Preparing the Corporate Governance of [company] for a Domestic and/or International IPO

1. Preparing the Corporate Governance of [company] for a Domestic and/or International IPO [presenter] Investor and Corporate Practice Corporate Governance Department International Finance Corporation [place, date]

2. Outline • Business Case for Corporate Governance • Investor Expectations • Shareholder Rights • Board of Directors • Transparency and Disclosure • [Family Business Issues] • LSE / NYSE/ NASDAQ Standards Compared • What IFC Can Do for You

3. Corporate Governance Defined “Corporate governance refers to the structures and processes for the direction and control of companies.” IFC “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” OECD Corporate Governance Principles, 2004

4. Narrow View of Corporate Governance Shareholders Represents and report to Report transparently to Elect and dismiss Provide capital to Regularly report and update Monitor and guide Managers Directors

5. Why Corporate Governance Matters Provides Access to, Lowers Cost of Capital Value Added Improves Operational Efficiency Improves the Company’s Reputation

6. Corporate Governance and Corporate Management Accountability and Supervision Accountability and Supervision Corporate Governance Corporate Governance Strategic Management Strategic Management Corporate Management Corporate Management Executive Mgmt. - Decision and Control - Operational Mgmt. Executive Mgmt. - Decision and Control - Operational Mgmt. Source: Robert I. Tricker, Corporate Governance, 1984 Source: Robert I. Tricker, Corporate Governance, 1984 Corporate governance & corporate/financial management interest

7. Shareholder Rights 1/2 • Protection of minority shareholders in charter, by-laws, governance code • Adequate notice and agenda of all shareholders’ meetings • Ability to participate and vote meaningfully at shareholders’ meetings (e.g., cumulative voting for directors) • Actions requiring shareholder approval (e.g., dividends; fundamental transformations; equity compensation)

8. Shareholder Rights 2/2 • Fair treatment regarding information disclosure (all material shareholder agreements, conflicts of interest, etc.) • Disclosure of beneficial ownership of all classes of shares • Clarity in rights of different classes of shares - voting rights vs. “economic rights” • Equitable treatment in changes of control (e.g., tag-along rights)

9. Board of Directors - Objectives • Add Value • Vision, Strategy, Experience, Energy • Identification of Key Risks; Oversight of Risk Management • Accounting, Audit, Control Environment • Market / Operational Risk • Growth-Orientation / Entrepreneurial Cos. • Help Plan, Oversee Execution of Corporate Transformation • Meet Market / Investor Expectations • Compliance with UK, Sarbanes/Oxley, etc.

10. Board of Directors - Composition • Seven to Eleven Members/Strong Independent Component • Separate Chairman and CEO Roles • Regular Calendar/Agenda of Meetings (~6-8 per Annum) • Independent Directors • No Connection with Management / Controllers • “Independent – Minded” • Minimum Requirements (local standards) plus Company’s Own Definition

11. Board of Directors - Composition • Entrepreneurial / Transformational Orientation • Committees Responsible for Oversight in Key Areas (Audit; Governance; Remuneration) • Mix of Professional Skills / Experience • International Financial Markets • Audit Committee Expertise • Director Education

12. Director Responsibilities • Duty of Loyalty • Duty of Care • Responsibilities to Shareholders • Activities as Directors (Duties) • Conflicts of Interest • Adequacy of Control Environment • Adequacy of Disclosure

13. Audit Committee - Role • Improvement of Control Environment: • Accounting Policies and Procedures • Internal Controls • Internal Audit • Integrity of Company’s Financial Reporting; Internal and External Auditing Functions • Selection / Evaluation / Independence / Compensation of the External Auditor

14. Audit Committee - Composition • At least 3 Independent Members of the Board • All Must be Financially Literate • At Least One an “Audit Committee Financial Expert” (i.e., an experienced CEO, CFO, accountant, auditor, etc.)

