – Board Leadership Training of Trainers. the event builds capacity of trainers who, in turn, train board directors in emerging markets and developing countries.

Azerbaijanhigh-level consultations on corporate governance scorecards (December)

IndonesiaLocalization of Board Leadership Training Resources toolkit and Governing Banks supplement (ongoing)

oeCD Asian Roundtable on Corporate Governance (october)

board Leadership tot (June)

LebanonCorporate governance dispute resolution workshop for IFC corporate governance staff (November) from different regions/countries

PeruLatin American Companies Circle annual meeting (November)

Latin American Corporate Governance Roundtable (November)

Institute of Directors consultancy for Procapitales (october)

NigeriaLocalization of Board Leadership Training Resources toolkit and Governing Banks supplement (ongoing)

“mentored” Governing Banks tot (september)

BangladeshFamily business board leadership tot (october)

VietnamLaunch of the corporate governance scorecard report (December)

Corporate governance enforcement workshops (september)

Corporate governance scorecard update and training (July)

SenegalCode Awareness Workshop (December)

Many of these activities have been accomplished in collaboration with IFC Corporate Governance Advisory Services and other partners.

Partnerships are central to leveraging the Forum’s resources and know-how, with the donors’ support making its work possible.

WINTER 2012 A Progress Report 3

Latin American Corporate Governance Roundtable: Key takeaways

The Latin American Roundtable on Corporate Governance met in Lima, Peru, in November 2011, bringing together policymakers, regulators, stock exchanges, corporate governance institutes, and private sector stakeholders from 16 countries.

Representatives from Institutes of Corporate Governance of Latin America, from left to right: silvia uribe (ecuador), Patricio Pena (ecuador), marta Vaca (mexico), and Francisco Prada (Colombia).

Key highlights included the following:

1. A Peru task force —formed to consider the Roundtable’s white paper on “Strengthening Latin American Corporate Governance: The Role of Institutional Investors” —issued an action plan referencing the Roundtable’s recommendations. The plan contains concrete actions to be taken by institutional investors, the stock exchange, and regulators to strengthen Peruvian corporate governance. The white paper encourages the emergence of active and informed owners as an important lever for influencing better governance in the region.

Since the global financial crisis, institutional investors have been under an increasingly intense spotlight concerning their presence — or absence — as active and informed shareholders. The corporate governance failures of boards and of shareholder oversight, which contributed to the crisis, have triggered a renewed focus not only on the role that institutional investors may play in supporting better governance practices, but also on the policy and regulatory framework that may facilitate or encourage such a role.

2. Roundtable participants agreed to form a task force to further analyze and develop country-specific recommendations to prevent abuse of related-party transactions. Treatment of related-party transactions within company groups will be a particular area of focus.

3. A new Roundtable survey in the region — on board nomination, election, and conflicts of interest — revealed clear weaknesses concerning processes to influence board composition. These weaknesses may impede the development of diverse and effective boards capable of objective, independent judgment.

4. A session with stock exchanges revealed a strong focus on reaching out to nonlisted companies to promote corporate governance improvements and wider access to Latin American capital markets through education initiatives, special listing segments, and partnerships with corporate governance institutes and academic programs. In periods of financial distress, when access to bank credit may be limited, capital market financing may offer a viable alternative for small and medium enterprises.

5. The Roundtable also discussed corporate governance of state-owned enterprises, an issue that will be addressed through a new Latin American Network on Corporate Governance of State-Owned Enterprises. The Network met for the first time in Bogota, Colombia, in September 2011 and will continue to meet annually.

Co-hosted by Peru’s Superintendencia del Mercado de Valores, the Bolsa de Valores de Lima, and Procapitales, the Roundtable included 140 participants from Latin American and OECD countries. It was organized jointly by the Organization for Economic Co-operation and Development, IFC, and the Global Corporate Governance Forum, with the support of the government of Spain.


Latin American Corporate Governance Roundtable: Key takeaways

Companies Circle: “Practical and hands-on” Guidance from Private sector Leaders

What makes board directors and top executives from 19 leading Latin American companies carve out two or three days from their busy schedules — every year?

The Latin American Companies Circle held its sixth annual meeting in November in Lima, Peru. Participants reviewed two draft reports (on annual general meeting practices and on board evaluations), discussed case studies of good-practice corporate governance reforms by its members, and set the 2012 agenda.

The Companies Circle is an initiative of the Latin American Roundtable and is supported by IFC, the OECD, and the Forum. Established in 2005, it quickly earned a reputation as one of the region’s most vibrant and effective advocates for good corporate governance. The Companies Circle provides private sector input into the work of the Roundtable and, increasingly more important, a forum where directors and top executives can frankly discuss corporate governance issues of common concern across the region and share practical solutions.

“What makes the Companies Circle unique is the sharing of experiences by its members with one another but also with companies throughout Latin America,” says Sandra Guerra, the Circle’s coordinator. “Companies that are interested in how good corporate governance practices can be implemented can see how similar

companies did so, and learn more about benefits that result from these reforms. This practical and hands-on guidance is invaluable.”

She also notes that, even though most members are public companies, the steps they have taken in board composition, shareholder and stakeholder relations, internal controls, and disclosure approaches provide important lessons

for closely held private corporations, including family firms.

The draft report on annual meeting practices, discussed at the meeting, examines three topics: presentation of business results, election of the board of directors, and board and management compensation approval. One practice the report emphasizes is the release in advance of all the information investors need to help them prepare for the annual meeting and, as a result, be better prepared to vote.

“We think it’s important for companies to relate their results, their strategy, and operating environment, telling investors how economic, social, and other factors have an impact on their businesses,” says André Covre, chief financial officer and investor relations officer for Ultrapar (Brazil). “In particular, companies must explain their risk-management systems —we call this the anti-Enron proposal. Investors must understand the reliability of the numbers that a company reports.”

Another report, on board evaluation, was also approved at the annual meeting. Drawing from the experiences and practices of the Latin American Companies Circle companies, the report set out the most effective practices and processes. Of the 19 member companies, 15 conduct board evaluations.

AhEAD

Meetings planned for 2012 include:

• Companies Circle

• SOE (State-Owned Enterprise) Network (OECD)

• Related-Party Transactions Task Force (OECD)

• Network of Latin American Corporate Governance Institutes

RESOURCES

The Latin American Corporate Governance Roundtable: Building on a Decade of Progress. IFC, World bank, oeCD, and the Forum.

