Transcript Governance for Young Leaders: Understanding Corporate

Governance for Young Leaders:
Understanding Corporate
Governance
Djordjija Petkoski
World Bank Group
March 23, 2004
[email protected]
www.csrwbi.org
World Bank Institute
Djordjija Petkoski
([email protected])
1
World Bank Group Priorities
•Poverty Alleviation
•Good Governance
•Good Investment Climate
World Bank Institute
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2
Poverty and Developing
Countries
Today:
• 3 billion people (survive on) under $2/day
• 1.2 billion people (survive on) under $1/day
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3
Population Growth
Population (billion)
Growth in Population
9
8
7
6
5
4
3
2
1
0
8
7
5
1
1
2000
2025
Year
Developed Countries
1
2050
Developing Countries
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Power of the Private Sector
• The output measure of the GDP is the sum
of value added by all sectors in society
• Typically 80% is from the private sector (in
market economies)
• Private sector is the principal engine for
growth
• Collectively the dominant force in the
economy with significant influence
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Increased Powers of MNCs
1
2
5
11
14
23
24
25
27
28
29
31
37
38
40
42
43
COUNTRY/
GDP/SALES
CORPORATION
($ Million)
USA
8,708,870
Japan
4,395,083
UK
1,373,612
Mexico
474,951
Australia
389,691
General Motors
176,558
Denmark
174,363
Walmart
166,809
Ford Motor Co.
162,558
DaimlerChrysler
159,985
Poland
154,146
Indonesia
140,964
Mitsui
118,555
Mitsubishi
117,765
GE
116,630
Portugal
107,716
Royal Dutch/Shell
105,366
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
([email protected])
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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, $240 billion FDI went to emerging
economies
• Over 4 times that of international aid
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Net capital flows to emerging
market economies, 1994-2003
200
100
Net FDI
Net portfolio
investment
50
-50
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
0
19
US$ bn
150
Source: IMF, World Economic Outloook, April 2002
Forecast
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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
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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
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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.
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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?
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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.
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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.
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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)
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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
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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
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Principles of Corporate
Governance
•
•
•
•
Transparency
Accountability
Fairness
Responsibility
-- The Business Sector Advisory Group on
Corporate Governance (1998)
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Some Debates
• Shareholder versus stakeholder models
• Private versus public roles in controlling
corporations
• One size fits all versus tailor-made
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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
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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
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Corporate Governance
Investors are Willing to Pay More For a Company
With Good Board Governance Practices
120
100
No
Yes
80
60
40
20
83
81
89
0
Latin America
Europe/US
Asia
Companies are willing to pay 18 % to 28% more for
better governance.
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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
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Competitiveness
Corporate
Social
Responsibilities
Corporate
Governance
Business
Conduct/Ethics
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Leadership
and
Values
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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
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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
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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
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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.
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Raising CSR IQs
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Thank You
Djordjija Petkoski
Lead Specialist, World Bank
[email protected]
www.csrwbi.org
World Bank Institute
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