Corporate Governance and Strategy Distance Learning Course Video Conference
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Corporate Governance and Strategy Distance Learning Course Video Conference November 15, 2001 Corporate Social Responsibility, and Sustainable Competitiveness--An Integrated Approach. D. Petkoski, World Bank Institute World Bank Group.

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D petkoski world bank institute world bank group

Corporate Governance and Strategy Distance Learning Course Video Conference

November 15, 2001

Corporate Social Responsibility, and Sustainable Competitiveness--An IntegratedApproach

D. Petkoski, World Bank Institute

World Bank Group


D petkoski world bank institute world bank group

“Bolstering the ties between companies and the communities in which they operate is crucial if economic and social development are really to succeed.”

James D. Wolfensohn

Davos, Switzerland

January 31, 2000


The main equation cg csr be c

The Main EquationCG+CSR+BEC

Corporate Governance +

Corporate Social Responsibilities +

Business Ethics = Competitiveness

(through people)


Why an integrated learning program

Why An Integrated Learning Program?

Competitiveness

Corporate

Social Responsibilities

Corporate Governance

Leadership

and

Values

Business Ethics


D petkoski world bank institute world bank group

The Tyranny of Either/Or

Company Choice

Contributing to Social and Environmental Improvement

Maximizing

Shareholder Value


Financial capital

Financial Capital

  • Debt

    •Commercial bank loans and bond purchases - private and sovereign debt

  • Portfolio Investment

    • Publicly traded companies

    (very few in developing countries)

    • More liquid and thus, more volatile

  • Foreign Direct Investment

    • Bigger impact due to increased access to markets, technology and management know-how


What does this mean to you

What Does This Mean to You?

  • Previouslyinvestors focused on conventional investment risks:

    • Financial Return on Investments

    • Political Stability/Efficacy

    • Regulatory Policy

    • Financial Structure

  • Currently investors are paying greater attention to:

    • Corporate Governance and

    • Social Responsibility


  • Why we need corporate governance

    Why We Need Corporate Governance?

    Because weak corporate governance limits investments in corporations, thus limiting growth and development

    … And the effectiveness of corporate governance cannot be taken for granted.


    Why we need corporate governance grabbing hands of insiders

    Why We Need Corporate Governance?“Grabbing Hands” of Insiders

    An Example of a Russian firm…

    An oil company skimmed over 30% of revenue, while stiffing its workers on wages, defaulting on tax payments…destroying the value of minority shares...


    D petkoski world bank institute world bank group

    Why We Need Corporate Governance?“Grabbing Hands” of Insiders

    Another Example of Russian firms…

    MarketEstimatedDiscounted

    ValueActual ValueRatio

    Firm A$90mil$50bil556 Times Less

    Firm B $20bil$600bil30 Times Less


    Why we need corporate governance grabbing hands of insiders1

    Why We Need Corporate Governance?“Grabbing Hands” of Insiders

    • The strength of private “grabbing hands” is measured by the difference in the share prices of voting and non-voting shares within a country

    • For example, the difference is 5% in the US, 13% in the UK, 45% in Israel, 32%-45% in Korea, 82% in Italy and higher in the Czech and Russia.

    • And such concerns are echoing across other developing countries, making it more difficult to raise capital to fund future investment projects...


    Corporate governance investors perspectives

    Corporate GovernanceInvestors’ Perspectives*

    • Latin America - 70% of respondents had invested in LA

      • 90 respondents with an estimated US$1,650b+ assets under management

    • Europe/US - 95% of respondents had invested in EU/US

      • 42 respondents with an estimated US$550b+ under management

    • Asia - 82% of respondents had invested in Asia

      • 84 respondents with an estimate $1,050b+ assets under management

        *McKinsey Investor Opinion Survey 2000


    Corporate governance investors perspectives1

    Corporate GovernanceInvestors’ Perspectives*

    • 75% - Board practices are at least as important as financial performance

    • 80% - Would pay more for shares of a well-governed company then for a poorly governed company with comparable financial performance

    • Premium differs by country and whether the investor is local or foreign.

