PSD Blog - World Bank Group

Sustainable banking awards: who's winning what?

The Financial Times and IFC announced shortlists of potential winners for the 2008 Sustainable Banking Awards. The awards recognize financial institutions that have led the way in integating their policies with social, environmental, and corporate governance objectives. Below is a sample the categories and the shortlisted candidates, the full list is available here.

Sustainable Bank of the Year

• Banco Real, Brazil
• Citi, US
• HSBC, UK
• Rabobank, Netherlands
• Standard Chartered, UK

Sustainable Deal of the Year

• BlueOrchard Finance, Switzerland/Morgan Stanley, US (microfinance loans)
• Calyon, France (solar thermal power plants)
• Citi, US (financing for rural housing)
• Glitnir Bank, Iceland (geothermal power generation)
• Merrill Lynch, US (carbon finance to reduce deforestation)

Banking at the Bottom of the Pyramid

• ASA, Bangladesh
• Banco Bradesco, Brazil
• ICICI Group, India
• Opportunity International, UK
• Wizzit, South Africa

Microfinance's "two cents" on its own future

Microfinance professionals, who responded to a new survey by the Center for the Study of Financial Innovation, identified poor management skills as the main risk the industry faces. Poor corporate governance is also seen as a great risk, but more so by investors and analysts than by practitioners.

According to the report "microfinance institutions tend to be dominated by 'visionaries' who are strong on charisma but less so on management skills and strategic flexibility."

More than 300 respondents from 74 countries contributed to the survey. It focused on institutions with more than $5m in assets which are profitable and capable of commercial growth.

Do you have any insights to share? Feel free to leave your own "two cents".

Not so green after all

Ceres, a coalition of investors, environmental groups and other public interest organizations, believes that the financial services industry – with nearly $6 trillion in market capitalization – should play a role in combating climate change.

Most recently, Ceres released a first comprehensive assessment of how the world's 40 largest banks fulfill their commitments to the reduction of greenhouse gas emissions.

The study found that, despite an overall widespread positive trend, only 12 banks made climate change a governance priority; only 6 said they were calculating carbon risk in their portfolio and "no bank has set a policy to avoid investments in carbon-intensive projects such as coal-fired power plants."

And the vote is in…

Alexis Sampson and Michael Jarvis sum up this year's International Business Forum:

The lights dimmed in the Preston Auditorium and the tension rose as the results were calculated. Having generated and then prioritized host of recommendations over the course of the IBF, delegates voted to rank their final top ten. Despite the risky reliance on electronic voting machines, the system worked and the results were reassuringly conclusive.

Time is money

According to a new research, time is worth more, if you're paid an hourly wage rather than a salary.

Entrepreneurship - new data, new research

What drives entrepreneurship across countries? What is the effect of entrepreneurship on economic development? Important questions, but up to now little data to answer them.

The 2007 World Bank Group Entrepreneurship Survey helps fill this gap with data for 84 developing and industrial countries. A first analysis of the data shows that countries with better governance and fewer licensing procedures have more entrepreneurs. Political turmoil seems to hurt entrepreneurship.

More Wall Street-like World Bank

From moving meetings with top managers to 8:30am, expanding the trading floor – which manages $65 billion portfolio - to providing risk-reducing derivative products, such as swaps, President Zoellick wants the bank to adopt more private sector practices.

SOX shows unique governance benefits

The critics of the Sarbanes-Oxley Act (SOX) say that the regulation has made the U.S. less competitive, causing an exodus of companies to less-regulated stock exchanges in London and Hong Kong. The authors of a new paper defy this common wisdom. They find that when firms' characteristics such as size and type are factored in, the listing gap disappears.

"Before you jump to the conclusion that this is evidence of New York losing market share, remember most of those firms wouldn't qualify for the listing in New York. It's apples and oranges" says George Karolyi, one of the co-authors.

In general, whether they list on the NYSE or NASDAQ, firms are subject to SEC oversight, they are exposed to class action lawsuits, and face additional monitoring by market participants, such as analysts and institutional investors.

Although there is a common belief that listing in London provides a certain level of good governance, firms […] in London generally need only comply with the governance rules of their home country [and] are subject to a "light touch" approach to regulation.

