1. The Business Case For Corporate Governance An Affiliate of the U.S. Chamber of Commerce CENTER FOR INTERNATIONAL PRIVATE ENTERPRISE Aleksandr Shkolnikov Beirut, Lebanon, July 1 2008

2. CIPE © 2008 Drivers of Corporate Governance Dealing with Failures and Scandals Chile Financial Crisis 1970sChile Financial Crisis 1970s Asian Financial Crisis 1997Asian Financial Crisis 1997 Russian Financial Crisis 1998Russian Financial Crisis 1998 Enron, WorldCom, Parmalat, etc.Enron, WorldCom, Parmalat, etc. Impact of governance failures on:Impact of governance failures on: CompaniesCompanies SocietiesSocieties EconomiesEconomies Challenges today: Who is next?Challenges today: Who is next?

3. CIPE © 2008 Drivers of Corporate Governance In Search of Benefits Search for investment (FDI trends)Search for investment (FDI trends) Cost of capitalCost of capital PrivatizationPrivatization SOE reformSOE reform Competitiveness pressuresCompetitiveness pressures SustainabilitySustainability The premium investors would pay for a well-governed company (McKinsey)

4. CIPE © 2008 Corporate Governance and Competitiveness Stronger Shareholder Protection=Larger Stock Markets

5. CIPE © 2008 Corporate Governance and Competitiveness Stronger Corporate Governance=Lower Cost of Capital

6. No need for investment My company has enough (access to) capital – why do I need corporate governance?My company has enough (access to) capital – why do I need corporate governance? Access to markets/competitionAccess to markets/competition Combating corruptionCombating corruption PartnershipsPartnerships ProcurementProcurement Managing conflict of interestManaging conflict of interest Increase the value of a company (sale)Increase the value of a company (sale) CIPE © 2008

7. Preventing Corporate Raiding Raiding – using legal and extra legal means to expropriate ownership of a companyRaiding – using legal and extra legal means to expropriate ownership of a company Increasingly popular in emerging markets with weak rule of lawIncreasingly popular in emerging markets with weak rule of law How does corporate governance help?How does corporate governance help? TransparencyTransparency EnforcementEnforcement Institutional reformsInstitutional reforms CIPE © 2008

8. Family Firms Does Corporate Governance Matter?Does Corporate Governance Matter? Risks associated with:Risks associated with: Family growth higher than profitability growthFamily growth higher than profitability growth Succession planningSuccession planning Separation of company and familySeparation of company and family Maintenance of professionalismMaintenance of professionalism NepotismNepotism RivalryRivalry CIPE © 2007

9. Family Firms Benefits (CIPE/IBGC study of 15 family firms in Brazil)Benefits (CIPE/IBGC study of 15 family firms in Brazil) ProfessionalizationProfessionalization Formalization of the work processFormalization of the work process Improved decision-making of the top managementImproved decision-making of the top management Ability to attract and retain personnelAbility to attract and retain personnel Better accounting practicesBetter accounting practices Greater brand reputationGreater brand reputation CIPE © 2008

10. Internal Controls and Ethics TI’s Business Principles for Countering Bribery Political and philanthropic contributions, gifts, hospitality, etc.Political and philanthropic contributions, gifts, hospitality, etc. Facilitation payments!Facilitation payments! Implementing the principles requires that: Boards of directors take formal responsibilityBoards of directors take formal responsibility Effective whistle-blowing channels existEffective whistle-blowing channels exist Embedded internal control measuresEmbedded internal control measures Formal accounting procedures set up that check for briberyFormal accounting procedures set up that check for bribery Internal communication and trainingInternal communication and training

11. Benefits to Shareholders Protect the rights of minority shareholdersProtect the rights of minority shareholders Protect the rights of foreign shareholdersProtect the rights of foreign shareholders Clear and predictable rules of the gameClear and predictable rules of the game Boards act in the best interest of a company, not in their own best interestBoards act in the best interest of a company, not in their own best interest Bottom line: corporate governance reduces riskBottom line: corporate governance reduces risk CIPE © 2007

12. CG as a Financial Risk Tool New push for corporate governance in the financial sectorNew push for corporate governance in the financial sector Basel II: re-assess risk factors in loan decisions – how?Basel II: re-assess risk factors in loan decisions – how? Corporate governance as a means of risk assessment in the provision of loansCorporate governance as a means of risk assessment in the provision of loans CIPE © 2008

13. CG Benefits vs. CG Crises Who defines the agenda? CIPE © 2008

14. CIPE © 2007 Corporate Governance: Key Institutions Must Function Well Procedures for bankruptcyProcedures for bankruptcy Property rightsProperty rights Contract enforcement – Judicial systemContract enforcement – Judicial system Enforcement mechanismsEnforcement mechanisms Securities marketsSecurities markets Free press – financial pressFree press – financial press Ratings agencies et al.Ratings agencies et al. Other checks and balancesOther checks and balances