Practical Guide to Corporate Governance: experiences from the Latin American Companies. IFC, oeCD and the Forum.

http://www.gcgf.org/ifcext/cgf.nsf/Content/otherpublications.

André Covre of ultrapar discusses good practices for Annual General meetings.

Both reports will be finalized and made available for the general public in 2012.

Following the discussion of the reports, four member companies — Embraer, Los Grobo, Carvajal, and Ultrapar —presented cases from their own businesses. The companies shared experiences in the adoption and implementation of new best practices and mechanisms in corporate governance. They also proposed solutions for common problems that affect companies that are pioneering new practices in corporate governance.

The event was hosted by Peruvian Companies Circle members Buenaventura, Ferreyros and Graña y Montero.

Early in February 2012, the Forum will make available several insightful video interviews from the annual meeting. Please visit www.gcgf.org.


team discussion during the tot in bangladesh.

board Leadership training of trainers

Bangladesh: Focus on Family-owned Companies

The Board Leadership Program, built around the Forum’s Corporate Governance Board Leadership Training Resources toolkit, is a comprehensive five-part program that examines key areas of expertise and responsibilities of board directors. It covers every major topic — from corporate governance basics, to financial statement analysis, to ethical issues — involved in directors’ roles and responsibilities. The curriculum, using an adult-learning method that draws heavily on participants’ experiences and observations, examines real-life examples and develops practical guidance.

The three-day training in October 2011 involved 22 participants selected from senior management, board directors, academics, independent consultants, and experts from legal, accounting, and other professions (for example, Institute of Chartered Secretaries).

“We each learn in different ways,” said Lopa Rahman, the Forum’s consultant. “Some of us are more active and highly engaged — learning by doing. Others are more passive — preferring to hear what everyone has

to say and then reflecting on all the points made. The Forum’s training recognizes such differences by offering several ways to learn.”

Below are reports from three recent ToT workshops, including a pilot program in Nigeria that allows new trainers to further develop their skills under guidance of experienced mentors.

Participants learned about succession planning and about family company structures — including the family assembly and family council — and their relationship to company governance and family members’ roles.

“At my company, I will be applying many of the concepts that I have learned, as my work involves strategy, internal governance, and risk management,” says M. A. Ibrahim, the group head of strategy at Rahimafrooz Bangladesh Ltd. During training, he shared with participants the planning and oversight systems his company uses.

Shabir Harun organized a case presentation describing serious corporate governance and legal issues he encountered after assuming a board position at the Harun Eye Foundation following the death of his father, who founded the renowned hospital. “If I had attended this course five years

This was the third in a series of workshops prepared by the Forum jointly with IFC Advisory Services, the Bangladesh Enterprise Institute, and Bangladesh Institute of Capital Markets. The first two workshops had targeted the banking sector. The objective for the third session was to develop a pool of trainers who will provide corporate governance training and advisory services to board members and senior executives of family businesses.

In addition to the usual topics (for example, directors’ responsibilities, board structures, and the governance of strategy and risks, plus the legal and regulatory controls, including financial disclosure requirements), the hands-on workshop emphasized the distinctive features and challenges of family-owned companies. Such companies account for a large percentage of the economic activity in Bangladesh and elsewhere worldwide.


ago,” he says, “I would not have found myself in my current predicament.”

Group exercises are part of the adult-learning methodology. In one exercise, participants adopted roles in the Satyam case, in which the chairman, B. Ramalinga Raju, and managing director, B. Rama Raju, admitted to having committed revenue fraud amounting to $1.3 billion. Called the “Enron” of India by newspaper headline writers, the case allowed participants to explore the corporate governance issues involved and discuss actions that could have prevented the fraud from occurring.

The training concluded with participants, working in teams of two, using 20-minute simulations to demonstrate what they had learned from the training. Each presentation was videotaped and then analyzed immediately by the Forum’s trainers.

The Forum worked in close partnership with the Indonesian Institute of Corporate Directorship (IICD) to organize the training program in Jakarta, which targeted banks and nonbanking financial institutions. Of the 21 participants, 18 were from Indonesia, 2 from Thailand, and 1 from Malaysia.

A major priority, one that surfaced in the ToT’s opening “expectations” session and during subsequent sessions, was the challenge of aligning good corporate governance with pressure for short-term profit. Other challenges included related-party transactions and the region’s nontransparent cultural practices.

The training covered family-centered cultures, checklist approaches to board structures, distinguishing responsibilities of two-tier boards, interpretations of “corruption,” and banking risks of new technologies (“hacking”). The discussions also addressed issues related to personal board leadership, including nonperforming chair, poor oversight, lack of candor,

John stout speaking at the board Forum organized by IICD.

John Stout practices in business organization, finance, and governance at Fredrikson & byron, a minneapolis law firm. In August 2011, he was appointed to a three-year term as chairman of the corporate governance committee of the American bar Association business Law section. he advises executives, boards of directors, board committees, and individual directors and officers of for-profit and nonprofit organizations. he spoke at several events organized by IICD, making the following points, among others:

Board Considerations

• Boards must strive to understand risks, pay attention to warnings, and confront problems promptly and forthrightly. they must, more than ever, pay attention to political risk and its impact on corporate strategy.

• Board composition must receive more attention and include a variety of voices and skills.

• Board oversight of the corporate culture is critical — including carefully assessing actual and perceived conflicts of interest.

• There must be periodic independent assessments of the company’s culture,

domination of personal interests, and an unwillingness to admit mistakes.

Training simulations addressed a wide range of topics — some covered in the Training Resources (such as remuneration, board conflict, committees, and so on) and others drawn from the group’s expertise (for example, Indonesian law and information technology).

One participant summarized the training’s purpose this way: “In my mind, it’s to compete for global capital to come to this region. To be global players, we need to be ready with good governance and capital management.”

The program in Indonesia is benefitting from partnership with Perbanas, the Indonesian Bankers’ Association, which is positioning the project strategically to work with the country’s banking sector, as well as from the extensive network IICD enjoys through its past chairmanship of the Institute for Directors of East Asia (IDEA.net).

Indonesia: building skills for bank board Directors

Directors, Chief Executive Officer

• Select capable directors, including independent directors, known to be ethical and screened for past legal and ethical issues, knowledgeable about governance and oversight, who have the time, energy, knowledge, judgment, leadership, and courage to effectively discharge their responsibilities.