Not exactly beach reading

Major conferences inevitably generate a plethora of documents. Corporate responsibility events seems particularly prone to this trend, so it should be no surprise that the gathering of around a thousand of the great and the good at the United Nations Global Compact Leaders Summit in Geneva earlier this month witnessed the launch of a daunting set of proclamations, new initiatives and reports.

Highlights include the Goldman Sachs report suggesting firms that are leaders on good environmental, social and governance policies have outperformed the stock market 25% over the past two years.

The State of Responsible Competitiveness 2007 report from the NGO AccountAbility lets you see how your country compares among the 108 analyzed in terms of their progress on boosting competitiveness through responsible practices. Ratings also feature in the Business guide to partnering with NGOs and the United Nations, but the novel twist is that it is the companies rating the NGOs, looking at their ability to partner effectively.

Finally, the Principles of Responsible Management Education attempt to offer a framework to guide education of the next generation of business leaders on CSR.

SOX in India

Not everything that works in developed countries works in developing countries, but here is an example of the reverse – while the Sarbanes–Oxley (SOX) Act might not have had the expected impact in the U.S., similar reforms have had a positive impact in India, including on the share prices of Indian companies.

These governance reforms could have net benefits in a poor-governance country, like India, but net costs for companies that are already well-governed, like the U.S.

The state of corruption

Transparency International focused its newly-released Global Corruption Report 2007 on judicial systems:

There is […] a correlation between levels of judicial corruption and levels of economic growth since the expectation that contracts will be honored and disputes resolved fairly is vital to investors, and underpins sound business development and growth. An independent and impartial judiciary has important consequences for trade, investment and financial markets, as countries as diverse as China and Nigeria have learned.

This 400-page-long volume adds new country-specific case studies, compares Russia with Brazil as well as other emerging economies. John Bray's section on measuring the impact of corruption on international business shows that 40 percent of surveyed firms believe to have lost international business contracts due to competitor’s bribe.

Ethics at the bottom line

Daniel Yankelovich is a key figure in the creation of public-opinion research and a long-time promoter of ethical integrity in business. In an interview, he challenges Milton Friedman's view that social good comes about automatically when companies make a profit.

How does the public want its business leaders to act? Should they increase short-term value or make contributions to a public good?

CGAP rates financial transparency

A team of accountants and auditors reviewed 231 microfinance institutions in 62 countries. See the winners.

Business and poverty reduction – the missing link?

Should your beer make you feel guilty? We are not talking the alcohol or calories, but its poverty impact.

Heineken is one of the first firms to go though the new MDG Scan developed by the Dutch that breaks down what multinational firms do in regard to the Millennium Development Goals (MDGs). This is a welcome development. There has been a lot of conference talk and coverage of business and the MDGs in recent years. Yet it has been hard to move beyond anecdotes to analytical data on private sector impacts on poverty reduction.

A Unilever-Oxfam study on the company’s impacts in Indonesia helped set a marker of what is possible. The new scan is another step forward, although only six firms - mostly Dutch - have so far undergone the scan and it tends to emphasize the positive. The challenge is to make sure it covers the range of operational impacts given that it is time and cost intensive to measure business impacts effectively.

The framework will soon be made available as a web-based tool for firms and also for NGOs. It will be interesting to look at the contributions of NGOs alongside those of companies they frequently critique.

Sustainability revealed

SustainAbility has released a new tool for reviewing, analyzing and benchmarking sustainability reporting by companies. "Learn from the leaders" is a database of reports organized by sector, region or issue – from the likes of BP, Nike, and Shell. Also useful for companies trying to figure out how to create their own reports.

The downside: subscription fee, though you can request one week for free. See more at Greenbiz.com.

Doing Business in South Asia 2007

A child publication of our Doing Business Report series was launched today – covering 8 countries and 22 cities in South Asia: Doing Business in South Asia 2007.

The elephant in the region is India. The chapter on India has some surprising city rankings.

