DEG – Deutsche Investitions- und
Entwicklungsgesellschaft mbH
5th DFI CONFERENCE ON CORPORATE GOVERNANCE
Adopting and Implementing a Common CG Methodology and Tools for the Due
Diligence of Investment Processes
Jeddah, Kingdom of Saudi Arabia –
January 25th – 26th, 2011
Our business is developing.
Content

DEG - who we are and what we do

General Aspects of Corporate Governance relevant for DEG

Where do we stand in respect of the implementation of the DFI Approach Statement

Experiences in implementing the DFI Approach Statement and/or Toolkit on
Corporate Governance (Joint FMO-DEG refinements on the tools)
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DEG - who we are and what we do
Corporate data
Founded:
1962
Employees:
418
Seat:
Köln
Shareholder:
KfW, Frankfurt
Equity 2009:
Total assets 2009:
EUR 1,336 million
EUR 3,643 million
New commitments in 2009:
EUR 1,015 million
(supporting investments worth EUR 4,700 million)
Portfolio 2009:
EUR 4,701 million
(supporting investments worth EUR 32,100 million)
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DEG - who we are and what we do
● One of the largest European development finance institutions for long-term project and
corporate financing
● Nearly 50 years of experience as a development finance institution in more than 130
countries
● Investments
 of private companies in developing and transition countries
 only in profitable projects that contribute to sustainable development in all sectors of
the economy, from agriculture to infrastructure and manufacturing to services
● Commitments only if an effective development policy impact is obtained and
environmental standards and social principles are met
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General Aspects of Corporate Governance relevant for
DEG (national level)
● Starting 1998 several legal reforms in Germany emphasize Corporate Governance
 Corporate Sector Supervision and Transparency Act (“KontraG”);
 Stock Corporation Act (Aktiengesetz, AktG) and Accounting law by means of the
„TransPuG“;
 Corporate Governance Code (in 2002) on a federal level (harmonization of German
Corporate law aspects with international standards)
 Management Board Compensation Act (VorstAG of 5. August 2009)
 Risk Limitation Act (Risikobegrenzungsgesetz) of August 2008
 Securities Trading Act (WpHG)
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General Aspects of Corporate Governance relevant for
DEG (company level)
● Most recent: Public Corporate Governance Code (“PCGC”; governing the
management and oversight of companies in which the Federal Republic of Germany is a
[direct or indirect] shareholder; Note: KfW is a state owned entity]
● PCGC is incorporated into the body of DEG’s Articles of Association
● Commitment to Corporate Governance shall be put into practice by the management and
the supervisory body declaring each year that the corporation has complied and
continues to so comply with the recommendations of the PCGC
● Deviations from the recommendations must be explained and justified; such declaration
is to be made permanently available to the public (either on corporations' website or in
the electronic version of the Official Gazette (Bundesanzeiger) and is to be published as
part of the corporate governance report
● The audit of the annual financial statement also is to review whether the declaration
regarding the PCGC was made and published
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General Aspects of Corporate Governance relevant for
DEG (Financing criteria)
General Investment Criteria
“Cooperation” Criteria
Qualified Management
• proven track record
• transparent and open to
innovations / new standards
Co-investments in Expansion / defined
Exit Strategy
• medium to long-term approach (5-7 years)
• alignment of interest with current
owners / stakeholders
• transparent reporting tools and standards
• international accounting standards and
reputed auditing firms
Good Corporate Governance
• transparency
• clear division between
shareholders and managers
Modern Environmental and Social Standards
• environmental and social
standards acc. to international standards
Sound Business Model
• feasible and realistic acc. to
environment and capacity
• competition and market analysis
• investment/expansion Plan
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Where do we stand in respect of the implementation of
the DFI Approach Statement (1-2)
● Develop or adopt guidelines, policies or procedures on the role of corporate
governance in our due diligence and investment supervision operations
DEG analyzes auditing, board and management structure, compliance (in the
broadest sense), financial transparency and ownership structure and exercise of
control rights in its investee companies (lacking a standardized approach and without
labeling it Corporate Governance)
● Training on corporate governance
DEG offers programs focused on staff and representatives within DEG holding a
Board or Executive position in our project companies; very recently DEG invited other
EDFI-members for joint trainings
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Where do we stand in respect of the DFI Approach
