Anar Aliyev, Operations Officer, IFC MCG Project

1. Corporate Governance Training for Directors
Anar Aliyev
Operations Officers
IFC Mongolia Corporate Governance Project
April 27, 2012

2. Corporate governance involves a set of
relationships between a company’s
management, its board, its shareholders and
other stakeholders. Corporate governance also
provides the structure through which the
objectives of the company are set, and the
means of attaining those objectives and
monitoring performance are determined.
The OECD Principles of Corporate Governance
Paris, France, 2004
Corporate Governance Defined

3. Corporate governance refers
to the structures and processes for
the direction and control
of companies
•Shareholders
•Board•Management
•Regular reporting and update
•Guidance and supervision
IFC Definition of Corporate Governance

4. Good CG Parameters
II. Structure & Functioning of Boards of Directors
IV. Transparency & Disclosure
V. Treatment of Minority Shareholders
I. Commitment to Good CG
 Roles & Responsibilities (vis-à-vis mgmt)
 Composition & Structure, incl. committees
 Independence & Skills
 Remuneration & Evaluation
 Dedicated CG officer
 Written code of CG
 Board committee on CG
 Financial reporting
 Information disclosure
 Shareholders’ meetings & Share voting
 Representation & Fair treatment
 Access to information
III. Control Environment
• Internal Audit Functions
• Internal Control Systems
• Risk Management

5. But…
CG does reinforce
all of these!!!
…as distinct from:
• Corporate citizenship
• Corporate social responsibility
• Socially responsible investing
• Other elements of sustainability
• Political governance
• Public sector anti-corruption/AML

6. Why Do Investors Care About CG?
• Portfolio performance
• Development mission
• Reputational risk / reputational agent

7. Business Case for Good Governance
(or, why should Clients Really Care About CG?)
Manages Risk
Enhances the Company’s Reputation
Provides Access to, Lowers Cost of Capital
Adds value to firms
Improves Operational Efficiency

8. Agency And Stewardship
•8

9. •9
Corporate Governance System

10. Competing Tensions
If management is
about running business,
governance is about
seeing that it is run
properly. All companies
need governing as well
as managing.
•10

11. ‘Foundation of Reform’
“I see corporate governance as a foundation of reform which
strengthens and modernizes an economy.…”
“Without corporate governance reforms, the alternatives would
be monopolies….”
“The corporation must be a separate, autonomous legal
personality with rights, duties, and responsibilities.”
Jesus P. Estanislao, President, Founder
Institute for Corporate Directors in the Philippines
•11

12. Strong commitment to corporate governance reforms
•Goodboardpractices
•Appropriatecontrol
environmentandprocesses
•Strongregimeof
•disclosureandtransparency
•Protectionof(minority)
shareownerrights
•The five key elements of
good corporate governance
Five Elements of Corporate Governance
•12

13. OECD Principles
• Ensuring the basis for an effective corporate governance
framework
• Rights of shareowners and key ownership functions
• Equitable treatment of shareowners
• Role of stakeholders in corporate governance
• Disclosure and transparency
• Board responsibilities
•13

14. Corporate Governance Framework
 Laws and Regulations
• Companies Law
 Corporate Governance Code
• Limited applicability
• Should provide for requirements above the minimum
requirements of the legislation

15.  Charter
 Company Governance Code
 Code of Ethics / Conduct
 By-laws on:
- Management
- Audit Commission
- Branches and Rep. Offices
- General Meeting
- Board of Directors
- Internal Audit and Internal Control
- Corporate Secretary
- Supervisory Board Committees
 Policies and Procedures
- on dividends
- on information disclosure
- on internal control
- on risk management
•General
Governance
Framework
•Specific
Governance
Framework
The Internal Framework

16. Risk 1 The board of directors is not up to the task of overseeing the strategy, management
and performance of the company.
– No proper “check and balance” of managers – e.g., UBS, Barings, Lehman
Brothers
Risk 2 The company’s risk management and controls are insufficient to ensure sound
stewardship of the company’s assets and compliance with relevant regulations.
– Catastrophic operating systems failure – e.g., Enron, Lehman Brothers.
Olympus
Risk 3 The company’s financial disclosures are not a relevant, faithful, and timely
representation of its economic transactions and resources.
– Fraudulent numbers shared with investors/capital markets – e.g., Enron,
Satyam, Olympus,
Risk 4 The company’s minority shareholders’ rights are inadequate or abused.
– Minority shareholders rights trampled or they need courts for recourse –
e.g., Mitsubishi, Samsung
Risk 5 The IFC potential investee company and its shareholders have not demonstrated a
commitment to implementing high quality CG policies and practices.
– Much of what investors see is window dressing – e.g., Tyco
Goal: Assess and Mitigate CG Risk –
IFC approach

