Governance for Young Leaders Understanding Corporate Governance Djordjija

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

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

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

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

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 5

Increased Powers of MNCs 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 Djordjija Petkoski World Bank Development Report 2000. Bank Institute (dpetkoski@worldbank. org) 6

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 7

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

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 9

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 10

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. World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 11

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? World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 12

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. World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 13

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. World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 14

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) World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 15

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 16

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 Institute Djordjija Petkoski (dpetkoski@worldbank. org) 17

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

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

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 20

Examples: Why we need Corporate Governance • Russian Oil Firms Market Value Estimated Actual Discounted Ratio Value Firm A: $90 mn. $50 bn. 556 times less Firm B: $20 bn. $600 bn. 30 times less World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 21

Corporate Governance Investors 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. World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 22

Investors interests Beyond 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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 23

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

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 25

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 26

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 World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 27

“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. World Bank Institute Djordjija Petkoski (dpetkoski@worldbank. org) 28

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

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