Afghanistan has the most unfriendly business regulations in the region, with low scores globally for registering property (most private land doesn't even have clear title); low scores for getting access to credit (there's no way to enforce collateral – legally); low scores for the red-tape required to trade – in a country where up to 80% of firms import, it takes 88 days and 11 forms to ship in goods.

Overall the region scores worst on cost of firing and enforcing contracts. Small wonder, then, that India for example has only a jaw-dropping 8 million workers in formal employment – all the other 450 million workers are in the informal economy.

More on materiality in sustainability reports

A postscript to my post on materiality last week:

.......with a perfect sense of timing, Greenbiz ran a feature this week on 'The Materiality Report' issued late last year by AccountAbility. I'd hadn't seen this 55 page document before (PDF), which provides some examples of the materiality matrices adopted by BP, Ford and BT. Although given current woes of the first two companies, perhaps they should get a review of their methodology (or its execution) on their corporate to do lists.

Less is more Madonna?

For reasons unknown, the Material Girl's 'Material World' has been swirling round my head. I believe this is called an 'earworm' and sadly, there is no known cure: I just have to wait for the next song to take its place.

While the song is anchored in 1980s excess (impress/depress yourself... in which year did the song come out?), it may be due for recycling. A Millennium version of 'Material World' might carry the opposite connotation - less is more.

The concept of materiality has long been part of the legal and financial worlds, yet it is now featuring much more prominently in the ESG (environmental, social, governance) arena. For the uninitiated, materiality means identifying the crucial bits of information when a decision needs to be made from the noise of surrounding bits.

Does corporate governance pay?

Does corporate governance pay, even if your company is not seeking outside investors? It does, especially when dealing with competitors. When I was traveling in Serbia in November, I met with some company managers who said their firms were not too worried about corporate governance.

Their firms were not looking for funding from outside investors, they said. Any growth capital they needed could come from either their own resources (i.e., retained earnings) or from bank loans. If they are not trying to lure funds from domestic or foreign investors, they said, why do they have to worry about financial transparency or upgrading their board practices?

The answer to that question is simple: their competitors will eat their lunch. There are larger, more efficient firms from all over Europe, with deeper pockets and more marketing muscle ready to snap up the Serbian companies' customers. By not upgrading their corporate governance standards, the Serbian firms are, in effect, operating with one arm tied behind their backs when they are competing with larger, better-funded rivals.

Their complacency gives their competitors a big advantage. An example of a manager of a small firm who used corporate governance to become more competitive is Mo Ibrahim, founder of Celtel. Instead of hiring family members or close friends, Mo employed the best managers he could find in the market. He also instituted an impartial board of directors who would tell him what they really thought about his decisions. Mo's decision to use good corporate governance practices worked—he recently sold the company for $4 billion.

Size matters – but what about ownership?

Think you know the world’s largest and most powerful companies? A new list in the Financial Times might make you think again.

The FT Non-Public 150, based on McKinsey research, provides an interesting insight into the shadowy world of private and state ownership, ranking the firms by estimated market value. Not surprisingly state-owned oil companies dominate the top of the list – only Japan Post breaks their hold on the top ten. So, who tops them all? Saudi Aramco - worth an estimated $781bn. Compare that to the paltry $454bn market capitalisation of ExxonMobil, which sits atop lists of publicly traded firms.

The exercise makes for fun headlines, but also raises crucial issues over the relative merits of different forms of ownership and the implications for ensuring good corporate governance and maximizing value. Non-public firms are increasingly influential – see the presence of 6 buy-out firms in the top 30 of this list - but it does not mean they necessarily offer better value. See the accompanying FT article for more.

Bollywood and the investment climate

Bollywood needs a better regulatory and corporate governance environment to attract more foreign investment, according to delegates at last week's India Media and Entertainment Forum in London.

The Indian Industry stands at $4.5 bn today and is expected to grow in high double digits at 18% per annum compounded annually over the next five years, to reach over $10bn by 2009. The largest contributor to this growth will be the television segment followed closely by the film segment.

No word in the press release on whether the 200 delegates performed an intricate dance routine in vibrant colors.

