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THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE

1 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 THE ROLE OF STAKEHOLDERS THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCEIN CORPORATE GOVERNANCEE astern Caribbean CORPORATE GOVERNANCE ForumEastern Caribbean CORPORATE GOVERNANCE ForumJohn A. ZemkoMarch 8-9,2005St. KittsAn affiliate of the Chamber of CommerceCenter for International Center for International Private EnterprisePrivate Enterprise2 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 The CORPORATE GOVERNANCE framework should The CORPORATE GOVERNANCE framework should recogniserecognisethe rights of STAKEHOLDERS established by law or through the rights of STAKEHOLDERS established by law or through mutual agreements and encourage active comutual agreements and encourage active co--operation operation between entities, including family owned businesses and between entities, including family owned businesses and statestate--owned/controlled enterprises, and STAKEHOLDERS in owned/controlled enterprises.

2 Center for International Private Enterprise © 2003 Center for International Private Enterprise © 2005 “The corporate governance framework should recognise

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Transcription of THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE

1 1 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 THE ROLE OF STAKEHOLDERS THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCEIN CORPORATE GOVERNANCEE astern Caribbean CORPORATE GOVERNANCE ForumEastern Caribbean CORPORATE GOVERNANCE ForumJohn A. ZemkoMarch 8-9,2005St. KittsAn affiliate of the Chamber of CommerceCenter for International Center for International Private EnterprisePrivate Enterprise2 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 The CORPORATE GOVERNANCE framework should The CORPORATE GOVERNANCE framework should recogniserecognisethe rights of STAKEHOLDERS established by law or through the rights of STAKEHOLDERS established by law or through mutual agreements and encourage active comutual agreements and encourage active co--operation operation between entities, including family owned businesses and between entities, including family owned businesses and statestate--owned/controlled enterprises, and STAKEHOLDERS in owned/controlled enterprises.

2 And STAKEHOLDERS in creating wealth, jobs, and the sustainability of creating wealth, jobs, and the sustainability of financially sound sound enterprises. Draft of CORPORATE GOVERNANCE PrinciplesDraft of CORPORATE GOVERNANCE Principles3 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Benefits To SocietyBenefits To Society Helps create competitive, modern and healthy Helps create competitive, modern and healthy companiescompanies An effective tool against corruptionAn effective tool against corruption Helps attract investmentHelps attract investment Helps foster healthy competitionHelps foster healthy competition Helps prevent banking crisesHelps prevent banking crises4 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Perspective of the CorporationPerspective of the CorporationMaximizing value subject to meeting the Maximizing value subject to meeting the corporationcorporation s financial, legal and contractual s financial, legal and contractual obligations.

3 Board of directors must balance the obligations. Board of directors must balance the interests of shareholders with STAKEHOLDERS : interests of shareholders with STAKEHOLDERS : employees, customers, suppliers, investors, employees, customers, suppliers, investors, communities in order to achieve longcommunities in order to achieve long--term term sustained value. (World Bank)sustained value. (World Bank)Center for International Private Enterprise 2004 Source: The World Bank Group6 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Defining StakeholdersDefining StakeholdersWith regard to identifying relationships with With regard to identifying relationships with STAKEHOLDERS there is a difference between STAKEHOLDERS there is a difference between taking taking into accountinto account and being and being accountable toaccountable to STAKEHOLDERS .

4 (The Economist) STAKEHOLDERS . (The Economist)7 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 STAKEHOLDERS to beStakeholders to be Accountable ToAccountable Banks and creditorsBanks and creditors Institutional investorsInstitutional investors EmployeesEmployees8 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Defending stakeholder Interests: Defending stakeholder Interests: Banks and CreditorsBanks and Creditors Transparency Transparency ----or full disclosure of financial or full disclosure of financial and key performance informationand key performance information Laws/regulations preventing conflicts of interest Laws/regulations preventing conflicts of interest involving boards of directors and managersinvolving boards of directors and managers Procedures for bankruptcyProcedures for bankruptcy Enforcement of creditor rightsEnforcement of creditor rights9 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Defending stakeholder Interests: Defending stakeholder Interests.