• The chief executive officer should be experienced in and committed to building a corporate culture that is ethical and compliant — and should be held accountable for the development of that culture.

ethics, values, compliance, and the effectiveness of training programs that are designed to instill appropriate corporate values, familiarize employees with the company’s ethics and compliance expectations, and assure that those expectations are met.

Management Relations

• Integrity is everything: insist that management have in place processes and procedures for preventing and detecting violations of laws, regulations, company governing documents, and company codes of ethical conduct.

ADDRESSING ShAREhOLDER CONCERNS


Nigeria: Innovative Approach to Developing trainers for the banking sector

In March 2011, the Forum signed a memorandum of understanding with the Financial Institutions Training Centre (FITC), a Nigerian organization that provides training, consulting, and research services to the financial services sector. FITC, IFC Nigeria, and the Forum are developing a training program and a corporate governance curriculum for

bank directors and senior managers in Nigeria. The goal is to build a team of trainers who will roll out the Forum’s Governing Banks supplement and the accompanying localized curriculum in Nigeria and Sub-Saharan Africa.

Forum’s partner in Nigeria, FItC, Celebrated its 30th Anniversary in 2011.

The term “mentor” is taken from Homer’s Odyssey, in which Ulysses asks his friend Mentor to counsel and guide his son during his absence in the Trojan War. In ancient Greek, the word came to mean “steadfast” and “enduring.”

modules from the localized curriculum. Two Forum master trainers — an adult-learning specialist, and a corporate governance expert — provided guidance and in-depth feedback on the trainers’ performance, acting as “mentors” or “coaches.”

Alison Dillon Kibirige, a Forum master trainer working on the Nigerian initiative, describes a mentored ToT as “an important

addition to the learning process, enabling the trainer to try out the methodology and techniques that she or he has learned in a semi-safe environment where the master trainers provide support and encouragement.” She adds, “It is like being thrown in the deep end with a life raft.”

Brenda Bowman, an adult learning expert, says, “Conducting participatory training is exciting but challenging for the new trainers. It takes skill to engage adult learners and provide them the space to share their knowledge while all the time keeping the session on track. The benefits of the mentored approach can include speedier adaptation and the reduced likelihood of frustration and failure.”

Following the “mentored” session in September 2011, the trainers then used modules from the localized curriculum, plus their newly honed trainers’ skills, to deliver real-life training to fee-paying clients for FITC’s Annual Continuous Education Programme for Directors of Financial Institutions.

RISK ASSESSMENT EXERCISE

tot participants in Nigeria divided into six groups. each group identified three key risks and their impact on an institution of their choosing. the six institutions chosen were a bank, a regulator, FItC, an insurance company, a Gsm company, and a furniture manufacturing company. “this wide variety of institutions generated many issues, insights, and heated debate,” says one participant evaluation. “the exercise demonstrated the learning process that best works for adults.”

Nigeria is the first country to pilot the “mentored” approach to the Forum’s ToT program. After participating in the Forum’s standard four-day ToT program in May 2011, the trainers facilitated a workshop in September 2011 for FITC staff, board members, and other business

leaders. Working in pairs, the trainers conducted four-hour sessions using


“MENTORED TOT EMPOWERS TRAINERS”

Victor odozi, former deputy governor of the Central bank of Nigeria, participated in tot workshops in Lagos in may and september 2011. he offered these observations:

“my experience in tot has confirmed the relevance and efficacy of the experiential learning cycle. before I was exposed to this methodology, I was accustomed to ‘lecturing and informing’ participants at seminars and workshops without adequately engaging them or eliciting their own ideas. Furthermore, I had wholly embraced the craze of seamless PowerPoint presentations, such that they dominated my sessions and supplanted the facilitator instead of being merely a technological aid!

the mentored tot, by contrast, not only ‘empowers’ trainers but it also facilitates the alignment of training objectives with participants’ expectations and preferences. I am grateful for this opportunity to hone my adult-learning skills. Whatever success that I achieved, it was due not only to my hard work and adequate preparation but also to the resource materials and mentoring guidance I had received from the IFC experts, who demonstrated uncommon willingness to accommodate my suggestions.”

“The Forum’s use of the experiential learning cycle has an impact on building leadership skills for change and influencing directors’ behavior in board and board committee processes,” says Lucy Newman, chief executive officer of FITC. “The overall objective is to be effective advocates for implementing corporate governance. The mentored training provides optimal feedback — that’s essential for continued improvement in preparing training material and enhancing delivery.”

The final step of the mentored program will be a three-day advanced ToT workshop, where the trainers will share with one another the lessons they have learned from using adult-learning methodologies. They will also receive additional feedback from the Forum’s master trainers.

Southern Africa: Development Finance Institutions Improve Governance, build CapacitySince 2006, the Forum has focused its efforts in Southern Africa on developing the corporate governance practices of development finance institutions and building their capacity through advisory services and training. Working in close partnership with the Southern African Development Community - Development Finance Resource Center (SADC-DFRC), the Forum has reached 29 institutions from 11 countries. DFIs report that they are transforming their organizations and deepening their impact as a result of this work.

DFIs are significant contributors to investment in the Southern African Development Community, which was formed in 1990 to promote sustainable, equitable economic growth. Business risks are high in the region, given the nascent development of its businesses, economies, and capital markets. Stock markets and private sector commercial banks are unable to provide adequate capital, so the DFIs are filling the financing gaps.

“DFIs play a vital role as financial intermediaries,” said Ghita Alderman, the projects officer who oversees the Forum’s work in Africa. “Strengthening their governance is essential to their effectiveness.”

The project’s first phase, building capacity for corporate governance training, started in 2007. The Forum developed a specialized corporate governance training curriculum (training toolkit) for DFIs, trained the regional trainers in the toolkit’s delivery, and piloted training with partner organizations in several countries. SADC-DFRC and member DFIs then adopted the toolkit for training board members and management.

The program created a pool of credible trainers and widely improved the awareness and understanding of corporate governance, as noted by Erenstine Kalomo, legal advisor and company secretary with the Agricultural Bank in Namibia. “We have facilitated the training of our managers based on what we have learned from these programs,” she reports. “We are introducing a corporate governance policy for the whole organization, and we plan to train all our staff. We also put in place a board charter and are introducing a board evaluation system with external facilitation. The impact is visible in Agribank.”