Capturing Value contest winners

Through this seed funding we are hoping to break a chicken-and-egg situation where investors will not invest in emerging markets for lack of information, and research providers will not enter the market for lack of demand. The object of the competition is to lead the market and to provide tools to a mainstream investment audience.

That's PSD Blogger Rachel Kyte on the IFC's research competition Capturing Value. Winners were announced last night in Zurich. Congratulations to both winning teams - CRISIL, Standard & Poor's and KLD; and Trucost and CLSA - who will split a $500,000 grant to study environmental, social and corporate governance data for emerging market equity investors. For details, see the press release.

Mexico's favorable investment climate

Forbes publisher Rich Karlgaard thinks it's time to invest in Mexico. He cites its solid economic performance (3.5% growth this year), favorable demographics (lots of brand-new workers), consumer credit growth of 400% since 2000 (signaling a healthy middle class, and room to grow in the stock market (currently trading at just 37% of GDP).

On top of all that, Mexico was ranked the 3rd best reformer in the recent Doing Business report. Why? Reforms in business entry, protecting investors and paying taxes. The corporate income tax rate is down to 29%, and a new securities law clarifies the obligations of company directors. For more, see my previous post or an online discussion on the report.

Banking on ethical performance

The recent public tribulations of firms such as BP serve as a further reminder of the importance of business ethics and how lapses can seriously impact corporate operations and reputations. (See Richard's post on BP and brand.) The case for business ethics is reiterated strongly by John Plender and Avinash D. Persaud in their recent failure of business ethics series in the Financial Times and their new book All You Need To Know About Ethics and Finance. As such examples as Enron and Parmalat highlighted, good governance remains very much a shared global challenge – not one limited to emerging economies.

This point was emphasized by private sector representatives in a global dialogue last Wednesday, organized by the World Bank Institute to discuss coverage of private sector roles in the World Bank draft paper on governance and anti-corruption. The discussants also considered the role of the banking sector in promoting good governance and anti-corruption measures.

Plender and Persaud use the case of Citigroup in their book. In addition to ensuring high standards among their own staff, one can argue that banks should urge similar standards from their clients. Is it viable to build on the success of the Equator Principles model for handling environmental and social risks, to have a similar commitment to demand good governance and anti-corruption frameworks to minimize ethical risks?

Corporate bodies and guilty minds

A new book, published by the University of Chicago press and titled Corporate Bodies and Guilty Minds, by Wharton's William S. Laufer takes a fresh look at corporate behavior. Unlike most of the recent volumes on the topic, this book's focus is not on corporate social responsibility but rather corporate liability, and on how current structures fail to fashion liability rules that attribute blame to corporations.    

While the book is written mostly for corporate executives and lawyers, it should be of interest to policy makers, too - with its in-depth study of legal reforms and close examination of what works and what doesn't.  Laufer argues, with a witty and somewhat sarcastic tone, that there is no single constituency or interest group that strongly and consistently advocates the importance of corporate criminal liability. Unless and until such a unified voice emerges, we can expect to see continued gross corporate malfeasance.

Brazilian companies pulverized

First was department store chain Lojas Renner, a JC Penney spinoff. More recently aircraft maker Embraer, online retailer Submarino, and industrial supply maker Eternit have been pulverized. What, you ask, has happened to these Brazilian firms? “Pulverization” - when a company that was held by only a few owners broadens its shareholding base, so that no controlling party remains. Several other of the country’s firms may not have been completely pulverized, but they now have less than 50% of their shares concentrated in one shareholder or shareholding group - such as home builder Rossi, construction firm Gafisa, and BrasilAgro.

One of the directors of a pulverized company confided to me that, so far, he has a low opinion of US institutional investors who had bought into his company.

Voluntary disclosure to fight corruption

On Tuesday the World Bank quietly announced a bold program to combat corruption on its own projects.

Under the new Voluntary Disclosure Program (VDP), firms, NGOs or individuals who work as contractors on Bank projects perform an internal investigation, report their corrupt acts and pledge to follow the rules on future projects. In exchange, they secure confidentiality and the right to continue working with the Bank. According to the press release, “those under active investigation by the World Bank are not eligible to enter the program.” Once firms sign on, any deviation from the VDP’s non-negotiable contract means ineligibility for Bank work for 10 years. (They’ll join the 330+ firms currently debarred.)