17. Common CG issues – Sample responses in East Asia
Concentrated ownership: agency problems between
controlling and minority shareholders
Clearly Articulate Shareholder Treatment
Policies, improve family governance structures
Ineffective Boards (poor capacity, passive approach, low
independence)
Strengthen Boards (e.g., composition and
procedures, develop and adopt audit and risk
committees, incorporating E & S into strategy)
Conflicts of Interest; RPTs Introduce Board Committees and Other
Mechanisms to Handle Conflicts
Succession / Family Business Issues Clear succession policy, introduce family
governance organs
Transparency / Internal Controls / Internal Audit
Function / Risk Management System
Introduce Audit and Risk Committees
(Financial and risk expertise) improve IC, RM
and improve/implement adequate IA functions

18. Board Practices

19. What’s wrong with this picture?
Board of Directors
Average age: 68 (two board members 80+)
 # of women: 1
 # of bankers: 2
 1 director is a theatre producer
 1 direction also on American Red Cross
 3 new members since turn of the century
 majority of board not financially literate
 Others all appointed in 1994 (at time of IPO)
 Chair of the Board, CEO, and Chair of the Risk
and finance committee – all the same person
 The other member of the 2 person committee
80+
 Risk and Finance committee met once in 2007

20. Lehman Bros.

21. Board’s Role
“The board’s role is to provide entrepreneurial leadership of the
company within a framework of prudent and effective controls….”
United Kingdom Combined Code (2006)
•The board should exercise compelling and relentless leadership and
should not underestimate the power of leading by example -
evidenced by high levels of visibility and integrity, strong
communications, and demanding expectations. This leadership should
be clear to all within the organization, as well as shareholders and
other stakeholders.”
Boardroom Behaviours
A report prepared for Sir David Walker
by the Institute of Chartered Secretaries and Administrators , UK
June 2009

22. Functions of the Board
• Determines the strategic direction and development of the
company
• Determines and approves the business plan of the company
• Appoints and removes the members of the Executive Board
• Supervises the operation of the Executive Board and company’s
administration
• Controls the implementation of the AGM’s resolution
Strategic Oversight
and Control
• Controls the accuracy of all financial reports and information
• Adopts the report about important events for the company
• Establishes internal control and risk management mechanisms
• Proposes the adoption of financial reports, managing reports,
auditor reports and Corporate Governance Reports to the AGM
Control, Disclosure,
and Transparency
• Organizes the AGM
• Approves related party transactions
• Resolves corporate conflicts
Shareholder Rights
• Increases the charter capital within the limitations of authorized
capital
• Issues bonds and other securities in accordance with the charter
and the law
Charter Capital and
Assets

23. Board Types
• One-tier or unitary
• Two-tier or dual
• Supervisory Board
• Management Board

24. • Simple Majority
 One share – 1 vote
• Cumulative voting – recommended international
practice
 Used for election of Directors;
 Allows the minority shareholders to have
their representative in the Supervisory Board;
 1 share – “X” votes (X – is the total number of
seats in the Board of Directors)
Election of Directors

25. Board Size
Companies should choose a board size that
will enable them to:
•Hold productive, constructive discussions
•Make prompt, rational decisions
•Efficiently organize the work of its
committees, if these are established

26. CG Theories on composition of the Board
Shareholders
Agency Theory
Resource
Dependence Theory
Stewardship Theory
•Advice and Counsel
•Legitimacy
•Channels for communicating
information between the firm
and external organizations
•Assistance in obtaining
resources or commitments
from important elements
outside the firm
Board of Directors
Management
Access to
resources
Monitoring
Advising role
Focus on internal vs. external and
independent and non-independent
Focus on directors who can maximize
the provision of important resources
to the firm
Focus on internal vs.
external and access to
information
Institutional Theory
Legitimacy
Focus on prevailing
institutionalized norms
in the organizational
field and society
Social Network Theory
Trust
Focus on social
networks of the
principal stakeholders

