The Role of Stakeholders In
Corporate Governance
Dr. Demir Yener
Center for International Private Enterprise
Washington, D.C.
Fourth Meeting of the Eurasian Corporate Governance Roundtable
‘The Responsibilities of Boards of Directors’
October 29-30, 2003, Bishkek, Kyrgyzstan
Purpose of the Presentation
To discuss:

Objectives of the firm: Wealth
Maximization

Responsibilities of the board

The role of stakeholders in corporate
governance
Stakeholders and Shareholders
Primary Stakeholders

Shareholders

Boards of Directors/Managing Boards

Executive Management
Other Stakeholders

Managers
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Employees
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Customers
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Community at Large
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Suppliers
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Financial Institutions: Creditors

Environment in general
Internal Elements
External Elements
of Corporate Governance
Factors of Sound
Corporate Governance
• Shareholders rights protection
• Rights and responsibilities of Board
of Directors and Shareholders
• Quality of Disclosure
• Monitoring
• Effectiveness of the core
management functions
of Corporate Governance
Principal Factors
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Stakeholders
Takeovers/acquisitions
Bankruptcy frameworks
Collateral and Foreclosure rules
Enterprise Restructuring
Investor and Creditors
Agents: Management
Enabling Environment
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International Auditing & Accounting Standards (IAS&ISA)
Securities Markets Legal and Regulatory Frameworks (IOSCO)
Financial Sector Participants : investors, issuers, intermediaries (interaction between participants)
Financial Market Infrastructure and Architecture
Product and Factor Competitiveness
Foreign Direct Investments
Corporate Control (Corporate Governance: OECD Principles)
Enabling, prudentially regulated business environment, with creative incentive structure
Benefits of Corporate Governance

Good corporate governance has a
positive effect on:
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Share valuation
Risk assessment
Reduction of market volatility
Good Corporate governance can:

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Reduce the cost of capital
Increase the pool of investors
Improve management accountability and
performance
Efficient Ownership
Sufficient concentration of
control in a firm by owners to
be able to monitor and
influence management
effectively.
The Goal of the Firm
To maximize the wealth of
its shareholders.
How To Determine Whether Corporate
Governance Is Effective?
Two tests
 Is the corporation maximizing
shareholder value?


Is the net present value of the corporation’s
cash flows positive and is it being used or
directed for the benefit of shareholders
based upon their pro rata ownership
interests?
If the corporation’s chief executive
officer is not performing well, does the
board of directors have the power to
remove him?
Responsibility of the Board

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In pursuit of the wealth
maximization objective, boards must
recognize the interests of all
stakeholders.
No company ever survived that
ignored the interests of its:

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Customers
Employees
Suppliers
Four Values of
Good Corporate Governance

Transparency

Accountability

Responsibility

Fairness
Linkages

The four pillars of corporate
governance and the wealth
maximization concept serve as the
‘aspirational benchmarks’
Investor Behavior

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Investor behavior is characterized by the
‘fear and greed’ factors
Corporate governance is not an end in
itself.
CG is about improving firm performance
and assuring access to capital at a
reasonable cost.
The end game of CG is achieving the most
efficient allocation of the scarce resources
the firm has available within its economic
environment, and gaining access to the
capital needed for growth and development
CG and Firm Performance

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The linkages between good CG and
firm performance is clear
Good CG will inspire investor
confidence
Good CG will assure investors of a
reasonable rate of return on their
investment
Good CG will generate operational
efficiency and increase the
competitiveness of the firm
Price Discovery



Good CG will contribute to the further
efficiency of the price discovery
mechanism in determining the value
of the firm.
This serves the purpose of wealth
maximization concept
Improved CG will help resolve the
problem of risk and help lower the
cost of capital. Thus leading to an
increase in the value of the firm.
Stick and Carrot
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Effective CG will serve as the carrot if
private sector is convinced that it will
gain from good governance. IN this
case, reform will happen.
IF private sector is not convinced,
reform will be resisted.
This is the dilemma.
The main player in the maximization
of wealth through good governance
is the board.
Responsibilities of the Board
and Performance

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Independent oversight
Contestability
Labor relations
Corporate strategy
Corporate social responsibilities
Respecting stakeholders
Excellent performing managers
Attracting low cost capital
Increasing market capitalization
Conclusion

The Board has an important role to play
in development and progress of the firm
on behalf of its investors.

Maximizing the shareholder value is the
long term objective of the firm.

Stakeholders play an important role in
CG

A board, respectful of the legitimate
expectations of all the stakeholders
should benefit all parties in the long run.