BRIEF

Corporate Governance

February 24, 2016

The Development Challenges

The Corporate Governance Team within the Financial Markets Integrity Group provides policy advice on corporate governance related to the financial sector and capital markets. 

Corporate Governance (CG) concerns the system by which companies are directed and controlled. It is about having companies, owners and regulators become more accountable, efficient and transparent, which in turn builds trust and confidence. Well-governed companies carry lower financial and non-financial risks and generate higher shareholder returns. They also have better access to external finance and reduce systemic risks due to corporate crises and financial scandals. Reliable financial reporting, timely disclosures, better boards and accountable management also facilitate development of stronger capital markets. They improve a country’s ability to mobilize, allocate and monitor investments and help foster jobs and economic growth. Better supervision and monitoring can detect corporate inefficiencies and minimize vulnerability to financial crises.

The World Bank’s Response

The Financial Market Integrity (FMI) group is located in the Finance and Markets Global Practice in the World Bank Group. Corporate governance (CG) is part of the FMI group’s mandate. The CG group within FMI focuses on improving corporate governance in emerging market countries. It does so by providing technical assistance, thought leadership, and support to the World Bank Group’s advisory service programs and lending/investment operations and through global engagements with standard setting bodies such as the Organization for Economic Cooperation and Development (OECD), Financial Stability Board (FSB), and the Basel Committee on Banking Supervision. 

The demand for good corporate governance is growing in emerging market countries in order to help companies and financial institutions improve their performance, access affordable external financing, and lower the cost of capital with the broader goals of advancing financial stability and economic growth.  Governance of listed companies has a direct impact on capital markets development and investor protection. In the case of financial institutions, both state-owned and private institutions, governance is crucial to the sustainability of the banking sector and the development and growth of pension funds and insurance companies. Governance is also important to microfinance institutions as they scale up, and to medium and high growth companies as they seek to access finance for investments and expansion. 

In carrying out its corporate governance works, the CG group has four focus areas: (i) developing the legal and regulatory foundation for corporate governance of listed and unlisted companies; (ii) improving the governance of banking institutions, in particular state-owned banks (development and commercial banks); (iii)  improving the governance of micro-finance institutions and financial cooperatives; and (iv) strengthening the capacity of regulators and supervisors to implement and enforce reforms.  In each of these areas, the group works closely with client countries to carry out diagnostics and roadmaps for reform, and support implementation through strengthening of legal and regulatory frameworks, building capacity of regulators and supervisors, and providing advisory services, training, and knowledge sharing.  In addition to supporting policy level reforms, the group also supports corporate governance diagnostics and improvements at the institution specific level. The group works closely with the Corporate Governance Group of the IFC and interacts closely with other WBG global practices, such as Trade and Competitiveness, Governance, and Macro Fiscal Management. The group represents the World Bank Group in international fora such as the OECD and ICGN.  


Areas of Focus

The Corporate Governance team focuses on two main areas: the financial sector and capital markets.

1. Corporate Governance in the Financial Sector

Why it matters

Governance issues in financial institutions are similar but differ in important ways from those in non-financial companies:

  • Financial institutions are charged with upholding the public's trust and protecting depositors. Balance sheets are more opaque, leading to less transparency and greater ability to conceal problems. Good governance requires boards and senior management to fulfill their fiduciary responsibilities by effectively communicating strategic business direction and risk appetite while assuring transparent and effective organization, risk assessment and mitigation, and sufficient capital support.
  • Good governance complements traditional supervision of financial institutions, protects the interests of depositors and other investors in commercial banks, builds and maintains public confidence in the financial sector, and ultimately contributes to its integrity and credibility.
  • Financial institutions are uniquely vulnerable to liquidity shocks which can result in institutional, and potentially, financial instability. Sound governance supports prudential supervision and regulation, enhancing the role and the effectiveness of the financial institution supervisor.
  • Many developing countries are embarking on wide-ranging corporate governance reforms of their state-owned banks in order to improve their efficiency and transparency. Development banks are now playing a more prominent role in the economy of emerging markets. Development banks play a central role in financial inclusion, SME development and, housing, agriculture and infrastructure finance. Solid corporate governance allows these institutions to fulfill their mandates more effectively.

What we do

The Corporate Governance Group has developed a set of tools to diagnose and strengthen the corporate governance policies and practices in financial institutions, for state-owned banks and for banks more generally.   