27. Executive/Non-Executive Directors
Executive directors
• Hold an operational position
• Typically the CEO, the chief operating officer (COO),
and/or the chief financial officer (CFO)
• Best informed about the company’s business and its
challenges since they make decisions daily about the
company’s operations.
• Ultimately responsible, too, for the company’s
operating results.
Non-executive directors
• Non-executive directors do not hold an executive
position and they may or may not be independent

28. Independent Director Qualifications
• International vs. Local requirements
• No close family ties with any of the company’s
advisers, directors or senior employees
• No cross-directorships or significant links with
other directors through involvement in other
companies or bodies
• Not a significant shareowner
• Not a long-term board member

29. Independent Director Qualifications
• Not a recent employee
• No recent material business relationship with the
company
• No recent or current remuneration from the
company, except for:
 Director’s fee
 Share options
 Performance-related pay
 Pension

30. Importance of Independent Directors
 Independent, non-executive directors should
constructively challenge and contribute to the
development of strategy.
 Independent directors should scrutinize the
performance of management in meeting agreed
upon goals and objectives, and monitor the
reporting of performance.

31. Importance of Independent Directors
 Independent directors should satisfy themselves
that financial information is accurate, and that
financial controls and systems of risk
management are robust and defensible.
 Independent directors are responsible for
determining appropriate levels of remuneration
for executive directors, have a prime role in
appointing, and where necessary removing,
senior management, and in succession planning.

32. Board Proceedings

33. Preparation for Board Meetings
• Setting the agenda and its content
• The annual calendar
• Board meeting frequency
• Board briefing papers, management reports

34. Board Agenda
• Approval of minutes of last meeting
• Formal approval of matters requiring limited
discussion
• Executives' reports – company performance
• CEO financial performance
• Audit committee report
• Appointing external auditors (if applicable)
• Remunerations report

35. Meeting Minutes
• Location, date of the meeting
• Names of the persons who participated in the meeting and
those absent
• Principal points arising during discussion
• A record of board decisions

36. Annual Calendar of Board Activities
Standing items
• Approve meetings of previous meeting
• Approve unbudgeted capital expenditures over
• Review actual versus budgeted financial results
• Approve board committee reports
February
• 1 year assessment
• Dividend declaration
• Growth strategy discussion
• Strategy review
March
• Review financial performance versus competitors
April
• Authorization of foundation contribution
• Business plan review for next financial year
June
• Review / approve strategic plan
• Business unit No. 1 strategy review
• Review of chairman’s personal objectives
• Dividend declaration
• Annual meeting resolutions
• Set meeting schedule for next calendar year
• Litigation review
September
• Annual organization matters (committees, officer
elections)
• Dividend declaration
• Annual shareowners meeting
• Review financial performance versus competitors
• Appoint external auditors
October
• Strategic plan review
December
• Approve annual budget
• Management development update
• Dividend declaration
• Strategy review

37. Instruments to Enhance Effectiveness
• Board by-law setting out procedural rules
 Clarifies leadership roles and core responsibilities
 Reserves matters specifically reserved to board
 Sets management delegations and reporting arrangements
• Comprehensive induction for new directors
 Legal and regulatory obligations
 Financial structure of business, budgets and KPIs
 Understanding of strategic priorities and current status
 Familiarize with business operations, e.g. site visits
• Annual board work plan
 Meetings and budget cycle, annual reporting
• Code of ethics or statement of business principles
 Defines corporate values and conduct of staff and directors
•

38. Directors’ Duties

39. Fiduciary Duties
• Directors must act in a faithful, trustful manner
towards or on the company’s behalf, putting their
duty before personal interests.
• Considerations include:
 Good faith
 Proper purpose
 Not to make secret profits
 Avoiding conflicts of interest
 Confidentiality

40. Duty Of Care
• Legal obligation imposed on directors requiring
that they adhere to a reasonable standard of
care while performing any acts that could
potentially harm others
• Directors are normally expected to discharge
their duties in:
 Company’s best interests
 Compliance with company’s code of conduct

