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ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE
 

ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE

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ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE

ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE

NYASHA P. S. ZHOU
CZI Committee on Business Ethics

Corporate Governance Summit – ZIMLEF Harare 28/09/2009

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    ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE Presentation Transcript

    • ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE NYASHA P. S. ZHOU CZI Committee on Business Ethics Corporate Governance Summit – ZIMLEF Harare 28/09/2009
    • PRESENTATION STRUCTURE
      • Session Fit
      • Driving Questions
      • Back To Basics
      • Scope Of Corporate Governance
      • +Plus Investment Thru’ Sound Corporate Governance
          • A Global View
          • At National Level (Macro)
          • At Firm Level (Micro)
          • At Investor Level
          • Global Competitiveness (wef)
      • Implication For Zimbabwe
      • Investor Concerns
      • Conclusion
    • SESSION FIT- IN CORPORATE GOVERNANCE
      • Philosophy
      • Importance In National Economic Development
      • Legislative Aspect – Companies Act
      • Stock Market Development
      • Rebuilding Structures & Systems (in Zim)
      • Implementation Of National Code (Zim)
      • State – Owned Enterprises
      • Investment Attraction
      Focus Investment Motivation
    • DRIVING QUESTION?
      • Why is Investment critical to National Economic
      • development?
      • Who is the Investor?
      • Why would one consider investing?
      • What are the investor’s expectations?
      • What consideration would an investor put at the centre
      • of his decisions?
      • Who are the key players on the investment chessboard?
      • What is sound/unsound governance?
      • What is the BEST-FIT for investor and investee
      • destination?
      • What are the safety nets?
      • How does Sound Corporate Governance Assist?
    • BACK TO BASICS (B2B ) BUSINESS ENTITY CONCEPT Ownership Business
      • Government
      • Publics
      • Community
      • Suppliers
      • Customers
      • Enterprise
      • Idea
      • Risk
      • Trade Off
      • Taxes
      • Social Cost
      • Services
      • Wealth Creation
      Risk Capital Profits
      • Management
      &
      • Staff
      A & B LTD
    • IN THE MIND OF THE INVESTOR
      • I Have an Idea!
      • I Have to Give Up Consumption!
      • I Have Capital!
      • I am Ready to Handover Control Of My Funds!
      • QUESTIONS
      • What Is My Risk / Return Trade Off?
      • Where Do I Place My Funds
      • What Safety Net Do I Need?
      • How Can I Minimize Risk / For Returns?
      BACK TO BASICS (B2B )
    • THINKING OF INVESTING
      • Forego Consumption !
      • Risk Taking For A Return!
      • Not Charity !
      • Wealth Creation !
      • Economic Growth !
      • Key Considerations
      • Attractiveness Of Destination !
      • Competition For Capital !
      • About Choices – Of Business !
              • -Of Domicile !
      BACK TO BASICS (B2B)
    • SCOPE OF CORPORATE GOVERNANCE
      • “ Corporate Governance is concerned with holding the balance between
      • economic and social goals and between individual and communal goals. The
      • governance framework is there to encourage the efficient use of resources
      • and equally to require accountability for the stewardship of those
      • resources .
      • The aim is to align as nearly as possible the interest of individuals,
      • corporations and society.
      • The foundation of any structure of corporate governance is disclosure.
      • Openness is the basis of public confidence in the corporate system and funds
      • will flow to centers of economic activity that inspire trust”
      • “ Shareholders role in governance is to appoint the directors and auditors. Poor
      • corporate governance has ruined companies, sent directors to jail, and
      • destroyed a global accounting firm and threatened economies and
      • governments.”
      (Sir Adrian Cadbury)
    • +Plus Investment Thru’ Sound Corporate Government A Global View Perspective
      • Economies wishing to attract their “Fair Share” of global FDI must
      • address those factors that either encourage or inhibit investment
      • Corporate Governance practices which protect the rights of
      • minority shareholders have major influence in:
          • Attracting FDI
          • Making positive contribution to economic development goal
      • 75% of institutional investors said Board Practices were as
      • important to them As Financial Performance when evaluating
      • potential investment (Mckinsey & Co.).
      • 80% of those would Pay a Premium for shares in corporations that
      • exhibit Good Governance Practices .
    • Macro Level (National)
      • According to the IMF- Capital Markets Consultative Group:
      • The investment regime and the environment for business ranked second in order of
      • importance among factors determining foreign investment location.(1)
      • Stability of investment environment (climate) :
      • Consisting of transparent and predictable investments’ regulations and rules-is very
      • important to attract FDI.
      • Can be provided through good governance practices on macro level.
      • To attract foreign investment, there are four main elements that should be
      • taken into consideration: Predictability, Accountability, Transparency and
      • Participation
      • In addition to increased importance of stable investment climate, governments
      • should work on achieving governance principles to provide a predictable,
      • transparent and stable investment environment.
