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CORPORATE GOVERNANCE TRENDS IN EMERGING MARKETS

Center for International Private Enterprise. An affiliate of the U.S. Chamber of Commerce. CORPORATE GOVERNANCE TRENDS IN EMERGING MARKETS Second Middle East and North African Forum on Corporate Governance. John D. Sullivan June, 2004 Beirut.

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CORPORATE GOVERNANCE TRENDS IN EMERGING MARKETS

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  1. Center for International Private Enterprise An affiliate of the U.S. Chamber of Commerce CORPORATE GOVERNANCE TRENDS IN EMERGING MARKETS Second Middle East and North African Forum on Corporate Governance John D. Sullivan June, 2004 Beirut

  2. Well Governed Company Does Make a Difference The premium investors would pay for a well-governed company in different countries and regions: Average premiums Source: McKinsey Global Investor Opinion Survey - June 2002

  3. BASIC MODELS • Principle-Agent problem based on the separation of ownership and control. • Solution to corporate governance issues is to strengthen disclosure of listed companies. • Enforcement of rules (US) is key. • Compliance with principles (UK) is key.

  4. Basic Model Assumes Key Institutions Function Well • Transparency -- or full disclosure of financial and key performance information • Laws/Regulations preventing Conflicts of interest involving boards of directors and managers • Procedures for bankruptcy • Property rights • Contract enforcement – legal system • Corruption and theft – legal system

  5. Source: The World Bank Group

  6. Drivers of Corporate Governance Reform • Asian Financial Crisis • Russian Currency Collapse and Privatization • Corporate Governance Failures in US and Europe

  7. Asian Financial Crisis "The Asian financial crisis showed that even strong economies lacking transparent control, responsible corporate boards, and shareholder rights can collapse quite quickly as investor's confidence erodes.“ M.R. Chatu Mongol Sonakul, former Governor of the Bank of Thailand

  8. Corporate Governance in the U.S.:Efforts in The Post Enron Era • The Sarbanes-Oxley Act – imposed stronger requirements for corporate disclosure and refined financial reporting for public companies. • New York Stock Exchange – new rules set by the NYSE strengthened the role of independent directors • NASDAQ – new rules set by NASDAQ addressed directors’ compensation and filing requirements

  9. Developing Countries Need Institutional Reforms Corporate governance systems depend upon a set of institutions (laws, regulations, contracts, and norms) that create self-governing firms as the central element of a competitive market economy. These institutions ensure that the internal corporate government procedures adopted by the firms are enforced and that management is responsible to owners (shareholders) and other stakeholders.

  10. Sample CG Projects • Russian Institute of Directors – New Egyptian Institute • Romanian Corporate Governance Code • Kenya Private Sector Corporate Governance Trust • Association of Development Financing Institutions in Asian and the Pacific (ADFIAP) • Middle East Regional Corporate Governance Roundtables • Colombian Chamber of Commerce

  11. Strategy for CG Reform • Initial Assessment and Advocacy • Outreach and Institutional Development • Capacity and Institutional Development  • Consolidation

  12. Initial Assessment and Advocacy • Assess corporate governance failures • Rate country standards v. best practice, • Adapt OECD principles • Build awareness at senior business and policy levels, • Identify stakeholders, • Create broader public demand for reform • Public education campaigns

  13. Outreach and Institutional Development • Develop corporate governance codes and internal control mechanisms • Foster shareholder activism • Improve regulatory and enforcement frameworks • Create informal corporate governance promotion networks within civil society, business, and regulatory bodies.

  14. Capacity and Institutional Development • Training and certification programs for managers and directors • Establishment of Institutes of Directors • Create corporate governance ratings systems for investors • Training for financial intermediaries.

  15. Consolidation • Further strengthen shareholder rights groups and Institutes of Directors, • Risk ranking by ratings agencies. • Reports on Standards and Codes (ROSC) – on going evaluation • Legal and institutional enforcement

  16. Benefits To Society • Helps create competitive, modern and healthy companies • An effective tool against corruption • Helps attract investment • Helps foster healthy competition • Helps prevent banking crises

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