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A country strategy on how to improve
upon corporate governance: from form
to substance
Sebastian Molineus
Practice Manager,
Capital Markets Practice
The World Bank
Presented on May 14, 2012, in Chisinau, Moldova
Objective and outline
To provide inputs on how to improve upon corporate
governance practices in Moldova
1. Defining what good corporate governance is and
why it matters
2. What are the lessons from over 10 years of World
Bank experience
3. A potential roadmap for Moldova
Introduction: what is and why does corporate governance matter?
Lessons learned: Corporate governance challenges across the world
A potential roadmap for reforms
To begin with, it is important that we are all on the same page as to
what good corporate governance means
Simplified definition
The OECD defines corporate governance as:
A system by which companies are directed and controlled …
which involves a set of relationships between:
• a company’s management
• board of directors
• its shareholders and
• other stakeholders
… and which provides the structure through which company objectives
are set, attained and monitored.
Source: OECD Principles of Corporate Governance
What is “bank governance”? How is it different?
The manner in which banks are governed by
their boards and senior mgmt, which affects how they:
1. Set corporate objectives
2. Operate the bank on a day-to-day basis
3. Meet their accountability to shareholders and interests of
4. Operate the bank in a safe and sound manner, and in
compliance with laws and regulations
5. Protect the interests of depositors
Source: Basel Committee on Banking Supervision - Enhancing corporate governance for banking organisations
The following illustration offers a ‘look & feel’ of the key themes
corporate governance touches upon
Robust legal & regulatory
Protection of (minority)
shareholder rights
Strong disclosure &
transparency regime
Robust control structures
Good board practices
Strong enforcement regime
But what does it mean to in practice?
A change in behavior!
… in the end, corporate governance is about what people in privileged or
v don’t do) with other people’s (e.g.
responsible positions actually do (or
shareholders’ and depositors’) money!
The good news: research and practice demonstrates that good
corporate governance adds to the corporate “bottom line”
Optimizes Operational and Financial Efficiency
• Streamlines business processes, leading to better operating performance & lower capital expenditures
 Gompers, Ishii and Metrick, Corporate Governance and Equity Prices, August 2001
• Improves the company’s ROCE, with firms in the top cg quartile avg. 33% & in bottom quartile 15%
 Credit Lyonnais SA, 2001
• Better share price performance, higher profitability, larger dividend payouts & lower risk levels than peers
 Lawrence Brown, Georgia State University, Sept. 2003
Improves Access to Outside Capital
•Global Institutional Investors managing more than 1 trillion of assets state that they will pay a premium for
well governed companies. Premiums avg. 30% in Eastern Europe & Africa and 22% in Asia and Latin America
 McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
Improves Valuation and Lowers the Cost of Capital
•Over 10 years, well-governed companies across a wide range of sectors have seen superior valuation
multiples of more than 8% over their badly governed peers.
 Metrick, Ishi and Gompers, Corporate Governance and Equity Prices, August 2001
•One standard-deviation improvement in governance brings an improvement in valuation multiples that
ranges from 18% for companies in major OECD markets to 33% in emerging markets.
 Clapper and Love, World Bank, 2002
Builds/Improves the Company’s Reputation
• CG can make/break reputations by creating confidence &goodwill and building/restoring investor trust
And also brings benefits to the public
 For regulators and supervisors
• A first line of prudential defense
• Increased financial stability & reduction to
 For markets
• Higher market capitalization and liquidity
• Increase in investor confidence and trust
• Ability to attract, allocate & monitor
 For economies
 More “champion” companies that can
compete and grow internationally
 Higher economic growth
Introduction: what is and why does corporate governance matter?
