role of stakeholders in cg

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The Role ofThe Role of StakeholdersStakeholders InIn

Corporate GovernanceCorporate Governance

Dr. Demir YenerDr. Demir Yener

Center for International Private EnterpriseCenter for International Private Enterprise

Washington D.C.Washington D.C.

Fourth Meeting of theFourth Meeting of the EurEurasian Corporate Governance Roundtableasian Corporate Governance Roundtable

‘‘The Responsibilities of Boards of Directors’ The Responsibilities of Boards of Directors’

October 29-30, 2003, Bishkek, Kr!"stanOctober 29-30, 2003, Bishkek, Kr!"stan



P!rpose of the PresentationP!rpose of the Presentation

To disc!ss"To disc!ss"

#$%ectives of the firm#$%ectives of the firm" Wealth" Wealth

&a'imi(ation&a'imi(ation

Responsi$ilities of the $oardResponsi$ilities of the $oard

The role ofThe role of stakeholders stakeholders in corporatein corporate

governancegovernance



Stakeholders and ShareholdersStakeholders and Shareholders

Primar) StakeholdersPrimar) Stakeholders ShareholdersShareholders

*oards of Directors+&anaging *oards*oards of Directors+&anaging *oards

E'ec!tive &anagementE'ec!tive &anagement

#ther Stakeholders#ther Stakeholders &anagers&anagers

Emplo)eesEmplo)ees

C!stomersC!stomers

Comm!nit) at ,argeComm!nit) at ,arge

S!ppliersS!ppliers -inancial-inancial Instit!tions" CreditorsInstit!tions" Creditors

Environment in generalEnvironment in general



Enabling EnvironmentEnabling Environment

• International Auditing & Accounting Standards (IAS&ISA)International Auditing & Accounting Standards (IAS&ISA)• Securities Markets Legal and Regulatory Frameworks (IS!)Securities Markets Legal and Regulatory Frameworks (IS!)• Financial Sector "artici#ants $ investors% issuers% intermediariesFinancial Sector "artici#ants $ investors% issuers% intermediaries (interaction between #arti(interaction between #arti

• FiFinancial Market Inrastructure and Arc'itecturenancial Market Inrastructure and Arc'itecture• "roduct and Factor !om#etitiveness"roduct and Factor !om#etitiveness• Foreign irect InvestmentsForeign irect Investments• !or#orate !ontrol (!or#orate overnance$ E! "rinci#les)!or#orate !ontrol (!or#orate overnance$ E! "rinci#les)• Enabling% #rudentially regulated business environment% wit' creative incentive struEnabling% #rudentially regulated business environment% wit' creative incentive stru

Enabling EnvironmentEnabling Environment

• International Auditing & Accounting Standards (IAS&ISA)International Auditing & Accounting Standards (IAS&ISA)• Securities Markets Legal and Regulatory Frameworks (IS!)Securities Markets Legal and Regulatory Frameworks (IS!)• Financial Sector "artici#ants $ investors% issuers% intermediariesFinancial Sector "artici#ants $ investors% issuers% intermediaries (interaction between #artici(interaction between #artici

• FiFinancial Market Inrastructure and Arc'itecturenancial Market Inrastructure and Arc'itecture• "roduct and Factor !om#etitiveness"roduct and Factor !om#etitiveness• Foreign irect InvestmentsForeign irect Investments• !or#orate !ontrol (!or#orate overnance$ E! "rinci#les)!or#orate !ontrol (!or#orate overnance$ E! "rinci#les)•

Enabling% #rudentially regulated business environment% wit' creative incentive struEnabling% #rudentially regulated business environment% wit' creative incentive struc

Factors of SoundFactors of SoundCorporate GovernanceCorporate Governance

• S'are'olders rig'ts #rotectionS'are'olders rig'ts #rotection• Rig'ts and res#onsibilities o *oardRig'ts and res#onsibilities o *oard

o irectors and S'are'olderso irectors and S'are'olders• +uality o isclosure+uality o isclosure•

