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

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

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

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?

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

Government

Publics

Community

Suppliers

Customers

Enterprise

Idea

Risk

Trade Off

Taxes

Social Cost

Services

Wealth Creation

Management

Staff

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 )

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?

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)

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 !

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)

“ 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.”

+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 .

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).

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.

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 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)

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 )

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

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 )

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

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

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

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

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.

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

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

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

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

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

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

Implications of Sound Corporate Governance What does this mean for our beloved country ? Do we need investment ? Is our climate attractive ?

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 ?

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

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

Benefits

Size of market

Growth rate

Economic system

Political

Economic

Costs

Political costs

Economic underdevelopment

Legal system

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

Skills

Core systems

Key resources

Basic infrastructure

Strong industrial base

Visible and active clusters

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?

Two perspectives:

Company specific concerns

Country Specific concerns

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

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 !

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

Institutional

Political

Legal

Civic

7 Characteristics

Fairness

Accountability

Responsibility

Independence

Social Responsibility

Discipline

Transparency

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

Chairman/ CEO

Non- Executive Directors

Audit Committees

Resources & Remuneration Committee

Risk Management For Compliancy

Controls Assurance

Strategic Planning & Alignment

Strategic Decision Making

Scorecards

Strategic Enterprise Systems

Continuous Improvement

Strategic Risk Management

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.

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)

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.

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