1. DCO-ZXH393-20040200-sdmPP1 The Value and Challenges of Good Corporate Governance Advanced Risk Management Workshop The World Bank Washington, DC May 2004

2. DCO-ZXH393-20040200-sdmPP1 1 Corporate governance codes during the last decade Date code published (latest code) CORPORATE GOVERNANCE REFORM IS A WORLDWIDE PHENOMENON Source: ECGI; web sites; clippings 1999 Brazil (2002) China, Hong Kong (2001) Italy (2002) Kenya (2000) Malaysia Mexico Portugal South Korea 1997 Finland (2000) Japan (2001) Kyrgyz Republic Netherlands (2003) Sri Lanka Thailand Pre-1997 Australia (2002) Canada (2004) France (2002) Ireland (1999) New Zealand (2000) South Africa (2002) Spain (2003) Sweden (2001) UK (2003) US (2003) 1998 Belgium (2000) Greece (2001) Germany (2003) India (2003) 2000 Denmark (2001) Indonesia (2001) Philippines (2002) Romania (2002) Singapore (2001) 2001 Argentina China, mainland Czech Republic Malta Peru (2002) 2002 Austria Chile Colombia Pakistan Poland Russia Slovakia Switzerland 2003 Cyprus Mauritius Oman Turkey

3. DCO-ZXH393-20040200-sdmPP1 2 SCOPE OF REMARKS Value of corporate governance to equity investors Value of corporate governance to creditors Progress and challenges in emerging markets Role of financial institutions in improving corporate governance

4. DCO-ZXH393-20040200-sdmPP1 3 KEY MESSAGES Investors are willing to pay a premium for a well-governed company, particularly in emerging markets Governance is now an established investment criterion Investors consider corporate governance risks at three levels

5. DCO-ZXH393-20040200-sdmPP1 4 INVESTOR OPINION SURVEY DETAILS *Addressed to key investment decision-maker, e.g., CEO, CFO, Fund Manager **Includes investment bank with asset management activities, family offices, holding companies Source:McKinsey Global Investor and Emerging Market Policymaker Opinion Surveys on Corporate Governance, 2002 Global Investor Opinion Survey, 2002 Type of investor Private equity Mutual fund Money manager Pension fund Broker/trader Insurance Bank Other** Venture capital 20 17 11 10 9 9 8 7 9 201 responses from professional* investors from institutions with an estimated USD 9 trillion assets under management (approximately USD 2 trillion AuM directly under their control) Covers 31 countries in Asia, Europe, Latin America, Middle East, Africa, and North America Undertaken in April/May 2002 in cooperation with the Global Corporate Governance Forum, using a questionnaire-based survey Percent of respondents

6. DCO-ZXH393-20040200-sdmPP1 5 A SIGNIFICANT MAJORITY OF INVESTORS SAY THEY ARE WILLING TO PAY A PREMIUM FOR A WELL- GOVERNED COMPANY % of investors Western Europe Asia North America Latin America Eastern Europe/Africa Yes No

7. DCO-ZXH393-20040200-sdmPP1 6 PREMIUM INVESTORS WOULD PAY FOR A WELL-GOVERNED COMPANY VARIES BY COUNTRY Average premiums of those investors willing to pay premium Morocco EgyptRussiaTurkeyIndonesiaChinaArgentinaVenezuelaBrazilPolandIndiaMalaysiaPhilippinesSouth AfricaJapanSingaporeColombiaSouth KoreaThailandMexicoTaiwanChileItalySwitzerlandU.S.SpainGermanyFranceSwedenU.K.Canada 41 39 38 27 25 24 23 22 21 20 19 18 16 15 14 13 12 11

8. DCO-ZXH393-20040200-sdmPP1 7 THE PREMIUM INVESTORS WOULD PAY FOR A WELL GOVERNED COMPANY VARIES BY REGION Premium in 2002 Eastern Europe/Africa Latin America Asia Western Europe North America

9. DCO-ZXH393-20040200-sdmPP1 8 CORPORATE GOVERNANCE IS NOW AN ESTABLISHED INVESTMENT CRITERION Avoidance of certain companies Decrease/increase holdings in certain companies Avoidance of certain countries Decrease/increase holdings in certain countries How does corporate governance affect your investment decision? % of investors selecting this option; multiple responses possible "Our investment group would never approve an investment in a company with bad governance" – US Investment Manager, US$2 billion Private Equity Fund "Good governance is a qualitative cut-off criterion" – Analyst, US$62 billon European Asset Manager "I simply would not buy a company with poor corporate governance" – CFO, US$3 billon European Private Bank