41. Duty Of Loyalty Calls For Directors Not to
• Conduct transactions in which they have a
personal interest
• Accept a position in a competing company
• Enter into contractual relations with a competing
company
• Use the company’s assets, facilities for personal
use
• Use information, business opportunities received
in their official capacity for personal gain
• Accept gifts

42. • Making a self-interest transaction, competitive actions
• Insufficient control over financial operations, unfair
valuation of a deal
• Misleading statements or data, including in the issue
prospectus
• Disclosure of confidential information
• Deliberate bankruptcy
• Breach of antimonopoly and other laws
• Insufficient control over of the actions of other directors
Typical cases of liability

43. • Business judgment rule - no liability if director acted in
good faith, on an informed basis, and in the belief that
the decision was in the best interests of the company
• Indemnification
• Director and Officer Liability Insurance
Director Liability

44. Director Skills, Experience, Attributes
•Financial expertise
•Relevant industry experience
•Legal expertise
•Representatives of key stakeholders
•Experience of operating internationally
•Honesty and integrity
•Gender distribution
•Age distribution

45. Qualifications of Directors: Best Practice
• The trust of shareholders, other board members,
managers and employees of the company
• The ability to relate to the interests of all
stakeholders and make well-reasoned decisions
• The professional expertise and education
• International business experience, knowledge of
national issues and trends, knowledge of the market,
products and competitors
• The ability to translate knowledge and experience
into solutions

46. Director’s Rights
• Access to information
• Reimbursement for expenses incurred
• Discharge their duties without interference
from co-directors
• Attend and participate in board meetings
• Notice of meetings
• Advice
• Delegation

47. Board Evaluation and Remuneration

48. •Why evaluate the board of directors?
• It improves board efficiency
• Focus on strategy
• Clarifies responsibility
• Better processes
• It improves accountability
• It makes the company more attractive to an
investor
Board Evaluation

49. • Types of Evaluations
• Self-evaluations
• Easy and simple
• Issue of bias
• Evaluations of the Whole Board
• Most common
• Evaluations of Individuals
• Most effective
• Most invasive
Board Evaluation

50. • Board Composition
• Committees
• Board Processes
• Board Responsibilities
• Individual Evaluations
What to Evaluate

51. Remuneration of Directors
• Flat established fee
• Fee based upon number of meetings attended
• Another form of reimbursement that is linked to
the company’s overall results of operations

52. Board Committees
• Aid to the board, not a substitution
• Generally no executive powers
• Focus on specialized areas of responsibilities
• Chair and members normally “independent”
• Key committees
• Audit (sometimes includes risk)
• Remuneration or compensation
• Nominations or governance

53. Benefits of Board Committees
• Assist the board in its decision making
 Brings together non-executives and management
 Allows detailed discussion on management matters
 But, filters out operational issues that remain with
management
 And, focuses on strategic decisions required of the board
• Supports board responsibilities in key areas
 Audit, internal controls and risk
 Executive compensation and management appointments
 Governance issues and corporate policies
 Nomination and selection of non-executive directors
 Others, e.g. health, safety, environment, etc.
• Defined terms of reference and limitations
• Generally, no executive powers
•

54. Audit Committee
Role:
• Approves or recommends the approval of the appointment of external
auditors and oversees their relationship with the company
• Monitors the effectiveness of, and receives regular reports from, the
internal audit function
• Reviews financial statements, procedures, and systems of internal
control over financial reporting
• Reviews arrangements for compliance with the requirements of
regulators
• Receives reports on the operation of the company’s “whistleblower”
arrangements
• May review the company’s risk-management framework
Composition:
• All independent, non-executive directors

55. Remuneration Committee
Role:
• Considers matters relating to board and
executive remuneration
• Approves changes to incentive and benefits plans
applicable to senior managers
• May be involved with remuneration decisions for
the entire company
Composition:
• All independent, non-executive directors

56. Corporate Governance And Nomination
Committee
Role:
• Considers matters relating to corporate governance,
including the composition of the board and the appointment
of new directors
• Oversees the annual performance evaluation of the board,
its committees, and the individual directors
• Reviews strategic human resource decisions and succession
plans for the chairman and other key board and executive
positions
Composition:
• All independent, non-executive directors