I asked Pascale Dubois, acting manager of the VDP, about the move to voluntary disclosure. She said:

Putting together a VDP that would work well for the private sector and for the Bank meant for us a long process of consultations and research into the latest trends in international anticorruption law and corporate social responsibility. We have also been working with pilot firms for the past two years, and that experience helped us to refine the program.

Corporate governance for state enterprises

In spite of extensive privatization over the last two decades, state-owned enterprises (SOEs) are still a mainstay in many developing economies. China, India, Russia and South Africa are just a few countries where wholly or partly government-owned SOEs remain productive and influential.

Good corporate governance is crucial for SOEs in emerging markets, because they face even more governance challenges than private companies do. Unlike a widely-held private company, an SOE usually cannot have its board or management changed via a takeover or proxy contest, and they usually cannot go bankrupt. In addition, they may have "free" equity and a very low cost of subsidized loans. Thus, the incentives for board members and managers to maximize the value of the company and keep costs in check are reduced. Accountability and performance may also be hindered by political interference, poorly defined non-commercial objectives, and an absence of transparency. Strong internal controls, good disclosure, independent boards of directors, and other corporate governance tools can help state-owned enterprises perform well and act in the best interests of citizens and other shareholders.

A new World Bank paper from David Robinett discusses corporate governance of SOEs in emerging markets and makes recommendations for reform.

UNEP's "Show Me The Money" report

The United Nations Environment Program's Finance Initiative launched last Friday the new report: “Show Me The Money: Linking Environmental, Social and Governance Issues to Company Value.” Their key conclusion:

The material contained in this document provides strong independent support for the view that effective attention to environmental, social and governance issues will enhance shareholder value. Investors who do not pay attention to environmental, social and governance issues are taking unnecessary risks with their portfolios. Investors who do pay attention are probably improving the risk/return relationship.

The report was pulled together with the support of 14 leading international financial institutions and is a summary of 1000+ pages of analyst research. See the table of content’s for commentary on issue and industry-specific research. Via Risky Business.

The global corporation

Are we moving beyond the multinational corporation towards the truly global corporation? Samuel Palmisano, chief executive of IBM, makes this case in an article in the latest edition of Foreign Affairs. Mr. Palmisano sees a globalized 21st century where we need to abandon antiquated thinking on multinationals and embrace the emergence of “the globally integrated enterprise” that develops strategy, management and operations to integrate production worldwide. He argues that the global approach offers:

A better and more profitable way to organize business activities – and it can deliver enormous economic benefits to developed and developing nations.

However, to foster truly global enterprises serving the global market, Palmisano encourages creation of a global regulatory system through better cooperation between regulatory agencies. Without such change it is hard to see even the most globally inegrated company escaping the impacts of politics that remain decidedly local. (Also see a previous post about a Palmisano op-ed in the Financial Times.)

Governance and private investment in MENA

Empirical results show that governance plays a significant role in private investment decisions. This result is particularly true in the case of "administrative quality" in the form of control of corruption, bureaucratic quality, investment-friendly profile of administration, and law and order, as well as for "political stability." Evidence in favor of "public accountability" seems, however, less robust. The estimations also stress that structural reforms-such as financial development and trade openness-and human development affect private investment decisions directly, and/or through their positive impact on governance.

From the new working paper, Governance and Private Investment in the Middle East and North Africa. Also see PGP on poverty reduction in MENA.

Update: See the upcoming workshop "Between Society and the Market: Novel Approaches to the Business History of the Middle East."

Leaving alpha on the table

More and more investors are recognizing the importance of "non-financial" disclosure.

A group of pension fund managers - including BP, CalPERS, and Morley Fund Management - are asking the International Accounting Standards Board to support incentives for voluntary reporting by companies on non-financial performance indicators. Such indicators typically include:

• a company's level of customer satisfaction
• environmental and social performance indicators
• indicators of employees' professional development
• the number of patents it has generated
• related-party transactions
• future political and regulatory risks
• other non-financial data

Investors say that enhanced reporting will help them evaluate companies' risks and competitive advantages, with information that goes beyond traditional financial analysis. A recent report on the Enhanced Analytics Initiative (EAI) from one EAI member, the Universities Superannuation Scheme (USS), shows that ignoring non-financial information can lead investors to "leave alpha on the table".

