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IFC’s Work on Corporate Governance of Financial
Institutions Nigerian Financial System Strategy 2020 Workshop
November 18-20, 2006Washington D.C, USA
Mike Lubrano
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[…] Mr. Edward Nassim, IFC’s VP for Africa, Europe, and Middle East said:
“The investment is designed to support OJSC Alliance on its path to enhanced environmental, health, and safety performance as well as improved corporate governance”. [...]
June 20, 2006
From a IFC pressFrom a IFC press--releaserelease
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Framework providedFramework providedby the OECD Principles:by the OECD Principles:
Shareholder rights
Boards of Directors
Control Environment
Transparency and Disclosure
Different from:Different from:
Corporate CitizenshipCorporate Social ResponsibilitySocially Responsible InvestingSustainabilityManagement“Public” GovernanceBusiness EthicsAnti-Corruption / AML
Defining corporate governanceDefining corporate governance
A Practical Investment-Driven Definition
(But CG does reinforce (But CG does reinforce all of these!!!)all of these!!!)
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Why corporate governance by IFC?Why corporate governance by IFC?
Portfolio Risk ManagementPortfolio Risk Management
Sustainable DevelopmentSustainable Development
As an investor, IFC cares about:Good disclosure & transparencyTreatment of SH rights
As a development institution, IFC cares about:Capital markets developmentStimulating private sector & economic growth
ReputationalReputational Risk / AssetRisk / Asset
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Why should companies Why should companies care about CG?care about CG?
Access to cheaper capitalImproved performance
Studies show that companies with good CG:Studies show that companies with good CG:
Have better access to capitalCommand a premium from investorsPerform better financially and operationallyAre less likely to experience fraud
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Why should Why should banksbankscare about CG?care about CG?
Learn from recent financial crisis: “CG is critical in banks” (Rich Roulier, IFC CRV)
Meet regulatory demand:Basel Committee on Banking Supervision: Enhancing corporate governance for banking organisations, revised Feb. 2006Basel Committee on Banking Supervision:New capital adequacy framework – Basel II
Be a catalyst for good CG practices in the economy
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IFC/WB CG Department
IFC’s CG Technical Assistance
Projects
Corporate Governance at IFC
Corporate Governance at IFCCorporate Governance at IFC
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Teresa BargerDirector
IFC Investor &
Corporate PracticeMike Lubrano
World BankPolicy Practice
Alex Berg
WB/OECDGlobal CG Forum
Phil Armstrong
IFC/WB Corporate Governance and Capital Markets Dept.IFC/WB Corporate Governance and Capital Markets Dept.Organizational Structure (Governance Side)Organizational Structure (Governance Side)
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Tools developed to help Tools developed to help IOsIOs workingworkingwith banks with banks
What we have for each of five types of enterprise:
Instruction Sheet Why Corporate Governance? (Fact Sheet) Progression MatrixInformation Request List Independent Director DefinitionSample Improvement Program Supervision Checklist
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Tools developed to help Tools developed to help IOsIOs workingworkingwith banks with banks
What we added recently for FIs: Advanced Methodology
Board of Directors Charter Assessment Tool (CAT)Audit & Compliance Committee CAT Compensation Committee CATCorporate Governance and Nominations Committee CAT Risk Policy Committee CAT ToR for Chief Compliance OfficerToR for CEOToR for Chief of Internal AuditToR for Chief Risk Officer
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IFC CG TA Projects IFC CG TA Projects
IFC TAAS – Regional and/or Country based CG Programs
• Under the leadership of Regional Departments in close cooperation with various PEP/PDF Facilities (e.g. PEP MENA)
• Input from SME Department and IFC/WB CG Department
• Mainly Donor funded projects • Limited duration• Mainly open programs – not limited to IFC clients • Design reflects specific needs of region / country
of inception
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CompaniesCompanies Educational InstitutionsEducational Institutions
GovernmentGovernment Public AwarenessPublic Awareness
Program DesignProgram Design
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What do we focus at? What do we focus at?
“The systems and structures that a bank put in place to effectively oversee its activities... This stipulates an understanding by directors of the bank’s strategic objectives, structures to ensure that these objectives are being met, systems to ensure the effective management of risks, and mechanisms to ensure that the Bank’s obligations are identified and discharged.”
Alan Bollard, Governor of the Reserve Bank of New Zealand, April 2003
Focus on the four P’s: Plans – Policies – Procedures - People
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Opaque company structure and
illegitimate business rationale
Main Areas of Concern
Quality of the Board of Directors
Quality of control, audit,and reporting
Disclosure of material risk factors
Disclosure ofownership structure
and related-partytransactions
Risk Management: Proper risk identification and quality of information
Risk Management:Clear Segregationof Duties
Main Areas of Concern (not exhaustive)Main Areas of Concern (not exhaustive)
Adequateremuneration
policy
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Some examples of Bank Clients Some examples of Bank Clients ––Advisory and InvestmentsAdvisory and Investments
Bank Audi, Lebanon (advisory)Bank TuranAlem, Kazakhstan (investment)Banco ABN AMRO Real, Brazil (CG Credit Line)Absolut Bank, Russia (investment)Bank of Shanghai, China (investment)Banco de Oro, Philippines (investment)
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Feedback from Feedback from IOsIOs and the Marketand the Market
From the prospectus of the $150 mill. Euronotesissue of Absolut Bank (lead manager: MerrilLynch):“… IFC has promoted certain general corporate governance guidelines to the Bank and the Bank is reviewing and implementing such guidelines to compliment its own.”
From a Fitch Ratings credit report of PSKB:“Following International Financial Corporation (IFC) recommendations the bank has already introduced several BoD level committees, and amended the bank’s charter.”
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• Largest Commercial Bank in Romania• US$1 billion book value• State-owned (70%), with minority (30%) held by
Investment Funds (SIFs)• Two failed privatization attempts in 2002• Management and board indistinguishable
• Board composed of senior managers and SIF representatives• met more than 25 times annually
• Risk management and internal controls systems weak
Banca Comerciala Romana - 2002
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IFC’s Investment
• 12.5% + one share for US$111• .88x book value• Negotiated pari passu and in tandem with
EBRD• Tag-along / drag-along
• Medium-term trade sale anticipated (no IPO)
• Subsequent distribution of 8% to management, employees and retirees
• Institution-building program
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Corporate Governance Program
• Philosophy – “Governance for the Interim”• Introduced Two-Tiered Board Structure
• Management off the Supervisory Board• Redrafted Charter• Amendments to Banking Law• Audit & Compliance and Compensation Committees
• IFC and EBRD-nominated directors• Active engagement at Shareholders Meeting• Two-Stage Training Program
• IMD/IIF Seminar• In-house Program
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Initial Results
• Rating Agency Upgrades• Board effectiveness (committees still nascent)• Professionalization of Shareholders Meetings• Implementation of IBP
• Improvement of Risk Management and Internal Controls
• IFC-sponsored Resident Advisor to Internal Controls Unit
• Transparency sufficient to privatize
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Road to Full Privatization
• 11 interested bidders initially• 7 bids submitted in mid-October• 2 finalists: Erste Bank (Austria) and BCP
(Portugal) bid for Gov’t and IFC/EBRD shares
• Erste wins bidding: €3.75 billion for 61.88%• ~6x book value of €1 billion at June 2005• IFC’s 12.5% stake worth €758 million
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Contact DetailsContact Details::
Mike Lubrano – Washington
Email: [email protected]: +1 202 473-7891Fax: +1 202 522-1604
www.ifc.org/corporategovernance
Davorka Rzehak – Jo-BurgEmail: [email protected]: +27-11-731-3000