MonitoringMonitoring• E,ectiveness o t'e coreE,ectiveness o t'e core

management unctionsmanagement unctions

Factors of SoundFactors of SoundCorporate GovernanceCorporate Governance

• S'are'olders rig'ts #rotectionS'are'olders rig'ts #rotection• Rig'ts and res#onsibilities o *oardRig'ts and res#onsibilities o *oard

o irectors and S'are'olderso irectors and S'are'olders• +uality o isclosure+uality o isclosure• MonitoringMonitoring• E,ectiveness o t'e coreE,ectiveness o t'e core

management unctionsmanagement unctions

Principal FactorsPrincipal Factors

• Stake'oldersStake'olders

• -akeovers.ac/uisitions-akeovers.ac/uisitions

• *ankru#tcy rameworks*ankru#tcy rameworks

• !ollateral and Foreclosure rules!ollateral and Foreclosure rules

• Enter#rise RestructuringEnter#rise Restructuring

• Investor and !reditorsInvestor and !reditors

• Agents$ ManagementAgents$ Management

Principal FactorsPrincipal Factors• Stake'oldersStake'olders

• -akeovers.ac/uisitions-akeovers.ac/uisitions

• *ankru#tcy rameworks*ankru#tcy rameworks

• !ollateral and Foreclosure rules!ollateral and Foreclosure rules

• Enter#rise RestructuringEnter#rise Restructuring

• Investor and !reditorsInvestor and !reditors• Agents$ ManagementAgents$ Management

External ElementsExternal Elements o !or#orate overnanceo !or#orate overnance

External ElementsExternal Elements o !or#orate overnanceo !or#orate overnance

Internal ElementsInternal Elements o !or#orate overnanceo !or#orate overnance

Internal ElementsInternal Elements o !or#orate overnanceo !or#orate overnance



*enefits of Corporate Governance*enefits of Corporate Governance

Good corporate governance has aGood corporate governance has apositive effect on"positive effect on" Share val!ationShare val!ation

Risk assessmentRisk assessment

Red!ction of market volatilit)Red!ction of market volatilit)

Good Corporate governance can"Good Corporate governance can" Red!ce the cost of capitalRed!ce the cost of capital

Increase the pool of investorsIncrease the pool of investors

Improve management acco!nta$ilit) andImprove management acco!nta$ilit) and

performanceperformance



Efficient #nershipEfficient #nership

S!fficientS!fficient concentrationconcentration of of

control control in a firm $) oners toin a firm $) oners to

$e a$le to$e a$le to monitor monitor andand

influenceinfluence managementmanagement

effectivel).effectivel).



The Goal of the -irmThe Goal of the -irm

ToTo maximizemaximize thethe wealthwealth ofofits shareholders.its shareholders.



/o To Determine Whether Corporate/o To Determine Whether Corporate

Governance Is Effective0Governance Is Effective0

Two testsTwo tests Is the corporation ma'imi(ingIs the corporation ma'imi(ing

shareholder val!e0shareholder val!e0 Is the net present val!e of the corporation1sIs the net present val!e of the corporation1s

cash flos positive and is it $eing !sed orcash flos positive and is it $eing !sed ordirected for the $enefit of shareholdersdirected for the $enefit of shareholders$ased !pon their pro rata onership$ased !pon their pro rata onershipinterests0interests0

If the corporation1s chief e'ec!tiveIf the corporation1s chief e'ec!tive

officer is not performing ell does theofficer is not performing ell does the$oard of directors have the poer to$oard of directors have the poer toremove him0remove him0



Responsi$ilit) of the *oardResponsi$ilit) of the *oard

In p!rs!it of the ealth ma'imi(ationIn p!rs!it of the ealth ma'imi(ationo$%ective $oards m!st recogni(e theo$%ective $oards m!st recogni(e the

interests of all stakeholders.interests of all stakeholders.

