Corporate Governance Development Framework

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 4, 2011 at 9:30 am
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Editor’s Note: The following post comes to us from Darrin Hartzler, Manager of the Corporate Governance Unit in the Environment, Social and Governance Department at the International Finance Corporation.

IFC recently joined 28 other development finance institutions (DFIs) – with combined assets of approximately $852 billion – to launch the Corporate Governance Development Framework. This new initiative provides DFIs with a common set of tools to evaluate the governance of their client companies, many of whom work in some of the world’s most challenging markets.

The framework helps DFIs strengthen their due diligence processes and work with their clients to improve weak areas in their corporate governance. By adopting a common approach, signatory DFIs will set consistent standards for corporate governance and common expectations from clients.

Corporate governance helps companies operate more efficiently, gain access to capital, and safeguard against corruption and mismanagement. It makes companies more accountable and transparent to investors and enables them to respond to legitimate stakeholder concerns, such as responsible environmental and social practices. As providers of financing to companies in emerging markets, DFIs play a significant role in promoting good corporate governance across a broad range of regions and sectors. Our hope is that by working together, we can help make corporate governance a cornerstone of sustainable development.

The working group that developed the Corporate Governance Development Framework includes IFC, The Asian Development Bank, the Black Sea Trade & Development Bank, the Latin American development bank CAF, CDC of the U.K., the European Bank for Reconstruction and Development, the Islamic Development Bank, the Dutch development bank FMO, and the German development bank DEG. Each signatory will endeavor to:

  • Integrate corporate governance in its investment operations by adopting procedures and tools in line with the framework, conduct corporate governance assessments of its investment clients, and develop action plans when appropriate.
  • Identify staff responsible for implementation and oversight of the framework.
  • Provide or procure training to ensure capacity building and knowledge sharing on corporate governance among signatory DFIs.
  • Collaborate with other signatories to share experiences and resources on training and implementation.
  • Report annually to partnering DFIs on the implementation of the framework.

The framework is based on IFC’s corporate governance methodology, which has been tested and refined over the course of a more than a decade. From start-ups to well-established firms, IFC’s clients have experienced the benefits of good corporate governance firsthand. For example, a family-owned agribusiness company in Egypt, Wadi Holdings, was able to secure more than $60 million in financing after improving its corporate governance practices, including better board effectiveness and shareholder and disclosure policies.

EDC, a large power company in the Philippines, improved its corporate governance practices as part of its privatization process. IFC helped the company adopt a new corporate governance manual and helped it appoint independent directors. It has grown to become the world’s second-largest geothermal energy company, providing electricity to more than two million households.

These are just a few examples.

Clients have reported that corporate governance improvements have helped them navigate the sometimes rocky road to stability as they struggle to regain economic momentum in the wake of the global financial crisis. More recently, changes sweeping the Middle East and North Africa have underscored the need for well governed, thriving private sectors and greater transparency to help build investor confidence.

In total, last fiscal year, IFC provided full corporate governance assessments to 33 debt and equity investment clients. We now require a systematic corporate governance analysis of every investment transaction as part of our due diligence process.

To improve corporate governance across sectors and countries, IFC delivers targeted capacity building advice to organizations and institutions which themselves are change-agents in this field.

Advisory projects work with companies, regulators, journalists and educators in over 60 countries, and have facilitated over $1.8 billion in new investment. This has contributed to the development of 48 corporate governance codes in 32 countries, including 11 in some of the world’s poorest countries. And it has delivered board leadership training resources that have been used to train about 600 corporate governance trainers in 46 countries.

New opportunities and challenges lie ahead. As DFIs expand into ever more challenging business environments, as market conditions change, as new financial instruments are created, and as technology enables ever-evolving ways of doing business, there will be an ongoing need to adapt corporate governance practices – as well as related public policies – to keep pace. Our hope is that the framework will help bring good corporate governance to the forefront of our clients’ agendas.

For more information on the Corporate Governance Development Framework, please visit www.cgdevelopmentframework.com

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