Statement (3)
● Encourage investee companies to observe local codes of corporate governance
 Due diligence addresses this issue (from time to time and depending on further
matters)
 Contractual: financing agreements (also where DEG acts as mere lender) deal with
corporate governance matters; standard wording:
 The Borrower makes the representations and warranties set out in this Clause to
each Finance Party …. It has … acknowledged all requirements as set out in
Schedule __ (Corporate Governance Guidelines) ….
 The undertakings in this Clause __ remain in force from the date of this
Agreement for so long as any amount is outstanding under the Finance
Documents ... The Borrower shall … use … best efforts to comply with the
corporate governance guidelines …..
 Sanctions?
Event of Default?
Margin Ratchet?
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Where do we stand in respect of the DFI Approach
Statement (4)
● Promote the use of internationally-recognized financial reporting standards and
encourage investee companies to adopt or align their accounting principles and practices
to such standards
Contractual requirements as to financial statements and auditors:
 “Each set of financial statements …….shall be certified by a director of the borrower
as fairly representing its financial condition……..”
 “The borrower shall procure that each set of financial statements delivered …… is
prepared using [GAAP]/[IFRS] ………………”
 a description of any change necessary for those financial statements to reflect the
[GAAP]/[IFRS], accounting practices and reference periods upon which its Original
Financial Statements were prepared; ……………. “
 “The Borrower shall not appoint any company, firm or individual to replace the
Auditors without the prior written consent of the Lenders.”
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Where do we stand in respect of the DFI Approach
Statement (5)
● Collaboration with other DFIs
 European partner agencies under the organizational umbrella of the EDFI
 particularly intensive with FMO and PROPARCO
• project related work: risk assessment, appraisal mission, credit proposal,
dedicated lead manager, joint financing agreement
• joint deal sourcing, joint training sessions, development of joint standards
 closely with EIB, EBRD, IFC and a variety of other regional and local development
corporations
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Experiences in implementing the DFI Approach
Statement and/or Toolkit on Corporate Governance
● Internal factors (within the institution)
 No standard yet – no harmonized approach, neither within the organizations nor with
other DFI’s
 Strong demand for guidance and clarification
 Awareness is there
 On the other hand: no clear understanding on the facets of Corporate Governance
(rather vague knowledge; one term - different meanings)
 multi-faceted subject - moving target
 People will generally appreciate an instrument like the toolkit
 Focus on matrix and keep supporting documents optional
 Important not to overburden staff by putting to much analytical tools on them (in
particular a problem for smaller DFI’s)
 Various aspects have been covered under other “headings”– in one way or the other
(labelling)
 Put different brains together (staff from different departments and backgrounds)
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Experiences in implementing the DFI Approach
Statement and/or Toolkit on Corporate Governance
● External factors (regional/local environment)
 Sound corporate governance is reliant on external marketplace commitment and
legislation, plus
 a healthy board culture which safeguards policies and processes
 Consequently not easy to develop standardized tools
 No “one size fits all” approach
● External factors (client/investee company)
 Acceptance - in many cases - depends from the seize (family run entity versus larger
corporation)
 Awareness exists
 Cost and administrative aspects need to be addressed and dealt with
 Technical assistance program by the DFI’s?
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Experiences in implementing the DFI Approach
Statement and/or Toolkit on Corporate Governance
Consequences for the Toolkit
the right time to bring it to the organization
“Learning instrument” that will be adjusted following the experiences of the users
easy to handle for internal staff (investment officer) in charge of this
avoid duplications with similar topics (for ex. legal dd. questionnaire and toolkit)
meet with the acceptance of the client / investee company
it should not involve to much additional costs on clients side (without
corresponding consideration)
over the time the additional value should be measurable and traceable
Open: Incentives and/or sanctions?
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Get in touch!
Markus Gabbert
Deputy General Counsel
Legal Department
DEG – Deutsche Investitions- und
Entwicklungsgesellschaft mbH
Kämmergasse 22
50676 Köln
Germany
Phone: ++49 (0) 2 21 / 49 86 - 1341
Telefax: ++49 (0) 2 21 / 49 86 - 1361
Internet: www.deginvest.de
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