Corporate Governance of State-Owned banks

The Group provides advisory services to countries wishing to improve state bank governance.  The focus is on the most common corporate governance shortcomings applicable to state-owned banks at three different levels:

  • Regulatory Level: Developing the corporate governance regulatory environment (e.g. laws, codes, listing rules, ownership policies).
  • State ownership level: Developing director nomination, remuneration and evaluation policies; creating performance monitoring frameworks; developing dividend policies; supporting the creation of specialized ownership entities; and defining and limiting state-owned bank objectives and mandates.
  • Institution specific level: working with specific state banks to diagnose and implement corporate governance reforms drawing on the methodology of the International Finance Corporation.

Bank Governance Reviews

As part of our global engagement work, the team conducts bank governance reviews in the context of the World Bank’s Financial Sector Assessment Program (FSAP). The review evaluates the specific aspects of the legal and regulatory framework applicable to banks and provides a detailed set of reform recommendations at different levels including: legal and regulatory; supervisory; and institution specific.

Governance of micro-finance institutions and financial cooperatives

The team has developed tools to assess the corporate governance framework applicable to micro-finance institutions and financial cooperatives. Reviews in the context of the World Bank’s Financial Sector Assessment Program (FSAP) and technical assistance programs are currently being carried out across the world. The program provides reform recommendations at different levels including: legal and regulatory; supervisory; and institution specific.

How we do it

  • Technical assistance advisory programs for modernization of state bank corporate governance, e.g.  Algeria, Bangladesh, Peru, Tunisia and Ukraine.
  • Bank governance reviews in more than 10 countries, e.g. Bosnia and Herzegovina, Economic Community of Central African States, Georgia, Moldova, and Sri Lanka resulting in changes to supervisory approaches and the legal and regulatory framework.
  • Institution level work including corporate governance diagnostic and action plan for individual state banks, e.g. Colombia.
  • Development of operational principles, e.g. for assessing and improving the governance of microfinance institutions https://openknowledge.worldbank.org/handle/10986/22059  
  • Strengthening the governance of municipal cooperatives, e.g. Peru

2. Corporate Governance in Capital Markets

Corporate governance continues to be a key component of capital market development. Good CG reduces emerging market vulnerability to financial crises, reduces transaction costs and cost of capital, and leads to capital market development. Capital markets in turn are a major driver of transparency. In addition to private companies, many SOEs are also listing on the capital markets to access alternative sources of capital and enhance transparency. Good CG also encourages investor confidence and outside investment. As pension funds invest increasingly in equity markets, retirement savings are more secure when invested in well-governed companies. Enhancing the governance and capacity of securities markets and financial sector regulators using a corporate governance lens is becoming an important part of the agenda.

What we do

The Corporate Governance Group has developed different tools to identify the strengths and weaknesses of the corporate governance framework applicable to listed and unlisted companies.

Corporate Governance Advisory Services

The Group provides advisory services to countries wishing to improve corporate governance policies and practices applicable to listed and unlisted companies at different levels:

  • Regulatory Level: Developing the corporate governance regulatory environment (e.g. laws, codes, listing rules).
  • Supervisory level: Building the capacity of selected regulators with tools and training including Central Banks, Capital Market Authorities and state ownership entities.
  • Market Level: Improving the enabling environment for corporate governance by building the capacity of corporate governance intermediaries, such as Institutes of Directors, consultants and mediators, jointly with IFC.

Corporate Governance ROSC

The corporate governance group is the official assessor of the OECD Principles of Corporate Governance, and conducts corporate governance country assessments under the ROSC initiative. In this context, the World Bank assists its member countries in strengthening their corporate governance frameworks. The goal of the ROSC initiative is strengthen corporate governance policies and practices of listed companies in emerging markets The ROSC assessment:  

  • Reviews the country’s legal and regulatory framework as well as the practices and compliance of its listed firms; 
  • Assesses the framework and practices relative to an internationally accepted benchmark as per the OECD Principles of Corporate Governance;
  • Provides policy recommendations for strengthening corporate governance in terms of board practice, control and audit structures, transparency and disclosure, and protection of shareholder rights — prioritized according to high, medium and lower priority;
  • Offers a country action plan which sets out key steps, responsibilities, and timelines, and which provides annex model corporate governance policies from other emerging and developing markets

How we do it

  • Corporate governance Reports on the Observance of Standards and Codes (ROSCs) in close to 60 countries, with a growing emphasis on implementing ROSC recommendations (through FIRST, IDF, and IFC) to help strengthen regulators, develop corporate governance codes, and create institutes of directors.
  • Technical assistance programs in more than 10 countries across different regions including: El Salvador, Guatemala, Colombia, Peru, Kenya, Ghana, Vietnam and Lao PDR. 

For more information, please contact Sunita Kikeri.