Abraham Mwenda, managing director of the Development Bank of Zambia, also praised the training. “The training programs and deliberations in them helped us in developing a list of changes required at the board level,” he says. “We now know what needs to be done and have undertaken training of all management staff.”

Fifteen DFIs implemented corporate governance best practices, exceeding the project’s goal of 10. Specific reforms

included introduction of board committees; board restructuring; implementation of risk management; improvements in transparency, reporting, credit policies, and internal audit procedures; and more extensive training programs. One DFI carried out a major restructuring of all its investee boards — a total of 40!

The second phase introduced an innovative component to corporate governance reform, based on the premise that introducing board and management-level reform and change in practice and attitudes needs to be sustained with broader policy reform. The Forum developed a regional strategy that identified key elements that affect the corporate governance policy environment. And it developed a manual for member states, which identifies priority policy efforts.

The Forum exited the project in mid-2011 with the expectation that the member organizations will continue to champion the reform agenda in their countries. “The approach to promoting the policy environment is innovative,” says David Nuyoma, chief executive officer of the Development Bank of Namibia. According to Stuart Kufeni, chief executive officer of SADC-DFRC in Botswana, “DFRC is proud to have been associated with this innovative project, with the Forum’s assistance, that recognizes the situational factors while promoting the policy environment for making corporate governance work in the region.”


Azerbaijan: Advancing Implementation of Corporate Governance standards

Christian strenger (PsAG), Philipp Keller (seCo), Aliya Azimova (IFC), and Anar hajizada (ministry of economic Development).

IFC is taking steps to enhance corporate governance standards in Azerbaijan’s business sector. One of these steps is the preparation of the corporate governance scorecard — a tool used to assess the quality of a company’s governance and, through that appraisal, define areas for improvement.

In Azerbaijan, the scorecard will assist boards, investors, financial analysts, regulators, and other stakeholders with systematically assessing the level of corporate governance in companies.

Developed by a national Corporate Governance Task Force, the scorecard

is based on the Azerbaijani National Corporate Governance Standards (approved by the Ministry of Economic Development in January 2011). This task force includes such institutions as the central bank, the State Committee for Securities, the Ministries of Justice and Finance, the Azerbaijan Investment Company (a sovereign investment fund), and the Baku Stock Exchange. The Corporate Governance Division of the Ministry of the Economic Development is leading the effort.

After the code’s approval, the national task force — led by the ministry and supported by IFC Azerbaijan Corporate Governance Project — began drafting the scorecard using publicly available material and recommendations from the Forum’s corporate governance codes workshop in February 2011. Peer review of the scorecard draft involved task force members and international experts, mainly from the PSAG.

At the December workshop in Baku, participants reviewed the draft scorecard, drawing from private sector expertise to inform the code’s content and structure. They examined the scorecard to determine whether the questions were well crafted and the criteria were appropriately weighted by level of importance. Other workshop discussion topics included an implementation plan for using the scorecard, more active private sector involvement, collecting the data, and monitoring progress. The host of this session was the Ministry of Economic Development.

PSAG Deputy Chairman Christian Strenger led the workshop. He is also a director of DWS Investment GmbH, Frankfurt, a member of the German Government Commission on Corporate Governance, and director of the Center for Corporate Governance, HHL Leipzig

SCORECARD’S ROLE

• Raise awareness and understanding of corporate governance.

• Facilitate the work of analysts and investors through a systematic, easy overview of all relevant issues of good governance.

• Enable companies to assess the reach and quality of their own governance.

• Allow investors to set minimum scores for governance as part of their investment decision making.


Vietnam: IFC Report urges Improvements

RESOURCES:

the Forum supports client countries in drafting, implementing, and monitoring corporate governance codes of best practice and scorecards. the codes can be found in more than 70 countries; nearly half have been developed with the Forum’s assistance.

For information on the program, and to download relevant publications and reports, please visit www.gcgf.org/codes.

The Corporate Governance Scorecard for Vietnam 2011 urges improvements in the rights and treatment of shareholders and stakeholders, the roles and responsibilities of a company’s board (especially its accountability for risk oversight), and policies for disclosure and transparency.

The IFC report reviewed corporate governance practices of the 100 largest companies listed on the Hanoi and Ho Chi Minh City stock exchanges. Although the average corporate governance score rose slightly, from 43.9 percent in 2009 to 44.7 percent in 2010, it falls short of the 80 percent score needed for a company to be considered to have met global best practices.

The companies were assessed against the five areas the OECD recognized as the keys to good corporate governance: shareholders rights, equitable treatment of shareholders, stakeholders’ role in corporate governance, disclosure and transparency, and board responsibilities.

Vietnamese companies are still in the early stages of adopting international corporate governance standards and best practices. The report says corporate governance continues to be practiced largely to meet regulatory requirements rather than as a voluntary effort to improve business practices.

Graduate School of Management. His remarks included the following:

“Good compliance with corporate governance is a key test of whether a country and its economy have achieved progress. This requires practical ways to implement better practices for corporate management and control. One systematic approach for all stakeholders is the governance scorecard. As we have seen in more than 15 countries, the use of scorecards is essential for implementing best practice. Doing this efficiently in Azerbaijan will support the efforts of the government and business community to further strengthen the country’s business climate.”

Bistra Boeva — a PSAG member, member of the Bulgarian National Corporate

DEVELOPING A SCORECARD — KEY STEPS

• Identify a corporate governance code.

• Involve stock exchanges as local partners.

• Create working groups with a wide range of stakeholders.

• Organize an international peer review of the final draft scorecard (PsAG members).

• Train local partners on the scorecard’s application.

• Promote the scorecard through media, conferences.

• Support the scorecard’s application.

• Transfer knowledge to local partners.

• Develop new scorecard concepts with local partners.

Source: Lessons Learned on Corporate Governance Scorecard. Available at www.gcgf.org.

AhEAD

Introductory workshop for Institutes of Directors and partners in Europe and Central Asia, Baku (February 28–29, 2012)

CG Scorecards Global Practice Group meeting (May 2012)

Governance Commission, and professor at the Department of International Economic Relations and Business at the University for National and World Economic Studies in Bulgaria — presented the Balkan experience in developing and implementing scorecards. She will also support future efforts to improve the scorecard.