5 Institutional InvestorsInstitutional Investors Transparency and disclosureTransparency and disclosure Duties of the auditor and professional care in Duties of the auditor and professional care in the conduct of auditsthe conduct of audits Protection of minority shareholder rightsProtection of minority shareholder rights Procedures for bankruptcyProcedures for bankruptcy Access to informationAccess to information10 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Defending stakeholder Interests: Defending stakeholder Interests: EmployeesEmployees Transparency and disclosureTransparency and disclosure Ethical codes for directors and senior Ethical codes for directors and senior managementmanagement Whistleblower protectionWhistleblower protection WellWell--defined role for employees in CORPORATE defined role for employees in CORPORATE GOVERNANCE structuresgovernance structures11 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Developing Countries Need Developing Countries Need Institutional ReformsInstitutional ReformsCorporate GOVERNANCE systems depend upon a set of CORPORATE GOVERNANCE systems depend upon a set of institutions (laws, regulations, contracts, and norms)

6 Institutions (laws, regulations, contracts, and norms) that create selfthat create self--governing firms as the central element governing firms as the central element of a competitive market economy. These institutions of a competitive market economy. These institutions ensure that the internal CORPORATE government ensure that the internal CORPORATE government procedures adopted by the firms are enforced and that procedures adopted by the firms are enforced and that management is responsible to owners (shareholders) management is responsible to owners (shareholders) and other STAKEHOLDERS . and other STAKEHOLDERS . 12 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Concentrated Ownership in BrazilConcentrated Ownership in Brazil CIPE/OECD survey revealed only 5% of large CIPE/OECD survey revealed only 5% of large firms and only 33% of medium firms are widely firms and only 33% of medium firms are widely heldheld Family Owned Firms:Family Owned Firms.

7 Agency Conflict Agency Conflict in family owned firms occurs in in family owned firms occurs in successor generation and in relationship with bankssuccessor generation and in relationship with banks Pyramid Structures Pyramid Structures firms controlled by families holding firms controlled by families holding small number of controlling shares small number of controlling shares Dual Class Shares Dual Class Shares minority shareholderminority shareholder s dons don t have the t have the same rights as majority shareholderssame rights as majority shareholders13 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Family Owned Firms in ColombiaFamily Owned Firms in Colombia Ownership and control Ownership and control --68% of corporations are 68% of corporations are family owned and out of those 59% are still managed family owned and out of those 59% are still managed by the foundersby the founders Poor survival rate Poor survival rate only of family firms have only of family firms have specified procedures for managerial succession and only specified procedures for managerial succession and only 13% of family business survive to 313% of family business survive to 3rdrdgenerationgeneration Little access to capital markets Little access to capital markets only 124 out of only 124 out of 148,000 legal enterprises are listed 148.

8 000 legal enterprises are listed 14 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Western Hemisphere ExperienceWestern Hemisphere Experience Brazil Instituto Brasileiro de Governan aCorporativa (IBGC) Chile Universidad Cat lica/Chamber of Commerce/Center for Excellence in GOVERNANCE Colombia Confederation of Chambers of Commerce and Industry (Confec maras) Peru Procapitales and the Universidad de Ciencias Aplicadas (UPC) BrazilBrazil InstitutoInstitutoBrasileiroBrasileirode de GovernanGovernan aaCorporativaCorporativa(IBGC)(IBGC) ChileChile Universidad Universidad CatCat licalica/Chamber of /Chamber of Commerce/Center for Excellence in Commerce/Center for Excellence in GovernanceGovernance ColombiaColombia Confederation of Chambers of Confederation of Chambers of Commerce and Industry (Commerce and Industry (ConfecConfec marasmaras)) PeruPeru ProcapitalesProcapitalesand the Universidad de and the Universidad de CienciasCienciasAplicadasAplicadas(UPC)( UPC)

9 15 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Emerging ConsensusEmerging Consensus For businesses to succeed in the world economy, For businesses to succeed in the world economy, they must have healthy CORPORATE GOVERNANCE they must have healthy CORPORATE GOVERNANCE mechanisms including rule of lawmechanisms including rule of law Building CORPORATE GOVERNANCE in developing Building CORPORATE GOVERNANCE in developing countries requires refashioning institutionscountries requires refashioning institutions Private sector must participate in developing Private sector must participate in developing GOVERNANCE mechanismsgovernance mechanisms The reward is increased investment and growthThe reward is increased investment and growth16 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Strategy for CG ReformStrategy for CG Assessment and AdvocacyInitial Assessment and and

10 Institutional Outreach and Institutional and Institutional Capacity and Institutional for International Private Enterprise 2003 Center for International Private Enterprise 2005 Initial Assessment and AdvocacyInitial Assessment and Advocacy Assess CORPORATE GOVERNANCE failuresAssess CORPORATE GOVERNANCE failures Rate country standards v. best practiceRate country standards v. best practice Adapt OECD principlesAdapt OECD principles Build awareness at senior business and policy Build awareness at senior business and policy levelslevels Identify stakeholdersIdentify STAKEHOLDERS Create broader public demand for reformCreate broader public demand for reform Public education campaignsPublic education campaigns18 Center for International Private Enterprise 2003 Center for International Private Enterprise 2005 Outreach and Institutional DevelopmentOutreach and Institutional Development Develop CORPORATE GOVERNANCE codes and internal Develop CORPORATE GOVERNANCE codes and internal control mechanismscontrol mechanisms Foster shareholder activismFoster shareholder activism Improve regulatory and enforcement


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