Lessons learned: Corporate governance challenges across the world
A potential roadmap for reforms
The World Bank has carried out 90 governance assessments or
reviews in 70+ countries, including the ECA region, with the following
set of lessons learned
The World Bank’s Corporate Governance Group carries-out country-level corporate
governance ROSC assessments, and reviews for SOEs and financial institutions
1. Most boards are not fulfilling their role: that of providing
managerial oversight and strategic guidance on behalf of all
Training &
• Boards involved in day-to-day management; no succession plans
• Duties (of loyalty and care) defined, but not understood
• In practice, most companies have not formed board committees
• Position of CEO and chairman legally separated, yet insiders
continue to dominate board
• MCGC calls on 1/3 of boards to be independent, but definition
fails to cover directors who are shareholders
• In practice, few directors thought to be truly independent
• Except for the largest companies, NEDs receive low pay
• Executive pay not based on formal evaluation or LT incentives
• Cultural stigma against training
• Board self evaluations virtually non-existent
Financial and non-financial disclosure in particular remains weak,
despite the adoption of IFRS and ISA
 IFRS typically mandatory, but often
incomplete, or based on outdated versions
 In practice, critical gaps in financial reporting
in terms of quality and timeliness
 Few companies prepare and disclose annual
reports; most do not have CG sections
 Little information on CG, ownership, board
information, remuneration, risk structures, etc
Conflicts of interest due to the provision of
non-audit work
Quality of peer review process questioned
Financial institutions have often established the requisite control
functions, although most remain nascent and under-resourced
Key control functions
Key issues
 Most boards do not set risk appetite, approve
Risk management
Internal controls
Internal audit
 Risks are identified, assessed, monitored in
boards” are
units–but not across the bank through a CRO
focused on
 Risk function has sufficient authority/stature, but growth,
lacks independence, resources and board
dividends, and
market share,
 IC in some banks is underdeveloped due to lack but not on the
underlying IT infrastructure
 Inadequate follow-up to management letter
 IA formally reports to CEO and AC, but in practice, dimension
strong liaison to CEO in most banks (sets salary,
promotion, hiring/firing)
 Few IA plans truly risk based
 IA function has sufficient authority/stature, but
lacks independence, resources and board access
Controls are
under Formal report to board but CEO typically presents
resourced and
for the head of compliance; position lacks
authority and resources
 Often consists of only one individual (0.2 vs. 1%)
Introduction: what is and why does corporate governance matter?
Lessons learned: Corporate governance challenges across the world
A potential roadmap for reforms
Much has already been achieved these past ten years! However, the
CG ROSC shows that a number of important challenges remain
Today’s Achievements
Tomorrow’s Challenges
• CG Codes/Regs launched for
Legal &
• To close remaining gaps in the legal
listed companies, banks, SOEs
and regulatory framework
• Key laws in place & recently
• Modernize and build ‘smart’ CG
amended; new reforms launched
• A&A, CG ROSCs commissioned
• SECs typically in place;
• Build enforcement capacity/ regulatory
“bite”, with real fines
• MoUs between the CB, SEC,
• Independence of regulators should be
MoF to ensure for financial
market stability
• Launch of CG reform
• Boards need to fulfill their primary role
of oversight/guidance
• Launch of CG Centers and
• Disclosure must be improved
training programs to build
capacity among directors
• Nascent internal control frameworks
are built
Policy Recommendations. The Government of Moldova might
consider the following strategy:
Short term
(<1 year)
1. Targeted changes to the regulatory framework
 Amend corporate governance code; specific regulations
2. Launch CG course for shareholders, board members and
sr. managers
 Targeted training courses for board members and sr. managers, as well as for
technical control bodies (Internal Audit, Risk Management, etc.)
Medium term
(years 2-3)
3. Incorporate CG into supervisory process
 CG incorporated into supervisory process and supervisors to receive targeted
training; issue implementation guide
4. Require financial institutions and other public interest
entities to carry-out corporate governance (self)
 Financial institutions to develop action and implementation plans
 Develop a strategy to improve upon the corporate governance of SOEs.
Long term
(>4 years)
5. Carry-out comprehensive review of the legal and regulatory
framework, incl. Company and Banking Law
But in the end …
… it is up to the private sector to demonstrate its commitment
to real reforms!
More specifically, in building a corporate governance
framework, Moldovan financial institutions will need to…
Direct = to organize, energize, and supervise; to lead
1. Create a professional, vigilant,
and independent board
In practice, this means that board need to:
 Set policies and the overall direction, and not manage (“nose in, hands out”)
 Guide and supervise management; set performance objectives
 Act in the interest of the company and all shareholders, not a particular
 Build robust corporate, board, and risk governance frameworks
To disclose = revealing, uncovering, making known to others
2. Improve disclosure practice!
In practice, disclosure means:
 Disclosing accurate, relevant and timely financial information
 Disclosing non-financial information!
 Being transparent to shareholders, debt-holders, depositors, regulators,
and other stakeholders
 Demonstrate how “other people’s money” is being used, what risks are
being taken, and what returns shareholders may expect
To control = to check, test, or verify
4. To create a robust control
In practice, building a robust control framework means :
 Understanding the company’s risks
 Implementing internal controls
 Establishing an independent internal audit function
 Working with (not against) the external auditor
 Establishing an audit committee to coordinate the control environment
To protect = to shield from injury or damage, save from financial
4. Protect shareholder rights
In practice, protecting shareholder rights is to:
 Inform minority shareholders of their rights
 Allow all shareholders to participate in the profits of the company
 Protect shareholders from abusive actions, e.g. related party
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