The IFC Azerbaijan Corporate Governance Project is being implemented in partnership with Switzerland’s State Secretariat for Economic Affairs, SECO.

“Adoption of better corporate governance practices and code will help enhance companies’ ability to attract higher quality of capital at a lower cost,” says Simon Andrews, IFC Regional Manager for Vietnam, Cambodia, Lao People’s Democratic Republic, and Thailand. “We expect that the scorecard will help companies and regulatory agencies identify strengths and weaknesses in corporate governance practices, leading to further reforms in this area at both the company and regulatory levels.”

This is the second scorecard review produced by IFC's Vietnam Corporate Governance Project and the Forum, in partnership with the State Securities Commission of Vietnam and the governments of Finland, Ireland, Japan, the Netherlands, New Zealand, and Switzerland.


Egypt: Corporate Governance Dispute Resolution training for mediators

Following a successful pilot in Colombia, IFC MENA Advisory Services worked with the Cairo-based Regional Centre for International Commercial Arbitration, the Egyptian General Authority for Investment (GAFI) and the London based Center for Effective Dispute Resolution (CEDR) to train experienced mediators in corporate governance dispute resolution. We expect the workshop, held on January 12, to be replicated in Morocco and Pakistan, where IFC is engaged in strengthening both corporate governance and alternative dispute resolution (ADR) practices.

or an arbitration panel often results in expeditious decisions that foster a sense of ownership and build collaboration toward a win-win outcome — in contrast to court battles that tend to result in a winner and a loser and leave divisions within a board for a long time.

“There is an increasing pool of professionals experienced in alternative dispute resolution procedures,” says Chris Razook, IFC’s Middle East and North Africa corporate governance program manager (pictured). “Many, however, lack expertise in corporate governance. Our focus is building that expertise to support sustainable corporate growth.”

on January 6, 2012, IFC through the Forum signed a memorandum of understanding with the CeDR to collaborate on (i) Piloting capacity building workshops based on the Forum’s toolkit, (ii) establishing an international experts’ task force, and (iii) Producing further best practice tailored to specific industries.

AhEAD

The Spanish translation of the Resolving Corporate Governance Disputes toolkit will be published in spring 2012.

Dispute resolution practice group meeting is scheduled for April 2012 in London.

The training draws from the Forum’s toolkit, Resolving Corporate Governance Disputes. The toolkit is the first of its kind to guide boards in using alternative dispute resolution approaches for corporate governance disputes. It provides guidance for companies, regulators, policymakers, mediators, and institutes of directors.

The toolkit is divided into three volumes. The first volume explores the rationale for applying ADR mechanisms to corporate governance disputes. The second focuses on the implementation and use of corporate governance dispute resolution mechanisms and services. The third reviews the skills required for effectively resolving corporate governance disputes and addresses the training needs of directors and of dispute resolution professionals.

ADR benefits include: Reduction of court backlog; Faster, less costly resolution of disputes; Improved investment climate; Reduction of formality with easier, more accessible processes; and more efficient dispute resolution in highly technical areas.

Too often, boards seek judicial means to resolve disputes. The result can be long delays before a court even hears the case, plus enormous litigation costs, which together can immobilize boards in destructive infighting, leaving key strategic decisions to be postponed indefinitely.

Bringing in a neutral third party, a so-called “peacemaker,” a mediator,


Robin Ford is a former regulatory lawyer in Canada and the united Kingdom, former chief counsel, insurance, at the u.K. Financial services Authority, and former executive commissioner at the british Columbia securities Commission. she has extensive experience in governance, including formulating regulatory policy, drafting rules and guidance applicable to listed companies and financial services firms, overseeing

compliance, and helping firms comply. Robin now consults in governance and regulation, in particular working with firms to improve their management of governance and regulation risk and working with firms and regulators to build capacity in governance, strategic planning, risk-based approach, and more disciplined decision making.

Arminta Saladžiene is the head of NAsDAQ omX baltic market, comprising stock exchanges and central securities depositories in estonia, Latvia and Lithuania, all part of the leading global exchange company, the NAsDAQ omX Group, Inc. she is also the President and Chairman of the management board of NAsDAQ omX Vilnius, and a board Director of the Central securities Depository of Lithuania.

Arminta has 15 years of experience in the capital markets, having worked in various capacities at the stock exchange. she also chairs the baltic Institute of Corporate Governance, which was established to promote best governance practices among public, private, and state-owned companies. For this work, she received the baltic sea Award 2009, presented by swedbank and the baltic Development Forum, and in 2011 she was named a Rising star of Corporate Governance by the millstein Center for Corporate Governance and Performance at the Yale school of management.

New PsAG members

IFC, Forum Receive Awards for Leadership in Corporate Governance

Two prominent corporate governance organizations recognized the leadership of IFC and the Forum in improving corporate governance in emerging markets.

The National Association of Corporate Directors (NACD) named Corporate Governance Unit Manager Darrin Hartzler as one of the 100 most influential people in the boardroom and corporate governance community. According to the NACD announcement, the annual list is “an honor bestowed not so much by NACD Directorship, but by the collective wisdom of the boardroom community.”

For Hartzler, the award is a recognition of IFC’s success in raising the bar for corporate governance and making it an integral part of sustainable economic development. “IFC has more than a decade of experience developing and implementing corporate governance projects around the world,” he says. “We are recognized as the leader among development finance institutions in bringing about lasting corporate governance improvements

Darrin hartzler at the IFC Corporate Governance Network meeting in beirut, November 2011.

in the countries and regions where we work. Our efforts are making a real difference in the ways companies are run, which is critical for sustainable private sector development. Ultimately, well-governed companies are good for people and communities.”

Philip Armstrong, the Forum’s head, received the 2012 Marcos E. J. Bertin Quality in Governance Medal, awarded by the International Academy for Quality. “I share this honor with the Forum’s many partners and donors worldwide who are united in their commitment to advancing corporate governance," he said. "We have developed a network of some 5,000 practitioners and institutions that are developing corporate governance codes, enhancing

board leadership skills, training business media, and introducing innovations such as corporate governance dispute resolution practices. It is their inspiration that this award commends."


Good Governance of Family-owned businesses is Critical to emerging market economies

Joseph Fan is a finance professor and co-director of the Institute of Economics and Finance at The Chinese University of Hong Kong. He is one of Asia’s most frequently cited financial economists and the author of numerous scholarly works on finance and corporate governance. This interview is part of the CG Insights Series, conducted by the Emerging Markets Corporate Governance Research Network, supported by the Forum (www.gcgf.org/research).

the most interesting piece on corporate governance I read recently was . . .