Private sector roles in fighting corruption

Fighting corruption with a multidimensional approach is picking up more speed.  At a recent conference in Hong Kong, sponsored by the Independent Commission Against Corruption, the gathering challenged some of the common notions of measuring corruption, focused on evidenced based policy, and looked at the roles that the private sector can and needs to play to reduce corruption.  Some 400 business and policy leaders from around the world recognized that closer engagement with associations of businesses, including small and medium-scale entrepreneurs and multinationals, is also required.  In addition they called for better integration of anti-corruption and integrity standards into corporate governance and guidelines for corporate social responsibility.   Much of the proceedings are available online.  You can also click on the following links for more information on World Bank's work on anti-corruption and business ethics, or see this reading list.  Hopefully, the event will contribute to generating more action on the private sector side.

Corporate governance assessments

Updated list of country corporate governance reports done by the World Bank-IMF ROSC program.

New global charter for responsible investment

In case you missed it on April 27, Kofi Annan rang the opening bell at the NYSE and announced the launch of new UN Principles of Responsible Investment. Calling the UN and business natural partners, Annan noted:

The Principles provide a framework for achieving better long-term investment returns, and more sustainable markets. They offer a path for integrating environmental, social and governance criteria into investment analysis and ownership practices. If implemented, they have tremendous potential to more closely align investment practices with the goals of the United Nations, thereby contributing to a more stable and inclusive global economy.

The UN is putting its money where its mouth is by signing up its own pension fund to adhere to the principles.

Private equity and emerging markets

I was able to catch today’s morning sessions at the Global Private Equity Conference and will link to the presentation when they go online next week. Comments on the event below the fold for those that are interested.

Improving corporate governance in Mexico

A new securities law could help dramatically raise Mexico’s corporate governance standards, which ranked a dismal 125th in the world in Doing Business’ most recent index of investor protection and corporate governance standards.

The new law introduces a new type of corporation, called a SAPI (sociedad anónima promotora de inversion), that gives much clearer rights for minority shareholders than other limited liability Mexican companies do. Companies can become SAPIs, but once they do, they have three years to list on an exchange. SAPIs will give minority shareholders more protection. For instance, investors will need fewer votes to call a meeting, and it will be easier to file a civil legal action or to oppose a resolution from a shareholders' meeting. SAPIs will also impose duties of care and loyalty on company directors, improve corporate financial reporting, and make clearer, harsher penalties for violations such as insider trading.

While this is certainly a step in the right direction for Mexico, it will be interesting to see how the courts interpret the new securities law requirements, especially in the context of various existing companies laws.

Latin American corporate governance

Several Latin American companies have seen big boosts to their stock prices, and/or to their bottom lines, after improving their corporate governance practices in the past few years. 'Case Studies of Good Corporate Governance Practices' (PDF, 2.9MB) showcases the experiences of these firms, which are known as the 'Companies Circle' of the Latin America Corporate Governance Roundtable - a group of Latin American firms sponsored by the IFC and OECD that have improved their governance practices.

The cases demonstrate the practical approaches companies take to improve their transparency and disclosure, accountability, respect for the rights of shareholders, and equitable treatment of all stakeholders. Each firm has taken its own path, adopting governance structures and practices tailored to its own situation, rather than blindly adopting “best practices”.

Here are some of the success stories featured in the book:

• Buenaventura (mining, Peru): The company converted all of its shares into a single share class prior to its 1996 IPO. Since then, its market cap has risen more than five times. The firm has complied with Sarbanes Oxley since July 2005.
• Argos (cement, Colombia): After adopting a code of corporate governance in March 2004, its share price rose 108% over the next 18 months.
• Natura (cosmetics, Brazil): The firm made its IPO on the "good governance exchange", the Novo Mercado, in 2004. The IPO was 14 times oversubscribed.

The case studies are available in English, Português, y Español.