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1Center for International Private Enterprise © 2003Center for International Private Enterprise © 2005

THE ROLE OF STAKEHOLDERS THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCEIN CORPORATE GOVERNANCE

Eastern Caribbean Corporate Governance ForumEastern Caribbean Corporate Governance Forum

John A. ZemkoMarch 8-9,2005

St. Kitts

An affiliate of the U.S. Chamber of Commerce

Center for International Center for International Private EnterprisePrivate Enterprise


““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, and stakeholders in creating wealth, jobs, and the sustainability of creating wealth, jobs, and the sustainability of financially sound enterprises.financially sound enterprises.””

Draft of Corporate Governance PrinciplesDraft of Corporate Governance Principles


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 crises


Perspective of the CorporationPerspective of the Corporation

Maximizing value subject to meeting the Maximizing value subject to meeting the corporationcorporation’’s financial, legal and contractual s financial, legal and contractual obligations. 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)


Defining StakeholdersDefining Stakeholders

With 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. (The Economist)stakeholders. (The Economist)


Stakeholders to beStakeholders to be““Accountable ToAccountable To……..””

•• Banks and creditorsBanks and creditors•• Institutional investorsInstitutional investors•• EmployeesEmployees


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 rights


Defending Stakeholder Interests: Defending Stakeholder Interests: 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 information


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 structures


Developing Countries Need Developing Countries Need Institutional ReformsInstitutional Reforms

Corporate governance systems depend upon a set of Corporate governance systems depend upon a set of institutions (laws, regulations, contracts, and norms) 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.


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:•• 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 shareholders


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 8.5% of family firms have only 8.5% 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 3rdrd generationgeneration

•• Little access to capital markets Little access to capital markets –– only 124 out of only 124 out of 148,000 legal enterprises are listed 148,000 legal enterprises are listed


Western Hemisphere ExperienceWestern Hemisphere Experience

• Brazil—Instituto Brasileiro de GovernançaCorporativa (IBGC)

• Chile—Universidad Católica/Chamber of Commerce/Center for Excellence in Governance

• Colombia—Confederation of Chambers of Commerce and Industry (Confecámaras)

• Peru—Procapitales and the Universidad de Ciencias Aplicadas (UPC)

•• BrazilBrazil——InstitutoInstituto BrasileiroBrasileiro de de GovernanGovernanççaaCorporativaCorporativa (IBGC)(IBGC)

•• ChileChile——Universidad Universidad CatCatóólicalica/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 (ConfecConfecáámarasmaras))

•• PeruPeru——ProcapitalesProcapitales and the Universidad de and the Universidad de CienciasCiencias AplicadasAplicadas (UPC)(UPC)


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 growth


Strategy for CG ReformStrategy for CG Reform

1.1. Initial Assessment and AdvocacyInitial Assessment and Advocacy

2.2. Outreach and Institutional Outreach and Institutional DevelopmentDevelopment

3.3. Capacity and Institutional Capacity and Institutional DevelopmentDevelopment

4.4. ConsolidationConsolidation


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 campaigns


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 frameworksImprove regulatory and enforcement frameworks•• Create informal corporate governance promotion Create informal corporate governance promotion

networks within civil society, business, and regulatory networks within civil society, business, and regulatory bodies.bodies.


Capacity and Institutional DevelopmentCapacity and Institutional Development

•• Training and certification programs for managers and Training and certification programs for managers and directorsdirectors

•• Establishment of Institutes of DirectorsEstablishment of Institutes of Directors•• Create corporate governance ratings systems for Create corporate governance ratings systems for

investorsinvestors•• Training for financial intermediaries Training for financial intermediaries


ConsolidationConsolidation•• Further strengthen shareholder rights groups and Further strengthen shareholder rights groups and

Institutes of DirectorsInstitutes of Directors•• Risk ranking by ratings agencies Risk ranking by ratings agencies •• Reports on Standards and Codes (ROSC) Reports on Standards and Codes (ROSC) –– on going on going

evaluationevaluation•• Legal and institutional enforcementLegal and institutional enforcement

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