An article in The Economist magazine (“Dusk for the patriarchs,” February 3, 2011) about infighting in the family that controls Macao's gambling industry as the founder grows old and battles illness. The story highlights the fact that the family succession issue in Asia is extremely challenging and that it must be addressed. In Asia, where more than 70 percent of businesses are family-owned, many of the dominant firms are in transition now, because the founders are quite elderly. If family disputes lead to decisions that damage the businesses, this could cause broader damage to these economies.

Right now, I am working on . . .

A follow-up to my earlier research about what happens to family-owned companies in Asia following transition to the second generation. The earlier research revealed that in the five years after the company

founder turns over the reins to the next generation, companies in the sample declined in value by an average of nearly 60 percent. Sixty percent! The new research looks at each of the 250 companies in the sample

in depth to understand what went wrong and whether a shift to a better governance model could have mitigated the dissipation of value. Some of the initial findings point to smaller declines in value for companies with better corporate governance structures during the transition period. For example, firms that recruited nonrelatives to the board of directors after the founder stepped down typically fared better.

I think the most relevant corporate governance research topic for emerging markets now is . . .

Identifying corporate governance models that work in emerging markets. Simply importing international governance standards and forcing emerging market companies to adopt these standards will not be useful. The companies will remain opaque. We need to recognize the unique nature of these companies and their national and cultural contexts, and look at how to modify western governance models to fit them.

the latest development in the field of family-business governance research is . . .

A shift toward quantitative methodologies.

Research on corporate governance in family businesses traditionally was a sort of subscience, where storytelling was the main method of analysis. Academics and researchers would use descriptive case studies to look at what went right and what went wrong. It was effective — as far as it went.

More recently, financial economists are teaming up with researchers to try to understand more about what’s going on in family-owned companies — and to find ways to measure this. What are the constraints? How does family structure affect governance? More rigorous econometrics and larger sample sizes will enable more quantitative research — yield a deeper and more nuanced body of information.

These quantitative studies are important, because they can help governments and regulatory bodies identify corporate governance strategies and approaches that can help these businesses retain their value and continue to be successful even as they transition to the second or third generation.

Simply importing international governance standards and forcing emerging market companies to adopt these standards will not be useful.


Our Donors Speak:“Forum’s Approach is highly Valued”

Daiki Suemitsu became deputy director of the Co-ordination Division of the Tax Bureau of Japan’s Ministry of Finance in 2011. Immediately before, he served as First Secretary at the Embassy of Japan in India, a position he held since 2007.

Why does your ministry support the Forum's projects to advance corporate governance in developing countries and emerging markets?

To achieve sustainable growth, developing countries and emerging markets need to develop a securities market and enable corporations to attract investment in an efficient manner. The Japanese government assists in advancing corporate governance, because it is a key factor to sustain such financial flow.

In particular, what Forum activities do you find to be most valuable?

The Forum’s project in India covers several targets, such as executive board members and the media, and I have found this multipronged approach to be very effective. One day, I joined the workshop for journalists and found that the participants were extremely keen on learning the concept of corporate governance, which is relatively a new practice to them. Corporate governance takes root in the country’s soil when its significance is introduced not only to the business sector but also to society. In that context, the Forum’s approach should be highly valued.

As the global financial crisis moves into a new phase, in your view, what is the role of corporate governance in supporting efforts to grow economies worldwide?

Corporate governance is basic infrastructure to support a healthy financial flow and sound economic growth, because it promotes solid investment. The global financial crisis has undermined confidence in the financial system; corporate governance will play a greater role by providing investors with safer opportunities.

What are the challenges for the advancement of corporate governance in emerging markets and developing countries?

In India, most companies are owned and run by family members. Establishment of a more transparent and accountable culture within family-owned companies is extremely important, so investors can be more trusting of these enterprises.


Women on Boards: A Conversation with (Male) Directors

This Focus publication explores the opportunities for and obstacles to increasing the number of women on boards as a means of enhancing companies’ governance. Forty percent of the world’s largest publicly listed companies have not appointed even one woman to their boards, according to a GovernanceMetrics International report in 2011. This low percentage reflects a failure to draw on the deep pool of highly qualified female talent available worldwide.

Two PSAG members share their thoughts on the topic: Kristin Holter (top photo), managing director/partner at Stakeholder (Norway), a communications consultancy specializing in corporate governance and climate/environmental issues; and Paulina Beato, a board director and chairman of the audit committee for Repsol YPF, Spain’s largest oil company, with operations in Latin America, the Middle East, and North Africa.

Research shows that the inclusion of female directors has a direct, positive impact on a company’s profits and risk management. Women directors also broaden a company’s market knowledge while raising its profile.

For the Focus publication, the Forum and IFC invited prominent male chairmen, chief executive officers, and directors of listed and unlisted companies across a range of industries and countries to share their opinions on how women add value

to corporate decision making. Focus compiled their practical ideas on how to use networking, training, and greater transparency of the director nomination process to encourage recruitment of women to boards.

The publication was compiled and edited by Marie-Laurence Guy, Carmen Niethammer, and Ann Moline. Foreword by Nena Stoiljkovic, Vice President for Business Advisory Services - IFC.

this approach has resulted in women on boards in companies covered by the law.

Beato: Both solutions — setting diversity targets and recommending institutional investors to push for more women on boards — would be effective. Voluntary standards and social pressure do promote advances, but changes are slower than what is desirable. Due to the historical discrimination that women have experienced, legal mandatory targets are justified, but these should be temporary.

In your view, what would be the most effective response to the low level of female representation on corporate boards?

Holter: Obviously, the most effective response is to enforce a quota by law. In Norway, state-owned companies and privately owned public limited companies are required to have at least 33 percent to 50 percent of each gender, depending on the board’s size. Since January 1, 2006, every new listed company must satisfy this requirement in order to register. Many —also women — disagree with the use of quotas as an antidiscrimination tool, but

highlight: Women on boards

“ I find it strange that owners have the guts to leave their belongings in the hands of all-male boards . . . .”


What is the business case, from a corporate governance standpoint, for diversifying a board to include more women?

