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

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

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

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.

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

ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE

by AfricanFinancials on Sep 28, 2009

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ENCOURAGING INVESTMENT THROUGH SOUND CORPORATE GOVERNANCE — Presentation Transcript