Importance of Corporate Governance

May 9, 2012

In partnership with

Delivered by Juan Carlos Fernandez Zara

IFC Advisory Services

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What can CG do for your company?

INCREASES CHANCES OF ACCESSING NEW SOURCES OF FUNDS

ENABLES THE COMPANY TO INCREASE ITS IMAGE AND INCREASES CHANCES OF ATTRACTING AND RETAINING TALENT

ENHANCES THE DECISION PROCESS

AND IMPACTS POSITIVELY ON THE PERFORMANCE OF

THE COMPANY

ALIGNS INTERESTS BETWEEN SHAREHOLDERS AND BOARD OF DIRECTORS / MANAGEMENT

PROMOTES ACCOUNTABILITY THROUGHOUT THE COMPANY

ENHANCES TRANSPARENCY WITHIN THE COMPANY AND TO THE OUTSIDE

ENSURES RESPONSIVENESS TO STAKEHOLDER CONCERNS, CONSISTENT WITH LONG-TERM SHAREHOLDER VALUE CREATION

GOOD CG

Why should companies care?

Is it listed on a market ?

• Investors provide capital

• Their lack of confidence impacts the market value

It has clients

• Clients look at the quality of a product and its price

• Depending on the business (e.g. banking) clients look at the reliability

It may play in a competitive market

• Need to understand the environment and the trends

• Needs to adopt the right strategy and implement it

•A

ll are

inte

rconnecte

d

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Local company

CG in Asia : pitfalls

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CULTURALNot loosing

FaceFamily / Insider oriented

ORGANIZATIONAL

Paternalistic

Concentration of power

STRUCTURAL

Importance of size

Spread out / not focused

FINANCIALLack of

transparencyPriority on the owner

•Lack of positive challen

ge

• Lack of profitability

• Lack of innovation •Lack of reliabili

ty• Lack of competitive

ness

Staff Loyalty

Lack of empowerment

Is CG relevant for all ?

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Is CG relevant for all ?

More on Financial Times : FT Non-Public 150 - the full list

By far, not exhaustive list of non-public companies

While they do not publicly disclose investor’s useful information, they do provide extensive communication to their stakeholders

They still use CG for monitoring and supervision purposes as well as to communicate with THEIR shareholders

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General legal structure of a JSC

Pro

vid

e

Capit

al

Report

Tr

ansp

are

ntl

y

Elect and Dismiss

Represent and Report to

Report and Answer to

Guide and Oversee

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Shareholders

Board of Directors

Management

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Family businesses. Tools

THE FOUNDER

Driven by Ownership Stages

Stage 1Dominant Issues

Leadership Transition

Succession

Estate Planning

THE SIBLING PARTNERSHIP

Stage 2Dominant IssuesMaintain teamwork and

harmony

Sustain family ownership

Succession

THE COUSIN CONFEDERATION

Stage 3Dominant IssuesMaintain teamwork and

harmony

Sustain family ownership

Succession

Shareholders

Board of Directors

Management

Founder centered.

Concentration of Power

Shareholders

Board of Directors

Management

Familycontrol

Shareholders

Board of Directors

Management

Familycontrol

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Family businesses. Specificities

FAMILY CONSTITUTION

Allows family to lay down the relationship of the

family with the company

FAMILY ASSEMBLY

Forum where the family discusses matters related

to the company.

FAMILY COUNCIL

Interlink between family and company.

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Good CG depends on following factors

• Environment

• Perception of trust

• Institutions

• Ability to provide active support

• Ability to effectively monitor

• Company

• Reliability of Data

• Competences of the management • Courts

• Ability to protect investors’ interests

• Ability to enforce decisions

The importance of Corporate Governance varies according to these parameters

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CG differentiation• E

nvironment• I

nstitutions

• Company • C

ourts

IN COUNTRIES WHERE

ENVIRONMENT / INSTITUTIONS / COURTS ARE PERCEIVED AS WEAK OR POTENTIALLY NOT ABLE TO FULLY FULFILL THEIR ROLES A SIMPLE “COMPLIANCE” APPROACH TO CORPORATE GOVERNANCE WILL HAVE LIMITED, TO NO POSITIVE EFFECT TO THE COMPANY.

What is a good Board ?

• Company’s Size • Company’s Age

• Country / Region of Operations

• Business / Sector

• Size of the Board

• # of outside / Independent

Directors

• Implication in day to day

management

• # Meetings per year

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Lack of monitoring

• Insider trading• Related party transaction

• Other abuses• Expropriation of minority shareholder’s rights

Lack of positive challenging

• Wrong decisions are made

• Wrong strategy is adopted

Lack of commitment

• No valued added by the board (“rubber stamp”)

• Threats and Opportunities are not correctly assessed

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Concentration of power

Concentration of Power

Can lead to Can result in

Attract investors

Attract talent

Increase competitiveness

Increase Performance

Can affect ability to

What is a good Board in the evolution of the company ?

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4 Stages to consider

Entrepreneurial Stage

Early innovation, niche formation, creativity

Collectivity Stage

High cohesion, commitment

Formalization and control

StageStability and institutionalization

Elaboration of structure Stage

Doman expansion and decentralization

Characteristics

Company seeks to achieve a survival threshold.

• Less planning,

• More real-time decisions

Period of growth.

• Informal communication and structure.

• Sense of family and cooperation

Continued success and increasing structural complexity.

• Functional structure and greater specialization

Commitment to the firm’s chosen market domain.

• Expansion within the chose domain.

• Strategies emphasizing productivity enhancement