Holter: Personally, I find it strange that owners have the guts to leave their belongings in the hands of all-male boards. No offence to men, but homogenous groups are typically characterized by their members being equipped with the same

type of radar. This implies that risks and opportunities may go undetected by the board. This is more true now than ever —with a rapidly changing world and, hence, a rapidly changing business environment. One important piece of information in this regard: in the developed world, women have surpassed men at many levels of education.

Beato: If intelligence and capacity are equally distributed among men and women, if women and men have similar levels of education, then, discrimination of women for boards means routinely rejecting half of the qualified talent. If a company does not have the best talent that it can afford, the company will not be efficient. Moreover, such board discrimination usually permeates throughout the entire company. And when discrimination is extended to the whole economy, the result is a squandering of talent, which costs society a lot of money and effort.

In board meetings, do women directors bring gender-specific traits?

Beato: I do not think that women directors bring gender-specific traits. However, women on boards do pay special attention to the discrimination issues.

Holter: That is an interesting question for researchers. Do men bring gender-specific traits? However, the professional world has changed: it includes women in many, many different roles. It is high time that this simple fact be reflected in board compositions.

What advice would you give women to better position themselves for becoming a board director? Do they need to “buy some boxing gloves,” as one person put it in the Focus publication?

Beato: Boxing gloves are not the tool. A well-organized professional career in technology, business, and economy is a better option to become qualified for a directorship. My advice to women includes: First, that women should set goals and develop the expertise to be among the best qualified in the field they have chosen; obtaining a board seat seems easier for those with technology, business, or economic backgrounds. Second, women should not be afraid of presenting their abilities and defending their capacities for management positions. Third, women should convince themselves that family care is a shared responsibility with other family members.

other thoughts on the issue?

Beato: Boards should choose the best that they can afford. To this end, the board should be aware of the advantages of gender diversity. Two remarks on the subtle discrimination of women:

• Men often reject women quotas, based on efficiency considerations, but never

“ There is a powerful business case for hiring more women to run companies. They are more likely to understand the tastes and aspirations of the largest group of consumers in the world, namely women. They represent an underfished pool of talent. And there is evidence that companies with more women in top jobs perform better than those run by men only.”

The Economist

“ In addition to the moral imperative, there’s an overwhelming business case here. Women make up 50 percent of the global talent pool, and boards cannot afford to overlook female candidates.”

Lars h. ThunellExecutive Vice President and Chief Executive Officer, IFC

FACTS

• There are 139 Fortune 1000 boards with no female directors and 133 with three or more women directors; 29 consumer companies still have no women directors, even though women make 75 percent of consumer purchase decisions.

• 16.4 percent of the directorships of 335 surveyed south African companies in 2010 were held by women.

• 13 percent of 303 publicly listed companies surveyed in Pakistan in 2010 had more than one woman director.

• 5.4 percent of the 923 directors that sit on the boards of the top 100 companies listed on the bombay stock exchange are women.

• 5.1 percent of board seats in Brazil were held by women in 2011.

Source: The first bullet - “Women on Boards: Review and Outlook,” CTPartners, 2011. The rest – the Focus 9 publication.

complain of explicit or implicit country quotas in other institutions, such as the United Nations or the European Union.

• When a board commission decides to increase diversity and tries to select a woman for the board, it usually sets stronger qualification conditions than would otherwise be required for choosing a man to be a director. This is a subtle discrimination procedure.


PRIVATE SECTOR OPINION

Corporate Social Responsibility: Private Self-Regulation is Not Enough

Although corporate social responsibility (CSR) has become an established part of the global landscape, there is no universal concept of CSR. How can we figure out what CSR actually is? What drives emerging countries to support a concept that they previously feared would pose a protectionist threat to them? Michel Doucin, the French ambassador for bioethics and corporate social responsibility since 2008 and an associate professor at Université Paris-Sud-Jean Monnet, begins his article with a fascinating historical analysis of the CSR concept. He identifies its pioneers, including those in emerging markets, and the different interpretations of CSR. He concludes by arguing for genuine international rules to shape a universal CSR framework. The challenge is to build a balance between collective

private self-regulation and government regulations.

Culture and Corporate Governance Principles in India: Reconcilable Clashes?

Pratip Kar, a former executive director of the Securities and Exchange Board of India since 1992, explores the dynamics of culture and corporate governance in India by calling attention to three areas where the clashes are strongest: related-party transactions, the promoter's or large shareholder's actions, and the board's nominations, deliberations, and effectiveness.

Corporate Governance in Emerging Markets: Why It Matters to Investors —and What They Can Do About It

What should investors do when scholarly research on corporate governance in

emerging markets does not provide conclusive evidence on which aspects of governance matter most across all the emerging markets and how they affect firm performance? Melsa Ararat, a professor at Sabanci University, and George Dallas, director of corporate governance at F&C Investments in London, team up to offer guidelines and recommendations that focus on board independence and business group affiliation.

MEDIA TRAINING UPDATE

In spring 2012, the Forum, together with the International Center for Journalists, will launch a corporate governance handbook for business reporters. It is part of the Forum’s media Program, which has three objectives: raise public awareness of corporate governance through the media, improve journalists’ investigative skills on corporate governance issues, and encourage journalists to promote corporate governance best practices in emerging markets. For more information, please visit www.gcgf.org/media

Publications

For all Forum publications, visit www.gcgf.org/publications.

UPCOMING EVENT:

Conference on Key Corporate Governance Issues in Emerging Markets — Theory and Practical Execution

June 11-12, 2012 Leipzig, Germany

the conference will be hosted by the hhL/ Center for Corporate Governance, with the support of the Global Corporate Governance Forum. It will bring together senior representatives from academia, development institutions, companies and investors, and aims to provide a future-oriented assessment of the governance situations in three important regions of the world — Africa, Asia and southern europe. While the conditions in the countries representing the three regions — Nigeria, Indonesia, and Croatia, respectively — will be quite different, there will be many over-arching topics that are relevant to all regions.

the conference will also have two global discussions on:

• The performance value of ‘good governance’ in emerging markets, based on the latest academic research and practical insights from large international investors.

• Corruption and practical ways of dealing with this major governance problem.

For more information, please contact Liudmila schmelzle at [email protected]


Pension Funds and Governance Challenges in emerging markets

Private investors and sovereign institutional investors are significant market participants. Together, they represent a sizable source of global capital flows, with important implications for corporate governance and, thereby, for global economic growth and financial stability.