57. Relationship with Executive Bodies
• Board’s primary role
 Provide guidance to and monitoring the performance of
the senior management for the benefit of all shareholders
• The relation of the board vis-à-vis management in following
areas
 Setting strategy and vision of the company
 Selection of CEO and senior management/approving
executive compensation
 Oversight of internal controls, external audit and
preparation of financial statements
 Authorization of major capital expenditures and large-value
transactions
 Oversight of human resources policy
•

58. Relationship with Executive Bodies
Management presenting information to the board:
– Identify and provide all material information
necessary for the board to provide adequate
oversight
– Analyze how changes in industry and economy affect
the strategy
– Describe action plans to stay on track, on schedule,
and on budget
– Report to the board regularly and fully on progress -
identify and disclose risk to the board
– Monitor and inform about risk changes
– Make reasonable and realistic recommendations to
the board

59. Succession Planning
• A succession planning policy is needed to ensure
the business continuity of the Company’s
operations and establish a formal process of
authority delegation in the normal course of
business as well as in emergency situations.
•To put individuals who could perform
executive functions sin the future in positions
where they can build necessary skills

60. 60 of 9
Role of the Board in Succession Planning
• Nominations and Remuneration Committee
develops the key positions succession policy.
• The Board reviews and approves (in coordination
with the CEO) succession policy
• The Board reviews candidates for the General
Director’s position.

61. •
Board’s Role in Financial Oversight
• Duty to maintain proper accounting records
• Periodic reporting of financial position,
performance
• Establishing, monitoring proper internal controls
• Ensuring proper external controls and audit
• Skills, knowledge required by directors

62. •
The Board and Risk Management
 The board should know about and evaluate the:
• Most significant risks facing the company
• Possible effects on shareowners
• Company’s management of a crisis
• Importance of stakeholder confidence in the organization
• Communications with the investment community
 The board should ensure that:
• Sufficient time is devoted to discuss risk strategy
• Appropriate levels of awareness exist throughout the
company
• Risk-management processes work effectively
• A clear risk-management policy is published

63. Board Oversight of Control Environment

64. Building Effective Board Governance
• Defining key board roles
 Board Chairman
 Board Directors - executive and non-executive
• Putting in place board governance arrangements
 Board committees to support decision process
 Supporting functions to regulate processes
 Board procedures and rules, e.g. conflicts of interest
 Delegated authorities for management
• Ensuring proper oversight and supervision
 Management reporting and public disclosures
 Assurance processes and controls
•

65. Ten practices to enhance board effectiveness
Value-added role Practices for enhancing effectiveness
•Vigilantly question and understand risk profile
•Set up audit and risk committees with real responsibility, authority and
accountability
Ensure effective risk
management
•Review, approve and periodically monitor (review of implementation,
recalibration as needed) company strategyOversee strategy
•Maintain a comprehensive “dash board” with key metrics to monitor the
performance and health of the bank
•Conduct 2-4 “site visits” each year to branches, operations centers or
other key functions
Monitor corporate
performance
•Evaluate candidates and hire CEO and / or other senior management
positions and develop contingency plan
Develop strong
management
•Establish code of conduct and serve as role model to the organizationMaintain corporate
and board values
•Ensure good board composition and dynamics
•Set up nomination committee to select independent directors and
appoint board committee’s members
•Maintain consistent, functional administrative processes
Independent self-
governance

66. And how is your board?
•Low Involvement •High Involvement
Passive
Board
Certifying
Board
Engaged
Board
Intervening
Board
Operating
Board
•At discretion
of GD
•Limited
activity &
participation
•Limited
accountability
•Ratifies Mgmt.
preferences
•Certifies to SHs
that GD meets
expectations
•Takes corrective
action only as
ultimate ratio
•Understands
role of ind.
directors
•Informed about
GDs performance
•Established a
succession plan
•Provides insight,
advice & support
to mgmt.
•Understands its
responsibility to
oversee mgmt.
•Guides & judges
the GD
•Has right skills
mix to add value
•Define roles and
responsibility of
Board vs. Mgmt.
•Intensely
involved in
decision-making
around key issues
•Frequent &
intense
meetings, often
on short notice
•Makes key
decisions that
mgmt. then
implements
•Fills gaps in
mgmt.
experience
•Source: HBR, David A. Nadler,
Building Better Boards

67. Anar Aliyev
Operations Officers
IFC Mongolian Corporate Governance Project
E-mail: aaliyev@ifc.org