2o compan) ever s!rvived that2o compan) ever s!rvived thatignored the interests of its"ignored the interests of its" C!stomersC!stomers

Emplo)eesEmplo)ees

S!ppliersS!ppliers



-o!r 3al!es of-o!r 3al!es of

Good Corporate GovernanceGood Corporate Governance

Transparenc)Transparenc)

4cco!nta$ilit)4cco!nta$ilit) Responsi$ilit)Responsi$ilit)

-airness-airness



,inkages,inkages

The fo!r pillars of corporateThe fo!r pillars of corporategovernance and the ealthgovernance and the ealth

ma'imi(ation concept serve as thema'imi(ation concept serve as the

5aspirational $enchmarks15aspirational $enchmarks1



Investor *ehaviorInvestor *ehavior

Investor $ehavior is characteri(ed $) theInvestor $ehavior is characteri(ed $) the5fear and greed1 factors5fear and greed1 factors

Corporate governance is not an end inCorporate governance is not an end initself.itself.

CG is a$o!t improving firm performanceCG is a$o!t improving firm performanceand ass!ring access to capital at aand ass!ring access to capital at areasona$le cost.reasona$le cost.

The end game of CG is achieving the mostThe end game of CG is achieving the mostefficient allocation of the scarce reso!rcesefficient allocation of the scarce reso!rces

the firm has availa$le ithin its economicthe firm has availa$le ithin its economicenvironment and gaining access to theenvironment and gaining access to thecapital needed for groth and developmentcapital needed for groth and development



CG and -irm PerformanceCG and -irm Performance

The linkages $eteen good CG andThe linkages $eteen good CG andfirm performance is clearfirm performance is clear

Good CG ill inspire investorGood CG ill inspire investor

confidenceconfidence Good CG ill ass!re investors of aGood CG ill ass!re investors of a

reasona$le rate of ret!rn on theirreasona$le rate of ret!rn on their

investmentinvestment

Good CG ill generate operationalGood CG ill generate operational

efficienc) and increase theefficienc) and increase the

competitiveness of the firmcompetitiveness of the firm



Price Discover)Price Discover)

Good CG ill contri$!te to the f!rtherGood CG ill contri$!te to the f!rtherefficienc) of the price discover)efficienc) of the price discover)

mechanism in determining the val!emechanism in determining the val!e

of the firm.of the firm.

This serves the p!rpose of ealthThis serves the p!rpose of ealth

ma'imi(ation conceptma'imi(ation concept

Improved CG ill help resolve theImproved CG ill help resolve the

pro$lem of risk and help loer thepro$lem of risk and help loer thecost of capital. Th!s leading to ancost of capital. Th!s leading to an

increase in the val!e of the firm.increase in the val!e of the firm.



Stick and CarrotStick and Carrot

Effective CG ill serve as the carrot ifEffective CG ill serve as the carrot ifprivate sector is convinced that it illprivate sector is convinced that it ill

gain from good governance. I2 thisgain from good governance. I2 this

case reform ill happen.case reform ill happen.

I- private sector is not convincedI- private sector is not convinced

reform ill $e resisted.reform ill $e resisted.

This is the dilemma.This is the dilemma.

The main pla)er in the ma'imi(ationThe main pla)er in the ma'imi(ation

of ealth thro!gh good governanceof ealth thro!gh good governance

is the $oard.is the $oard.



Responsi$ilities of the *oardResponsi$ilities of the *oard

and Performanceand Performance

Independent oversightIndependent oversight Contesta$ilit)Contesta$ilit)

,a$or relations,a$or relations

Corporate strateg)Corporate strateg) Corporate social responsi$ilitiesCorporate social responsi$ilities

Respecting stakeholdersRespecting stakeholders

E'cellent performing managersE'cellent performing managers 4ttracting lo cost capital4ttracting lo cost capital

Increasing market capitali(ationIncreasing market capitali(ation



Concl!sionConcl!sion

The *oardThe *oard has an important role to pla)has an important role to pla)in development and progressin development and progress of the firmof the firm

on $ehalf of its investors.on $ehalf of its investors.

Maximizing the shareholder valueMaximizing the shareholder value is theis the

long term o$%ective of the firm.long term o$%ective of the firm. StakeholdersStakeholders pla) an important role inpla) an important role in

CGCG

4 $oard respectf!l of the legitimate4 $oard respectf!l of the legitimatee'pectations of all the stakeholderse'pectations of all the stakeholders

sho!ld $enefit all parties in the long r!n.sho!ld $enefit all parties in the long r!n.

role of stakeholders in cg

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