15. Audit Committee - Activities • Regular Schedule of Meetings • Periodically Meets Separately with CFO, External Auditors; Chief of Internal Audit • Follows-up Management Letters; All Reported Deficiencies in Controls • Receives and Reviews Periodic Reports on Implementation of Control Environment Improvements

16. Audit Committee and Internal Control Environment • Responsible for the Board’s Duty to Ensure the Adequacy/Integrity of Internal Control Environment • Staffing • Manuals • Procedures • Standards

17. Governance Committee • Develops and Oversees Implementation of Corporate Governance Improvement Program • Recommends Board’s Committee Structure • Nomination of Independent Directors • Recommends Independence Definition • Manages Conflicts of Interest • Written Policy, Ethics Code, Board Review & Approval of Related Party Transactions • Reviews and Revises Governance Policies / Compliance with UK, Sarbanes - Oxley, and Listing Rules on Corporate Governance • Evaluates Board Effectiveness

18. Transparency and Disclosure “The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.” OECD Principles

19. What to Disclose Disclosure should include, but not be limited to, material information on: • Financial and operating results; company objectives • Shareholder agreements • Major share ownership and voting rights • Remuneration policies; information about board members • Related party transactions; foreseeable risk factors • Issues regarding employees and other stakeholders • Contents of any corp. gov. code or policy and its implementation • Material off-balance sheet items

20. Transparency and Disclosure - Procedures • Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure. • An annual audit should be conducted by an independent, competent, and qualified auditor in accordance with the International Standards of Auditing. • External Auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit. • Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant information by users.

21. Benefits of Disclosure 1/2 “Good corporate disclosure is often regarded as one of the leading indicators of good corporate governance. There is a growing body of evidence that supports the view that high standards of transparency and disclosure can have a material impact on the cost of capital.” Standard & Poor’s

22. Benefits of Disclosure 2/2 The Report of the Special Committee of the American Institute of Certified Public Accountants on Financial Reporting (1994) identified lower cost of equity to be the biggest benefit of disclosure. • Lower transaction costs • Reduced error in earnings forecasts • Higher demand for a company’s securities • Enhances stock market liquidity

23. Benefits of Family Control • Long-term view in decision-making (consistent with investors) • Possibility of unconventional strategy(flexibility) • Desire to build a business for future generations (sustainability) • Commitment of family management to their company (continuity) = the family business edge (profit)

24. Special Challenges for Family Companies • Need to Distinguish Family Relationships and Company Relationships (True Separation is Impossible) • Especially financial relationships and accounts • Informality of governance policies • “Common” understandings may not be so universally held or understood • Weakness of control environment • Challenges only increase as the family grows More Complex with Succeeding Generations

25. What does IFC Look for in Family Company Governance? • Ways to work with family businesses to maximize the benefits of family ownership while addressing the potential pitfalls • Governance models that ensure: • Accountability / Transparency • Continuity • Efficiency • Fair treatment of stakeholders (like us) Ambiguity is always the enemy

26. …And Now the Specific Issues IFC Analyzes … • Succession Planning • Family Employment • Family Salary-Earners vs. Dividend Receivers • Incentivating Non-Family Managers • Treatment of Outside Financial Stakeholders • Formalities - They Do Matter • Family’s Long-Term Role as Shareholder (Share Retention/Voting)

27. Listing Requirements Compared: Additional Corporate Documents

28. Listing Requirements Compared: Board Practices – Composition

29. Listing Requirements Compared: Board Practices – Committees

30. Listing Requirements Compared: Disclosure

31. Listing Requirements Compared: Transparency

32. Listing Requirements Compared: Minimum Float and Shareholder Rights

33. Listing Requirements Compared: Exceptions and Limitations

34. Beyond Compliance – Where IFC Helps • Governance is a Journey, Not a Destination • A Company’s Governance Should be Tailored to its Own Reality / Needs – and those of its Investors • Communicating Good Governance to the Markets is a Challenge • Transparency • Reputational Agents

35. IFC – A Natural Partner • IFC’s Reputation (BCR, Hikma, etc.) • Experience in Corporate Governance Worldwide in All Types of Companies, Industries • “Grass Roots”/ PEP Projects • Capital Markets Development Focus • Global Partners • OECD • Global CG Forum / Private Sector Adv. Group • Regional Partners • National advocacy, business schools, training institutes • IFC-Nominated Directors

36. Thank you!!! www.ifc.org/corporategovernance