      *McKinsey Investor Opinion Survey 2000


    D petkoski world bank institute world bank group

    Corporate GovernanceInvestors Are Willing to Pay More For a Company With Good Board Governance Practices

    83

    81

    89


    Corporate governance investors agree on the important board tasks

    Corporate GovernanceInvestors Agree On the Important Board Tasks


    Investors interests beyond the balance sheet

    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


    Socially responsible investment going beyond corporate governance

    Socially Responsible InvestmentGoing Beyond Corporate Governance

    • Funds that pass multiple, broad-based social or ethical screens, e.g., community involvement, environment, employee relations, product-related issues, and workplace practices

    • Seeks to provide shareholders with long-term total return

    • Is rapidly expanding with assets over $2.1 trillion in the United States


    Socially responsible investment domini social fund performance

    Socially Responsible InvestmentDomini Social Fund Performance


    Corporate social responsibility citizens expectations of companies

    Corporate Social ResponsibilityCitizens’ Expectations of Companies*

    Make Profit, PayOperateImprove Society

    Taxes, Create JobsBetweenSet Higher Ethical

    Obey LawsTwo PositionsStandards

    In %In %In %

    Australia84345

    Canada114543

    United States115335

    Great Britain174239

    Mexico252635

    Russia282323

    Japan321833

    Germany333134

    South Africa352334

    China442231

    * The Millennium Poll on Corporate Social Responsibility, 2000


    D petkoski world bank institute world bank group

    Corporate Social ResponsibilityCan Business Do Well By Doing Good?Dow Jones Sustainability Group Indexes (DJSGI)

    Global Investment

    Index of Sustainable Companies

    Outperformed the broader Dow Jones Global Indexes (DJGI) on the 5, 3, and 1 year periods

    This has focused attention on Corporate Management in general


    D petkoski world bank institute world bank group

    Corporate Social ResponsibilityCan Business Do Well By Doing Good?The Millenium Poll on Corporate Social Responsibility, PriceWaterhouseCooper, 2000

    • Company Reputation

      60% of consumers form their impression of a company based on labor practices, business ethics, social responsibility, environmental impact

    • Consumer Demand

      66% of consumers want companies to focus on societal goals in addition to financial performance

    • Legal and Civil Penalties

      75% of consumers hold companies responsible for avoiding bribery and corruption, avoiding child labor, preventing discrimination, protecting worker health, not harming the environment

    • Direct Financial Effects

      21% of consumers in the past year report rewarding or punishing companies based on social performance.


    Corporate social responsibility can business do well by doing good

    Corporate Social ResponsibilityCan Business Do Well By Doing Good?*

    In organizations with formal codes of business ethics, ethics training, and a formal reporting mechanism, employees:

    • Observe Less misconduct

    • Experience less pressure to compromise standards

    • Are more likely to report observed misconduct

    • Are more satisfied with their company

    • Are more satisfied with their job

    • Rate their company higher compared with competitors

      * National Business Ethics Survey, Ethics Resource Center, 2000


    Why business ethics what do all these names have in common

    Why Business Ethics?What Do All These Names Have in Common?

    NBC, Sears, General Electric, Westinghouse, Salomon Brothers,

    Dow Corning, Pfizer, American Express, Hertz, NYNEX, Northrop, Teledyne, Lockheed, Arthur Andersen, Ernst & Young,

    Price Waterhouse, Alleco, Drexel Burnham Lambert, A. H Robbins, Gitano Group, Cendant, Archer Daniels Midland, Texaco, Mitsubishi, Nike, Prudential, Shell, Union Carbide, Hudson Foods, BCCI, Barings, Maxwell Communications, Sumitomo, Dow Chemical, United Way of America


    Why business ethics financial and reputational risks to the corporation

    Why Business Ethics?Financial and Reputational Risks to the Corporation

    • Assets not used for intended purposes

    • Non-compliance with laws and regulations

    • Corrupt behavior, poor business practices

    • Shareholder activism – boards, senior management areheld accountable

    • Employee responses: impact on quality and productivity “Exit, Voice and Loyalty”


    International trends ethical issues of corporate governance

    International TrendsEthical Issues of Corporate Governance

    • Making management accountable to shareholders

    • Creating and maintaining adequate control systems

    • Ensuring Board oversight of corporate management

      Ordinary decency–fairness, honesty–are

      central ethical principles of corporate governance


    D petkoski world bank institute world bank group

    International TrendsEnsuring Management AccountabilityOECD, ICC, Russian Chamber of Commerce, Hong Kong EDC, Gulf Centre EE, U. S. Federal Sentencing Guidelines, OAS, TI, Ethics South Africa

    • Written code of ethics, business practice standards, prioritized values clearly communicated to provide broad and specific guidance

    • Senior executive/management, oversight and reporting, visible commitment by organizational leaders

    • Formal mechanisms, e.g., helpline/hotline, to report suspected instances of improper conduct

      • Staff encouraged to make reports

      • Disciplinary, corrective actions are taken

      • Fair and consistent enforcement

    • Regular communication/training on the standards, business practices, values of the organization

    • Internal and external auditing and monitoring, ethical work culture assessments/surveys, regular review of policies, procedures, business practices


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