By Philip ArmstrongHead, Global Corporate Governance Forum

According to the latest Towers Watson Global 300 Survey, six of the ten largest pension funds at the end of 2010 were sovereign pension funds. The largest is Japan’s Government Pension Investment Fund ($1.4 trillion), which is nearly three times the size of the Government Pension Fund of Norway ($550 million). These two pension funds alone dwarf some of the world’s largest companies by market capitalization, led by Apple and Exxon Mobil, each at about $350 billion (as of September 2011).

That makes asset owners (pension funds) key players, with the power and influence to change the direction of and attention paid to good corporate governance practices. In turn, without a vibrant institutional investor community, companies are simply not going to take corporate governance seriously — other than those that see the sense in it and are willing to follow good corporate governance practices, regardless.

But, until we have a situation where asset managers, through their asset owners’ (institutional investors) mandates, have in place thoughtfully considered and well-structured mandates that define the way they invest “other people’s money,” the whole notion of corporate governance will remain a challenge for us all — which, let it be said, regulations and laws alone will not fix.

Unfortunately, the very fund managers who join calls for more independent, more professional boards of companies are not necessarily subjecting themselves to the same strictures, in my opinion.

Specifically, two areas of concern to funds worldwide — developing countries and emerging markets included — are now

coming to the fore:

• The extent to which pension fund beneficiaries (members contributing to pension fund plans) are empowered to supervise the deployment of their pension fund assets — in a way that parallels that of a shareholder regarding accountability by the appointed trustees for these funds and the accompanying transparency of the decisions made;

• The caliber, training, and expertise of trustees themselves in managing these assets in a way that dictates the governance priorities of the pension fund beneficiaries on a basis that delivers long-term value rather than implicitly stimulates short-term profit taking.

In other words, how does a pension fund implement a more effective process for trustees? Why, for instance, do pension funds not insist that trustees have the same attributes of expertise, professionalism, and knowledge that would be expected of a board member for a substantial company, as demanded by asset managers?

Generally speaking, the sponsoring employer appoints trustees. In some countries where unions have a right to nominate, worker representatives may be

appointed, too. These appointments are largely based on the trustees’ affiliation or function — not their acumen or experience. This skill deficit is particularly troublesome when it comes to deciding how to invest pension fund assets.

Worker representatives likely perceive their main role to be protection of workers’ interests, which may not be aligned with the fund’s overall strategic interests. Employer-appointed representatives have different interests, too — driven more by management priorities than necessarily by pension beneficiaries’ interests.

All this brings us to another challenge and its attendant problems: the investment decision, or fund allocation, process. Either the amateurs allocate funds among assets or an advisor is engaged to support or make decisions. In either case, there is tremendous potential for conflicts of interest unless strong fiduciary accountability is in place and enforced across the decision-making process.

How should asset owners (pension funds) and asset managers (fund managers) be engaged with one another? Above all, this relationship must not be based on contractual terms that serve the

asset manager’s interests more than those of the asset owner. Fund managers should not monopolize the relationship.

Through the International Corporate Governance Network (an organization representing some of the world’s largest investors, reportedly with funds under management of $18 trillion, see more at www.icgn.org), work has advanced rapidly in the formulation and adoption of the Model Mandate Initiative. This effort defines a set of contractual terms between

“ Institutional investors are key players, with the power and influence to change the direction of and attention paid to good corporate governance practices.”


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asset managers and asset owners that explicitly define that pension funds are in charge of the investment chain process, that they drive and control the terms of trade.

Equally inspiring is the current debate taking place through the Cooper review in Australia, which raises fundamental questions about the extent to which the pension fund industry serves beneficiary interests. This questioning focuses largely on pension funds’ costs, specifically whether managers are taking more in fees than their fair value and whether the amount of fees erodes beneficiaries’ returns.

In response, there is a growing trend worldwide to adopt stewardship codes and thereby instill a long-term mindset among investors. However, this task is a significant one.

Entrenched practices, including compensative incentives, in the investment industry are one obstacle. Putting into place effective best practices, regulations, and laws, if needed, is another.

Then, there is the funds’ ability to be effective advocates for corporate governance for the companies they own. We need only to look at Norway’s Government Pension Fund, with investments in some 8,000 companies in 58 countries. Is it realistic to expect it to exercise its fiduciary responsibility to undertake detailed corporate governance oversight of its entire portfolio without incurring huge overhead costs that could arguably be detrimental to the fund’s financial performance?

With emerging markets attracting significant interest from fund managers,

how much more difficult will this be? Of even more concern is that, in many of these markets, domestic fund managers —whether from the public or private sector

funds — are generally passive, with little or no stimulus from their clients (namely, pension fund beneficiaries). This is notwithstanding government action, such as the Malaysian government’s efforts to establish the Minority Shareholders Watchdog

Group, for example.

How do we change the dynamics, and in what way?

The fallback position — in the absence of effective self-governing mechanisms — is too often to call for more regulations and rules.

My own view is that rules and regulations can only go so far and will not likely resolve the governance tensions and challenges that plague the financial markets system, unless you can finance huge capacity for regulatory supervision and enforcement, which I very much doubt.

Instead, what is needed are enlightened and accountable trustees of pension funds responding to their fiduciary responsibilities to the pension fund beneficiaries in a thoughtful and well-considered way.

Another area for reform is transparency. According to the Towers Watson Survey, only eight of the top twenty pension funds highlighted the relevance of building

What is needed are enlightened and accountable trustees of pension funds responding to their fiduciary responsibilities to the pension fund beneficiaries in a thoughtful and well-considered way.

Mindsets are shifting as the current state of the markets makes all players increasingly aware that this is an area that for too long has not received the attention it warrants.

confidence with their members by increasing transparency to their members and disclosure of information. This suggests we have some distance to go to address this serious shortcoming.

Finally, the mandates that funds give asset managers for investment strategies and the metrics used to evaluate investment returns (often to determine the performance-based basis of the managers’ compensation) need to be more closely aligned with beneficiaries’ interests. Mindsets are shifting as the current state of the markets makes all players increasingly aware that this is an area that for too long has not received the attention it warrants. As we search for ways to emerge from the financial crisis with a strong financial foundation, pension funds need a more rigorous corporate governance.

Phil Armstrong delivered these remarks at a discussion forum in November, co-hosted by the International Centre for Pension Management and World Bank Treasury.

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