lessons in corporate governance: the role of the...
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Lessons in Corporate Governance: The Role of the Securities Regulator
Alex Berg April 2012
Overview
• Corporate governance defined • WB corporate governance assessment program • Lessons learned for securities regulators • Questions…
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Corporate Governance Defined
Perspectives on corporate governance
Company perspective:
• “The system by which companies are directed and controlled.” • The set of relationships between:
• A company’s management • Board of directors • its shareholders and • Other stakeholders
The policymaker’s perspective:
• Corporate governance = how to regulate the governance of public interest entities in order to maximize productivity and value while preserving company flexibility and minimizing costs
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The company perspective …
Shareholders
DirectorsManagers
Regularly report and update
Monitor and guide
Repre
sents a
nd re
port to
Ele
ct and d
ismiss
Pro
vid
e c
apital to
Report
tra
nsp
are
ntly to
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The policymaker’s perspective …
Law and Regulation:
• Company law
• Securities law
• Listing rules
• Accounting and audit standards
• Codes of Best Practice
Institutional / enforcement capacity
• Securities Commissions
• Company registrars / company regulators
• Stock exchanges
• Court and judicial reform
• Depositories / registrars / custodians
• Director training organizations
• Audit oversight bodies
• Shareholder associations
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Go
od
bo
ard
pra
cti
ces
an
d C
on
tro
l S
tru
ctu
res
Ma
nag
ing
Sta
keh
old
er
Re
lati
on
s
Str
on
g d
isclo
su
re &
tra
nsp
are
ncy r
eg
ime
Pro
tecti
on
of
(min
ori
ty)
sh
are
ho
lder
rig
hts
Achieving Good Corporate Governance
Robust legal & regulatory environment
Strong enforcement regime
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The value of improved corporate governance …
For companies:
• Streamlined business processes, better operating performance & lower
capital expenditures
• improved access to finance (both equity and debt)
• Higher valuations
• Better decision-making
For shareholders (including pension beneficiaries):
• Protection from abuse
• Increased shareholder value
• Protection from “reputational risk”
For regulators and supervisors:
• A first line of prudential defense
• Increased financial stability
For markets and economies:
• Higher market capitalization and liquidity
• More “champion” companies that can compete and grow internationally
• Higher economic growth
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Why does it matter?
Better Corporate Governance =
Bigger capital markets + more listed companies =
Better access to finance and higher growth Market capitalization to GDP
Note: Relationships remain significant when controlling for income per capita. Higher values on the strength of investor protection index indicate greater protection. Source: Doing Business database, World Bank (2010).
Higher entry level to capital markets Number of listed firms
Levels of Investor Protection (as measured by Doing Business)
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What is corporate governance? Regulator versus company perspectives …
Valu
ation
Quality of corporate governance
Country with poor governance framework
Country with good governance framework
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The Corporate Governance ROSC Assessments
International Consensus:
the OECD Principles of Corporate Governance
• Certain basic principles apply in all countries:
• The Rights of Shareholders
• The Equitable Treatment of Shareholders
• The Role of Stakeholders
• Disclosure and Transparency
• The Responsibilities of the Board
• Designed to apply to companies listed on stock exchanges
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The Corporate Governance ROSC program:
Overview
• Benchmarking exercise against the OECD Principles of Corporate
Governance
• Standardized and systematic diagnostic, including ratings, report,
and policy recommendations
• Engage a local consultant to complete a standard questionnaire
• Country participation and publication is voluntary
• Updates: measure progress over time
• 85 carried out or underway since 2000 in 64 countries
• Impacts include country action plans, legal / regulatory reform,
Code drafting / updates, creation of new institutions
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ROSC Country Coverage
Africa East Asia / Pacific Europe / Central Asia Latin America Middle East / North Africa South Asia
Ghana (2011) Hong Kong SAR, China (2003)Armenia (2005) Latvia (2002) Argentina (2007) Egypt (2009) Bangladesh (2008)
Kenya (2008) Indonesia (2010) Azerbaijan (2005) Lithuania (2002) Brazil (2012) Jordan (2004) Bhutan (2006)
Malawi (2007) Korea (2003) Azerbaijan (2009) Macedonia, FYR (2005)Chile (2003) Morocco (2010) India (2004)
Mauritius (2011) Malaysia (2012) Bosnia and Herz. (2006) Moldova (2004) Colombia (2010) Pakistan (2005) Maldives (2009)
Nigeria (2012) Philippines (2006) Bulgaria (2008) Mongolia (2009) El Salvador (2012) Saudi Arabia (2008) Nepal (2005)
Senegal (2006) Thailand (2012) Croatia (2007) Poland (2005) Mexico (2003)
South Africa (2002) Vietnam (2012) Czech Republic (2002) Romania (2004) Panama (2004)
Togo (2009) Georgia (2001) Russia (2012) Peru (2004)
Zambia (2007) Hungary (2002) Slovak Republic (2003)Uruguay (2006)
Zimbabwe (2000) Kyrgyz Republic (2010) Slovenia (2003)
Turkey (2000)
Ukraine (2006)
Example: Indonesia (Chapter 2: Shareholder Rights)
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68
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100
75
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59
65
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78
