Leadership.Position.Value!
June 2015 - Peter Montagnon, Institute for Business Ethics, and Charles Canfield,
International Finance Corporation (IFC), champion good corporate governance. In this
interview with corporAID they discuss the significance of corporate governance in the
developing markets.
Interview:
C. Coudenhove-Kalergi with P. Montagnon und C. Canfield in Vienna.
CORPORAID: What role does competition or lack of competition play in the emerging markets given that
their economy is often dominated by a handful of families?
Montagnon: Indeed we frequently observe a high concentration of power in few businesses, a
phenomenon that restrains economic development in such markets. That situation requires meaningful
rules of competition that have little to do with corporate governance. The biggest challenge in those
markets are the excessively powerful shareholders and transactions within groups of companies to the
detriment of other, mostly smaller, shareholders. That often leads to extensive loss of confidence in the
capital market - provided that such a market exists at all since, where a small number of families
dominate a country's economy, it is very difficult to develop a capital market that functions.
"Better governance and transparency are prerequisites for going public."
Charles Canfield, International Finance Corporation.
Canfield: IFC invests in newly industrialized and developing countries, and a considerable part of the
investments flows into family businesses, most of which are managed by the first or second generation.
That means risk, and by the same token, opportunity because many family businesses fail in the third
generation. We support these businesses in opening up and in professionalizing their boards and
governance. Thus we work with them on governance at both the business and the owners' levels. That is
attractive to the entrepreneurs because family businesses are often more interested in continuity than in
short-term profit maximization. IFC is a medium-term shareholder. Bringing IFC on board is a significant
incentive for businesses because better governance and greater transparency are prerequisites for going
public.
Sounds simple: "Show us that you are improving your corporate governance standards, and we'll show
you the money".
Canfield: Exactly. Before each planned investment, we analyze the corporate governance of the
business concerned. If the situation is disastrous, we withdraw or set stringent conditions. We examine
the areas of risk, and usually analyze commitment, the board of directors, risk management, internal
control and auditing, treatment of shareholders and transparency. In the case of family businesses, we
check whether there is a family council and a family charter or related documents.
"It is often difficult to convince family businesses to bring external managers on board."
Peter Montagnon, Institute for Business Ethics.
Montagnon: Family businesses are always accompanied by difficult governance issues. The founder is
usually unwilling to give up control and often prepares poorly for the surrender of authority. Rifts surface
in the next generation, among the founder's children, each of whom may want to occupy the executive
chair - and that is a corporate governance problem. Moreover, if it is to grow, the business needs outside
capital, for instance from IFC, which demands a voice in the management. At that moment, bringing
external managers on board is a thorny question for a family business: on one hand, such a step is in the
interest of the capital provider while, on the other hand, managers external to the family often make better
decisions and can assess risks more effectively. Convincing a family business of the need for such a step
is naturally quite difficult.
Here in Vienna you have dealt with the question of how corporate governance tools should be adapted to
newly industrialized and developing countries. What is the key insight that you have gained in that
connection?
Canfield: We don't yet have any results. First we must digest the various elements. There have been
points of concurrence and also broad differences of opinion. The general response to the new OECD
Guidelines on Corporate Governance, scheduled to take effect in September, has been positive. That is,
so to speak, the gold standard. The IFC corporate governance methodology is based on those guidelines.
The Global Corporate Governance Principles of the International Corporate Governance Network (ICGN)
are another recent example. The great number of different standards is a challenge. There are those of
the Global Reporting Initiative (GRI), the Integrated Reporting Framework and the Sustainable
Accounting Standard Board (SASB). Moreover, the United Nations has launched the Sustainable Stock
Exchanges (SSE) initiative. The crucial and at the same time most controversial question [at the event] is
whether the matter of sustainability should be part of corporate governance codes. On this point, opinions
diverge considerably.
How can multinationals prepare for entry into developing countries?
Montagnon: The key issue is bribery. In Great Britain, we have very strict anti-corruption laws.
Accordingly, for British firms the practice of double standards in developing countries is highly risky. Thus
the Institute of Business Ethics (IBE) has developed the Say No App, which is already used by many
businesses.
That application is a decision tool. If you receive equivocal suggestions or are asked to pay for doubtful
services, you can use the application so as to be on the safe side. When things become serious, the cell
phone flashes red and the message reads "Say no!". Managers of multinational businesses who work in
developing markets are frequently under enormous pressure. In a case of corruption, they can now
invoke the application and say: Look, my superiors don't allow that. Through that application, IBE has
made a valuable contribution to raising the standards in developing countries.
How does IFC try to establish corporate governance in developing countries?
Canfield: IFC is active in difficult markets avoided by other investors. In order to establish corporate
governance in such markets, one needs above all patience. We cooperate with governments, businesses
and educational institutions and engage in relevant public relations work. There are numerous examples
of businesses which initially had terrible governance and then improved step by step. Clearly, however,
nothing can be achieved overnight. The way is long and arduous. Turan Bank in Azerbaijan is a case in
point. The owners approached us, we thoroughly analyzed the bank and reorganized it, before entering
the capital with $ 7 million. Or take the formerly national and at that time badly managed Banca
Comerciala Romana. We entered its capital with approximately $ 125 million, hired new managers,
improved risk management and prepared the initial public offering. After privatization, our package of
shares was worth almost $ 1 billion. To us that was almost embarrassing.
Does success then depend mainly on professional and honest managers?
Montagnon: It is a question of overall organization: internal auditing, accounting and risk management.
Only with good governance can a business make sound strategic decisions. Consider financial scandals:
their causes are usually failing corporate governance and deficient business culture. Take for instance
Enron. They had a code of ethics which, allegedly for technical reasons, was temporarily suspended for
certain transactions to be carried out. If a business suspends it, a code of ethics is not worth the paper it's
printed on.
Canfield: We are firmly convinced that companies with good governance are the prerequisite for a better
society.
Thank you for the interview!
-------------------------------------------------THE INTERVIEWEES:
Peter Montagnon is a director of the Institute of Business Ethics, a British NGO, and advises numerous
businesses. He is British and has earlier worked in the insurance industry and, for a long time, as a
journalist for the Financial Times.
Charles Canfield is part of the Corporate Governance Group of the International Finance Corporation
(IFC). He is a United States national and works as a senior corporate governance officer working on all
matters related to corporate governance.
BACKDROP:
Corporate Governance in Emerging Markets
In May, a group of experts on corporate governance matters of the International Finance Corporation
(IFC), a member of the World Bank Group, and external participants met in Vienna to debate on key
developments in corporate governance standards and benchmarks of best practice.
© corporAID Magazine No. 58
Interview moderator: Clemens Coudenhove-Kalergi.
Photographs: Pia Cencig