10. DCO-ZXH393-20040200-sdmPP1 9 GOVERNANCE OFTEN AS IMPORTANT AS FINANCIALS, PARTICULARLY IN EMERGING MARKETS How important is corporate governance relative to financial issues – e.g., profit performance and growth potential – in evaluating the companies in which you invest? % of investors, 2002 Eastern Europe/Africa Latin America Asia North America Western Europe Less important Equally important More important

11. DCO-ZXH393-20040200-sdmPP1 10 INVESTORS IDENTIFY RISKS AT THREE LEVELS THAT IMPACT ON THEIR INVESTMENT DECISIONS % of investors who think that factor is very important for investment decision; top ten factors listed Accounting disclosure Shareholder equality Market regulation and infrastructure International accounting standards Market liquidity Property rights Pressure on corruption Insolvency and bankruptcy regulation Fiscal environment Banking system Corporate factors Capital market factors Broad country level factors

12. DCO-ZXH393-20040200-sdmPP1 11 SCOPE OF REMARKS Value of corporate governance to equity investors Value of corporate governance to creditors Progress and challenges in emerging markets Role of financial institutions in improving corporate governance

13. DCO-ZXH393-20040200-sdmPP1 12 CORPORATE GOVERNANCE ANALYSIS IN CREDIT RATINGS “The combination of aggressive management culture and weak board oversight has the potential to constrain or impair creditworthiness. Alternatively, evidence of strong corporate governance could mitigate perceived risk in management culture, thereby contributing to ratings stability.” Risk-based approach, focus on: –Aggressiveness of business model/growth strategy –Complexity/transparency of legal, financial and tax structure –Aggressiveness of accounting practices –Absence of succession plan –Litigation/government actions Outputs include CG commentary in credit rating report and separate Governance Assessment report “Research on the impact of corporate governance practices on credit risk is limited. Moody’s will be undertaking research to clarify these issues. The core objective of undertaking the Corporate Governance Assessment is to improve rating quality and help investors assess the credit risk of issuers.” Qualitative discussions of key governance issues; no quantitative ratings or scores Identify significant deviations from generally accepted best practices, including: –Composition and quality of the board of directors –Audit committee and key audit/accountability functions –Conflicts of interest –Executive compensation –Shareholder rights –Governance transparency

14. DCO-ZXH393-20040200-sdmPP1 13 SCOPE OF REMARKS Value of corporate governance to equity investors Value of corporate governance to creditors Progress and challenges in emerging markets Role of financial institutions in improving corporate governance

15. DCO-ZXH393-20040200-sdmPP1 14 POLICYMAKER OPINION SURVEY DETAILS Source:McKinsey Global Investor and Emerging Market Policymaker Opinion Surveys on Corporate Governance, 2002 Emerging Market Policymaker Opinion Survey, 2002 Market regulator Stock exchange official Academic Business representative body Government official Type of policymaker 32 22 19 5 44 responses from leading policymakers and academics Covers 20 countries in Asia, Eastern Europe, and Latin America Undertaken in April/May 2002, using a questionnaire-based survey Percent of respondents

16. DCO-ZXH393-20040200-sdmPP1 15 Source:McKinsey Emerging Market Policymaker Opinion Survey on Corporate Governance, 2002 POLICYMAKERS HIGHLIGHT SIGNIFICANT CORPORATE GOVERNANCE CHANGES IN RECENT YEARS 44 38 35 29 26 4. Strengthened shareholder rights and enforced activism 2. Adoption of best practice code 3. Improved corporate legislation 1. Enhanced disclosure 5. Improved and enforced capital market regulation "Enhanced enforcement powers of regulators and the penalties applicable for breaches of securities law" – Director, Asian Market Regulator "The comprehensive review of the legal framework and its specific recommendations" – Law Reform Manager, Asian Market Regulator "Increased protection, and board and general meeting representation, for minority shareholders" – Chief Advisor, Latin American Market Regulator % of respondents; Top 5 changes

17. DCO-ZXH393-20040200-sdmPP1 16 POLICYMAKERS BELIEVE IMPLEMENTATION HAS BEEN RELATIVELY SUCCESSFUL, BUT WITH ROOM FOR IMPROVEMENT Source:McKinsey Emerging Market Policymaker Opinion Survey on Corporate Governance, 2002 How successful has your country been in implementing corporate governance reform? Somewhat unsuccessful Very successful Somewhat successful 78 14 8 % of respondents