      +Plus Investment Thru’ Sound Corporate Government 1) International Monetary Fund, (2003), Foreign Direct Investment In Emerging Market Countries., Working Group of the Capital markets Consultative Group(Washington DC.: IMF).
    • THE FIRM LEVEL ( company )
      • Well governed firms invest more than badly governed ones(1)
      • Better governance quality improves the efficiency of capital
      • allocation within firms , whereas lax governance produces
      • under- investment rather than over-investment.
      • Well-governed companies receive higher market valuations ,
      • which increase the inflow of capital from both domestic and
      • foreign sources in the form of debt and equity.
      • The higher the marginal product of capital , the higher the
      • quality of corporate governance.(1)
      +Plus Investment Thru’ Sound Corporate Government
      • Well-governed firms have considerably better access to outside
      • financing than firms with weaker governance.
      • Equally important and, irrespective of the need to access capital,
      • improved governance structures and processes help insure quality
      • decision making, encourage effective succession planning for
      • senior management and enhance the long-term prosperity of
      • companies, independent of the type of company and its sources of
      • finance.(1)
      • Oyvid,B., Cooper, I., and Priestly,R., (2007) :Corporate Governance and Real Investment Decision”, working paper series, Norwegian School Of Management.
      • La Porta, R., Lopez-de-Silanes,f., and Vishny,R.,(2002), “Investor Protection and Corporate Valuation,” Journal of Financ e.57(3),1147-70
      THE FIRM LEVEL ( company )
      • A study of S&P 500 firms by Deutsche Bank shows that companies with strong or
      • improving corporate governance outperformed those with poor or deteriorating
      • governance practices by about 19% over a two-year period. (1)
      • An ABN/AMRO study demonstrates that Brazil-based firms with the best
      • corporate governance ratings garnered 2004 P/E ratios that were 20% higher
      • than firms with the worst governance ratings(2).
      • A study of Russian firms shows that a worst-to-best improvement in corporate
      • governance predicted a huge 700-fold (70,000%) increase in firm value . The
      • study’s sample size was small (21 firms), so it’s unlikely that such a huge increase
      • would take place in a larger, more representative sample. However, the study still
      • demonstrates a correlation between improved corporate governance and firm
      • value(3).
      • Grandmont , R., Grant, G., and Silva, F., (2004) Beyond the numbers-Corporate governance: Implications for investors. Deutsche Bank
      • Erbiste , B., (2005), Corporate Governance in Brazil: Is there a llink Between Corporate Governance and Financial Perfomance in the Brazilian markets?” Abn Amro Asset Management.
      • Black, B. ,( 2002), “The Corporate Governance Behavior and market value of Russian Firms”,, Emerging Markets Review, 2(2), 89-108
      THE FIRM LEVEL ( company )
    • Firm Level ( continued)
      • A study by Korean and US researchers finds that a well-governed
      • firm in Korea traded at a premium of 160 percent to poorly governed
      • firms (1).
      • A Harvard/ Wharton Study shows that if an investor bought shares
      • in US firms with the strongest shareholder rights, and sold shares in
      • the ones with weakest shareholder rights, that investor would have
      • earned abnormal returns of 8.5 percent per year(2).
      • Black,B., Jang,H., and Woochan,K., “predicting Firms’ Corporate Governance Choices: Evidence fromKorea.”, Journal of Corporate Finance, 12, (3), 660-91
      • Gompers, P., Ishii, J., and Metrick, A., (2003), “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118(1), 107-155
      +Plus Investment Thru’ Sound Corporate Government
    • Investor Surveys
      • Investors state that they still put corporate governance on par
      • with financial indicators when evaluating investment decisions
      • 80% of the respondents would pay a premium for well-governed
      • companies,
      • (premiums averaged 12-14% in North America and Western
      • Europe; 20-25% in Asia and Latin America; and over 30% in
      • Eastern Europe and Africa)(1).
      • The Mckinsey survey shows that investors do place importance
      • on good corporate governance and are prepared to pay a
      • premium for shares in well governed companies.
      +Plus Investment Thru’ Sound Corporate Government
    • Global Competitiveness (wef) Key for efficiency driven economies Key for innovation driven economies How Competitive Is Mother Zimbabwe
      • Basic Requirements
      • Political and Legal Institutions
      • Infrastructure
      • Macro Economy
      • Health & Primary Education
      • Efficiency Enhancers
      • Higher education & training
      • Market efficiency (goods, labour, financial)
      • Technological readiness
      • Innovation and Sophistication Matters
      • Business sophistication
      • Innovation
      Key for factor driven economies Zimbabwe’s position
    • How can Zimbabwe Regain its Global Competitiveness?
      • 1 st Pillar: Institutions
      • Property rights
      • Ethics & Corruption
      • Undue Influence
      • Government red tape
      • Security
      • Accountability
      • 3 rd Pillar: Macro Economy
      • Government policy
      • National Savings
      • Inflation
      • Interest rate
      • Government debt
      • Real Effective ROE
      2 ND Pillar: Infrastructure
    • How can Zimbabwe Regain its Global Competitiveness?
      • 4 th Pillar: Market Efficiency
      • Agric. Policy costs
      • Legal framework
      • Extent & effect of taxation
      • Local Competition
      • Antitrust laws
