corporate governance

Slide 1: 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 1 Governance for Young Leaders: Understanding Corporate Governance Djordjija Petkoski World Bank Group March 23, 2004 dpetkoski@worldbank.org www.csrwbi.org

World Bank Group Priorities : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 2 World Bank Group Priorities Poverty Alleviation Good Governance Good Investment Climate

Poverty and Developing Countries : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 3 Poverty and Developing Countries Today: 3 billion people (survive on) under $2/day 1.2 billion people (survive on) under $1/day

Population Growth : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 4 Population Growth

Power of the Private Sector : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 5 Power of the Private Sector The output measure of the GDP is the sum of value added by all sectors in society Typically 80% is from the private sector (in market economies) Private sector is the principal engine for growth Collectively the dominant force in the economy with significant influence

Major Players : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 6 Major Players Companies command significant economic influence Business is the principal motor for growth and development However, investment in the developing world remains small compared to industrialized countries Investment flows represent both capital flow and also the needed skills and know-how to compete Ranking based on corp. sales data from Fortune, July 31, 2000, and GDP data from World Bank Development Report 2000. Increased Powers of MNCs

FDI Flows : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 7 FDI Flows With an excess of savings, many developed countries are in a position to be net capital exporters Suffering from scarce capital and higher risks, developing countries offer higher returns on investments In 2000, $240 billion FDI went to emerging economies Over 4 times that of international aid

Net capital flows to emerging market economies, 1994-2003 : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 8 Net capital flows to emerging market economies, 1994-2003 Source: IMF, World Economic Outloook, April 2002

More Equitable Growth Depends : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 9 More Equitable Growth Depends On the signals provided to the private sector by The government Civil society Investors Employees Consumers On the character of the private sector iteself

Reputation : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 10 Reputation Reputational capital $52 bn. for Coca-Cola $12 bn. For Gillette $11 bn. For Eastman Kodak Critical for brand names such as Nike and Shell

Impact of Media : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 11 Impact of Media The CNN world—real time information Easy access to news from around the world Power of visual images Businesses and governments are subject to relentless scrutiny.

Questions for Companies : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 12 Questions for Companies what are the kinds of impact which companies in various sectors can have on poverty? what kinds of activity constitute best practice in this area? is a company aware of its impact? is it doing something about it? if not, what are the issues the company needs to face, and what can we say to them about what is being done by other companies in the sector?

Businesses’ Contribution to Society : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 13 Businesses’ Contribution to Society Indirectly through growth; Business operations influence the extent to which growth is equitable; Directly through the incomes and jobs they generate producing products that serve the needs of the poor the opportunities they provide for increasing incomes through their marketing and purchasing arrangements, employment and training policies their contribution to local communities through the provision of social services and infrastructure.

But First…. : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 14 But First…. Main function of the business create wealth for their shareholders maximize profits Profits start by adding value The profit motive, and the resulting value created for shareholders, is aligned with the need to sustain growth in order to reduce poverty.

A Short History : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 15 A Short History Corporate governance - a new name for an old problem “[B]eing managers of other peoples’ money but their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which …[they] frequently watch over their own. Negligence and profusion, therefore, must always prevail more or less in the management of the affairs of a company.” - Adam Smith, Wealth of Nations (1776)

A Narrow Definition : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 16 A Narrow Definition Corporate governance can be defined as “the system for direction and control of the corporation.” - Sir Adrian Cadbury, The Report on the Financial Aspects of Corporate Governance, 1992

A Broad Definition : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 17 A Broad Definition “Corporate governance is… holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics and discourage fraud and mismanagement.” - Sir Adrian Cadbury(1999). “Corporate Governance: A Framework for Implementation”. World Bank

Principles of Corporate Governance : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 18 Principles of Corporate Governance Transparency Accountability Fairness Responsibility -- The Business Sector Advisory Group on Corporate Governance (1998)

Some Debates : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 19 Some Debates Shareholder versus stakeholder models Private versus public roles in controlling corporations One size fits all versus tailor-made

Global Drivers : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 20 Global Drivers Rise of institutional investment - “other peoples’ money” Privatization – the corporation dominates the economy Deregulation/Liberalization – competition and mobile money Crisis and scandals – no market is immune

Examples: Why we need Corporate Governance : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 21 Examples: Why we need Corporate Governance Russian Oil Firms

Corporate GovernanceInvestors are Willing to Pay More For a Company With Good Board Governance Practices : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 22 Corporate GovernanceInvestors are Willing to Pay More For a Company With Good Board Governance Practices 83 81 89 Companies are willing to pay 18 % to 28% more for better governance.

Investors interestsBeyond the Balance Sheet : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 23 Investors interestsBeyond the Balance Sheet Ethical and responsible business behavior Corporate Codes of Conduct New ideas and Information Technology Western Business Practices Environmental, energy efficiency, health and safety standards Workplace issues: compensation, benefits and training Volunteerism, charitable giving and community activism Rule of law

Slide 24: 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 24 Competitiveness Corporate Governance Corporate Social Responsibilities Business Conduct/Ethics Leadership and Values

Importance of Ethics : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 25 Importance of Ethics “The best chance you have of making a big success…is to decide from square one that you are going to do it ethically” - Alan Greenspan Chairman, Federal Reserve Board

Importance of Ethics : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 26 Importance of Ethics “There is no such thing as business ethics….There’s just ethics; and we all have to practice them every day in everything we do.” – Peter Drucker

Private Sector Perspective : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 27 Private Sector Perspective “Corporate Social Responsibility is not a cosmetic; it must be rooted in our values. It must make a difference to the way we do our business.” Group Managing Director

Slide 28: 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 28 “You cannot talk about CSR unless you love your people and your country” A student from Moscow, in opening remarks for a meeting on Russian Future Leaders and CSR, with Mrs. Wolfensohn.

Raising CSR IQs : 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 29 Raising CSR IQs

Slide 30: 

World Bank Institute Djordjija Petkoski (dpetkoski@worldbank.org) 30 Thank You Djordjija Petkoski Lead Specialist, World Bank dpetkoski@worldbank.org www.csrwbi.org