18. DCO-ZXH393-20040200-sdmPP1 17 POLICYMAKERS IDENTIFY SIGNIFICANT BARRIERS TO FUTURE CORPORATE GOVERNANCE SUCCESS *Including lack of trained personnel Source:McKinsey Emerging Market Policymaker Opinion Survey on Corporate Governance, 2002 % of respondents Core owners/ concentrated ownership Poor enforcement* Other vested interests, e.g., political interference Cultural difficulties Inactive shareholders 32 24 30 27 22 "No strong local institutional investment industry" – Head of Listings, Latin American Stock Exchange "Successful lobbying by effected and influential people" – Vice Chairman, Latin American Market Regulator "Change in corporate culture is evolutionary in nature" – Deputy President, Asian Stock Exchange "Mindset that the company belongs to me (as the dominant shareholders) even though there are many other shareholders" – Head of Regulation, Asian Ministry of Finance

19. DCO-ZXH393-20040200-sdmPP1 18 EXAMPLE: THE ASIA REGION Many reforms since 1997–1998 Government led initiatives –Enhanced authority for regulators –Strengthened board independence –Improved disclosure standards –Stopping auditing/consulting linkage Private sector activities –Thailand: Institutional Investor Alliance –Singapore: Securities Investors Association –Individual companies: Infosys and others … but Compliance with letter not spirit of law Focus on structure/process; less attention paid to changing behaviour Enforcement lagging Shareholders sell rather than challenge Lack of qualified professionals Uneven progress across the region

20. DCO-ZXH393-20040200-sdmPP1 19 PROGRESS ACROSS THE REGION ON SOME ISSUES Independent director and audit committee requirements Independent directors? Audit committees? 1997 Independent directors? Audit committees? 2003 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Source:Asian Corporate Governance Association

21. DCO-ZXH393-20040200-sdmPP1 20 A NUMBER OF EXEMPLARY COMPANIES Other leaders of the pack in Asia Complies with 10 corporate governance codes Reconciles financial statement to 8 accounting standards Board with majority of independent directors, with wholly independent committees Received numerous corporate governance awards Hong KongKoreaMalaysiaThailandSingapore

22. DCO-ZXH393-20040200-sdmPP1 21 ENFORCEMENT LAGS FORMAL RULES 1 = lowest, 100 = highest Source:Asian Corporate Governance Association Singapore Hong Kong Malaysia India South Korea Taiwan Thailand Philippines China Indonesia 120406080100 Enforcement Rules, regulations/ adoption of IGAAP

23. DCO-ZXH393-20040200-sdmPP1 22 KEY CHALLENGE IN MANY EMERGING MARKETS IS BUILDING EFFECTIVE SUPPORTING INFRASTRUCTURE When … Regulators do not have sufficient human and financial resources Contracts are difficult to enforce Corruption is rife Judicial system not working How can you pursue … Greater disclosure and transparency More independent directors Long-term outlook Foreign investment

24. DCO-ZXH393-20040200-sdmPP1 23 GOVERNMENTS AND COMPANIES MUST MOVE FORWARD SIMULTANEOUSLY Mindset change Basic governance structure and processes World-class corporate governance Stability and predictability Quality of rules and enforcement Market discipline Realize importance of good corporate governance Secure adequate board independence Create independent board committees Embrace strict accounting norms Institute risk management structures Build a strategic, value-added board Constructive engagement with investors and stakeholders High quality of financial and non- financial disclosure Rule of law Corporate and securities legislation Check on corruption Disclosure/listing requirements Strong regulators and vigorous enforcement Protection of minority shareholders Well-developed equity and bond markets Takeover market Enhanced remedies for shareholders Companies Governments

25. DCO-ZXH393-20040200-sdmPP1 24 SCOPE OF REMARKS Value of corporate governance to equity investors Value of corporate governance to creditors Progress and challenges in emerging markets Role of financial institutions in improving corporate governance

26. DCO-ZXH393-20040200-sdmPP1 25 SETTING THE CONTEXT: PRACTICES OF BANKS CONTRIBUTED TO 1997- 1998 ASIAN FINANCIAL CRISIS Family or state ownership of banks led to excessive lending to related parties or politically- motivated lending decisions Weak credit assessment mechanisms Poor monitoring of borrowers

27. DCO-ZXH393-20040200-sdmPP1 26 THE CHALLENGE TO FINANCIAL INSTITUTIONS Financial institutions can play an important role in improving corporate governance if they: Lead by example: Adopt good corporate governance practices themselves Adopt disciplined approach: Engage in rigorous pre-lending evaluation and post- lending monitoring Reward good behaviour: Insist that borrowers undertake reform and lower the borrowing rates for those that do

28. DCO-ZXH393-20040200-sdmPP1 The Value and Challenges of Good Corporate Governance Advanced Risk Management Workshop The World Bank Washington, DC May 2004