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D. Petkoski, World Bank InstituteWorld Bank Group
Corporate Governance and Strategy Distance Learning Course Video Conference
November 15, 2001
Corporate Social Responsibility, and Sustainable Competitiveness--
An Integrated Approach
“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
Corporate Governance +
Corporate Social Responsibilities +
Business Ethics = Competitiveness (through people)
The Main EquationCG+CSR+BEC
Competitiveness
Corporate Governance
Corporate Social Responsibilities
Business Ethics
Leadership and
Values
Why An Integrated Learning Program?
The Tyranny of Either/Or
Maximizing
Shareholder Value
Company Choice
Contributing to Social and Environmental Improvement
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?
Previously investors 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?
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
An oil company skimmed over 30% of revenue, while stiffing its workers on wages, defaulting on tax payments…destroying the value of minority shares...
An Example of a Russian firm…
Another Example of Russian firms…
Why We Need Corporate Governance?“Grabbing Hands” of Insiders
Market Estimated Discounted
Value Actual Value Ratio
Firm A $90mil $50bil 556 Times Less
Firm B $20bil $600bil 30 Times Less
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 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 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
Corporate GovernanceInvestors Are Willing to Pay More For a Company With Good Board Governance Practices
0
20
40
60
80
100
120
Latin America Europe/US Asia
NoYes
83 81 89
Would be willing to pay a premium
7178
78
79
79
79
82
82
82
82
82
82
84
84
88
88
89
89
89
90
91
82
Italy
Venezuela
Belguium
Switzerland
Spain
Japan
Argentina
US
Indonesia
Brazil
Mexico
Average premium
2227.2
27.6
18.5
19.6
20.2
18
18.2
19.2
19.8
20.2
20.8
21.2
17.9
18.3
24.9
27.1
20.2
22.9
25.7
21.5
24.2
Italy
Venezuela
Belguium
Switzerland
Spain
Japan
Argentina
US
Indonesia
Brazil
Mexico
Average premium
2227.2
27.6
18.5
19.6
20.2
18
18.2
19.2
19.8
20.2
20.8
21.2
17.9
18.3
24.9
27.1
20.2
22.9
25.7
21.5
24.2
Italy
Venezuela
Belguium
Switzerland
Spain
Japan
Argentina
US
Indonesia
Brazil
Mexico
Corporate GovernanceInvestors Agree On the Important Board Tasks
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Evaluate performance of the board
Evaluate Mgmt. Development processes
Establish independent corporate leadership
Determine executive compensation plan
Communicate with other stakehlders
Communicate with shareholders
Manage CEO succession
Maintain legal and ethical practices
Evaluate Sr. Mgmt. Performance
Monitor and evaluate corporate performance
Monitor and evaluate long-term strategy
Not Important Very Important
AsiaEurope/USLatin America
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 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 InvestmentDomini Social Fund Performance
Corporate Social ResponsibilityCitizens’ Expectations of Companies*
Make Profit, Pay Operate Improve Society
Taxes, Create Jobs Between Set Higher Ethical
Obey Laws Two Positions Standards
In % In % In %
Australia 8 43 45
Canada 11 45 43
United States 11 53 35
Great Britain17 42 39
Mexico 25 26 35
Russia 28 23 23
Japan 32 18 33
Germany 33 31 34
South Africa 35 23 34
China 44 22 31
* The Millennium Poll on Corporate Social Responsibility, 2000
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
Corporate Social ResponsibilityCan Business Do Well By Doing Good?The Millenium Poll on Corporate Social Responsibility, PriceWaterhouseCooper, 2000
Company ReputationCompany Reputation
60% of consumers form their impression of a company based on labor practices, business ethics, 60% of consumers form their impression of a company based on labor practices, business ethics, social responsibility, environmental impactsocial responsibility, environmental impact
Consumer DemandConsumer Demand
66% of consumers want companies to focus on societal goals in addition to financial performance66% of consumers want companies to focus on societal goals in addition to financial performance
Legal and Civil PenaltiesLegal and Civil Penalties
75% of consumers hold companies responsible for avoiding bribery and corruption, avoiding child 75% of consumers hold companies responsible for avoiding bribery and corruption, avoiding child labor, preventing discrimination, protecting worker health, not harming the environmentlabor, preventing discrimination, protecting worker health, not harming the environment
Direct Financial EffectsDirect Financial Effects
21% of consumers in the past year report rewarding or punishing companies based on social 21% of consumers in the past year report rewarding or punishing companies based on social performance.performance.
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?Why Business Ethics?What Do All These Names Have in Common?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
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 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 Ordinary decency–fairness, honesty–are
central ethical principles of corporate governancecentral ethical principles of corporate governance
International TrendsEnsuring Management AccountabilityOECD, ICC, Russian Chamber of Commerce, Hong Kong EDC, Gulf OECD, ICC, Russian Chamber of Commerce, Hong Kong EDC, Gulf Centre EE, U. S. Federal Sentencing Guidelines, OAS, TI, Ethics South Africa 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