      • Trade barriers
      • Prevalence of foreign ownership
      • GDP size
      • Labour market: Flexibility & efficiency
      • Brain drain
      • Employment equity
      • Financial markets
      • 5 th Pillar: Health & Primary Education
      6 th Pillar: Higher education and Training 7 th Pillar: Technological Readiness 8 th Pillar: Business Sophistication 9 th Pillar: Innovation
    • Implications of Sound Corporate Governance
      • What does this mean for our beloved country ?
      • Do we need investment ?
      • Is our climate attractive ?
      • Crisis Of Confidence
      • Liquidity
      • Institutional Collapse
      • Decapitalization
      • Technological Reversal
      • Outdated Methods / Processes
      • High Cost Producer
      • Weak Enablers
      • Supply – Demand Side Constraints
      • Decline In Investment Volumes
      Our Mirror – Brutal Facts Zim needs investment to speed up recovery but how attractive are we ?
    • The State Of Manufacturing A 70% Reduction Including 2008… INDEX: 1990 = 100 Robertson Economic Information Services (Indices)
      • Benefits
      • Size of market
      • Growth rate
      • Economic system
      • Political
      • Economic
      • Costs
      • Political costs
      • Economic underdevelopment
      • Legal system
      Overall attractiveness Business Climate Sound Corporate Governance HOW ATTRACTIVE ARE WE ? Risks The Building Blocks
    • National Competitiveness ( Porter’s Diamond Model) Sound Corporate Governance The Safety Net Firm Strategy Structure Rivalry Supply Side Factor Endowments Market Side Demand Conditions Industry Cluster Related Supporting
      • Skills
      • Core systems
      • Key resources
      • Basic infrastructure
      • Strong industrial base
      • Visible and active clusters
      Real wages Vibrant business
    • What Concerns Foreign Investors ?
      • What concerns foreign investors?
      • Two perspectives:
        • Company specific concerns
        • Country Specific concerns
      DOES ZIM WANT TO ATTRACT INVESTMENT ?
    • What Concerns Foreign Investors?
      • Country Specific
      • Property Rights
      • Strong Legal & Political Institutions
      • Consistent Government Macroeconomic and Fiscal Policy
      • Stable political system
      • Profit/dividend Repatriation
      • Company Specific
      • Strong Management team with a excellent track record
      • Good Strategy
      • Market Dominance
      • Strong Cash Generation
      • Capital Appreciation
    • Corporate Governance as the safeguard salary Policies Fairness Social Responsibility Transparency Systems Accountability Losses Responsibility Independence Objectivity Discipline Out Profits Structure In
    • WITHER TO ZIM ? So What Then – Our Reality ?
      • Our Nation Needs Investment !
      • We Have Lots Of Idle Assets !
      • The Capital Markets Have Choices !
      • Investment Is Not Charity !
      • We Need To Get Our Act Together To Get Our Fair Share Of Investment Funds !
      • We Have The Right Work Ethic !
      • Need To Build Sound Governance !
    • Rebuilding A Sound National Governance Ethos Individual level National level
      • Institutional
      • Political
      • Legal
      • Civic
      • 7 Characteristics
      • Fairness
      • Accountability
      • Responsibility
      • Independence
      • Social Responsibility
      • Discipline
      • Transparency
      Firm level
      • School
      • Community
      • Home
      • Civic
      • Shareholders
      • Boards
      • Executives
      • Supervisory
      • Work floor
    • Enterprise Governance Corporate Governance Processes Balance Business Governance Processes
      • Chairman/ CEO
      • Non- Executive Directors
      • Audit Committees
      • Resources & Remuneration Committee
      • Risk Management For Compliancy
      • Controls Assurance
      Accountability Assurance conformance
      • Strategic Planning & Alignment
      • Strategic Decision Making
      • Scorecards
      • Strategic Enterprise Systems
      • Continuous Improvement
      • Strategic Risk Management
      Value Creation Resource Utilization Performance
    • Conclusion Impact Of Sound Corporate Governance On Attracting Investment
      • Competitiveness. The more a company’s system is opening ethically and with integrity the more it becomes competitive because of its goodwill and formidable reputation.
      • Sound governance shows investors a high level of potential for success in a company.
      • Good governance makes a company visible in the domestic and international market. Such visibility exposes it to a variety of ideas and activities from other international business. International business bring in new markets, efficiency gains , diversification, spreading of risk, strategic assets, the list is long.
      • A better allocation of capital overtime , and hence higher productivity and growth .
      • Increased ability of companies to raise funds overseas and compete internationally.
      • f. Stronger foundations for further opening of the capital account.
      • Linkages to international networks , contacts and possible lucrative partnerships.
      • Employment. Investors see the degree of resource employment by the level of corporate government a company has.
      • I Target firms need good corporate governance practices to evaluate takeover offers - most takeovers are negotiated.
      • j Good corporate governance practices prevents firms from being seen as an easy target by other firms and governments.
      • k. Good corporate governance is also necessary to attract venture capital.
      Conclusion (continued)
    • Lets’ Go For It……….. Accountability Responsibility Social Responsibility Independence fairness Marks! Set ! Go ! Get Zimbabwe Moving Again Transparency Discipline Conclusion (continued)
    • I THANK YOU Taking A Risk