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IIA: Basic shareholder rights
IIA 1: Secure methods of ownership registration
IIA 2: Convey or transfer shares
IIA 3: Obtain relevant and material company information
IIA 4: Participate and vote in general shareholder meetings
IIA 5: Elect and remove board members of the board
IIA 6: Share in profits of the corporation
IIB: Rights to part in fundamental decisions
IIB I: Amendments to statutes, or articles of incorporation
IIB 2: Authorization of additional shares
IIB 3: Extraordinary transactions, including sales of major …
IIC: Shareholders GMS rights
IIC 1: Sufficient and timely information at the general meeting
IIC 2: Opportunity to ask the board questions at the general …
IIC 3: Effective shareholder participation in key governance …
IIC 4: Availability to vote both in person or in absentia
IID: Disproportionate control disclosure
IIE: Control arrangements allowed to function
IIE 1: Transparent and fair rules governing acquisition of …
IIE 2: Anti-take-over devices
IIF: Exercise of ownership rights facilitated
IIF 1: Disclosure of corporate governance and voting policies …
IIF 2: Disclosure of management of material conflicts of …
IIG: Shareholders allowed to consult each other
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Example: Indonesia vs. Region
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70 66
73
65
56 60 60 60
68 73
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72 68
I. Enforcement & Institutional Framework
II. Shareholder Rights and Ownership
III. Equitable Treatment of Shareholders
V. Disclosure and Transparency
VI. Board Responsibilities
Indonesia Country Assessment vs. Asia Regional Average
Indonesia (2009) Indonesia (2004) Asia and Pacific Region (India, Malaysia, Thailand, Philippines, Vietnam)
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Roadmap to For CG Reforms
Assessment
Country Action Plan
Implementation
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Lessons Learned
Lessons learned (for regulators / supervisors)
1. Enforcement of shareholder rights 2. Improving disclosure 3. Improving board practices 4. Regulatory governance
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Enforcement of shareholder rights
• Courts don’t function well for minority shareholders in most countries
• Company law has no effective regulator in most countries • Strongest enforcement of company law happens when securities
regulator can take action on behalf of shareholders. • “Mirrored” company law provisions in securities regulation
(Indonesia) • Special “court” where shareholders can complain (Egypt) • Impose administrative penalties if company law violated
(Brazil) • Stock exchange approval of related party transactions (South
Africa)
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Improving disclosure
• Financial and non-financial disclosure radically improving everywhere
• But almost all countries still rely on 19th century disclosure mechanisms (annual reports)
• Way forward: • On-line updates of wide variety of financial and non-
financial disclosure (Brazil’s “reference form”) • Adaptation of new web-based technologies • Removal of expensive requirements to publish (e.g.
annual reports to all shareholders, publication in newspapers and government gazettes).
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Improving board practices
• Board is at core of modern corporate governance reform • Big changes everywhere including:
• Role and responsibility of board • Liabilities of directors • Board objectivity and independence
• In terms of regulation – biggest idea of the past 10 years has been introduction of “corporate governance codes’ in many countries.
• But how should they be introduced?
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Corporate Governance Codes: A variety of approaches
Mandatory “codes
Comply-or-explain models
Voluntary codes
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Improving Board Practices (cont.)
Our observations from working in many countries are: • Corporate governance codes are most influential when
they are supported by the securities regulator and well anchored in regulation (on a comply or explain basis).
• Codes add something to mandatory regulation, for those areas that are “aspirational” and hard to measure / enforce (like board practices)
• The influece of a Code is increased if a single code can be adopted across many sectors (e.g. capital markets, banks, insurance companies)
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Regulatory Governance
• Impact of securities regulator is driven by policy, regulatory framework, resources, and authority – but governance of regulator is also crucial.
• Global financial crisis = a catalyst for reexamining of the effectiveness and efficacy of existing financial regulatory structures.
• To the extent regulatory power expands and is consolidated in fewer entities, their performance becomes even more important.
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Regulatory Governance (continued)
• Regulatory governance involves decisions about: • Independence, autonomy and accountability of the regulator from and to
government.
• Independence and accountability of the regulator from and to regulated
financial institutions.
• Formal and informal decisionmaking processes.
• The composition and role of the board of directors of the regulator (if any)
and its relationship to management.
• Transparency, predictability, and accessibility of decisionmaking
• Organizational structure and resources available to the regulator.
• WB now working to develop a diagnostic framework for regulatory governance • How we should define good governance for securities commissions?
• What are basic standards of and key challenges to good regulatory
governance?
• What can governments do to improve their regulatory governance?
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