IFC Corporate SUPPLEMENT TO TOOLKIT 2 Governance Knowledge Developing Corporate Governance Codes of Best Practice 91052 Tool Corporate Governance Scorecards ASSESSING AND PROMOTING THE IMPLEMENTATION OF CODES OF CORPORATE GOVERNANCE SUPPLEMENT TO TOOLKIT 2 Developing Corporate Governance Codes of Best Practice Corporate Governance Scorecards ASSESSING AND PROMOTING THE IMPLEMENTATION OF CODES OF CORPORATE GOVERNANCE © Copyright 2014, All rights reserved. any right to resell, redistribute, or create derivative works International Finance Corporation there from. Any other copying or use of this work requires 2121 Pennsylvania Avenue, NW, the express written permission of the International Finance Washington, DC 20433 Corporation. 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For more information, visit www.ifc.org/corporategovernance Corporate Governance Scorecards CHAPTER PAGE Foreword................................................................................................................... iv 1 In Brief....................................................................................................................... 1 2 Introduction............................................................................................................... 2 3 How to Use This Supplement...................................................................................... 7 4 The Process Step-By-Step............................................................................................ 8 4.1 Establish clear and realistic goals for the project.................................................... 8 .2 Recruit the institutions to lead and implement the project................................... 12 4 4.2.1 Find the project owner....................................................................... 12 4.2.2 Engage key stakeholders.................................................................... 14 4.3 Develop the scorecard....................................................................................... 17 4.3.1 Draft a delivery plan........................................................................... 17 4.3.2 Choose the benchmark...................................................................... 17 4.3.3 Develop the scorecard structure......................................................... 24 4.3.4 Select the platform............................................................................ 29 4.3.5 Solicit stakeholder feedback............................................................... 33 4.3.6 Pilot test the scorecard....................................................................... 34 .4 Conduct the scorings......................................................................................... 35 4 4.4.1 Engage early adopters........................................................................ 35 4.4.2 Promote the scorecard broadly........................................................... 37 4.4.3 Conducting the scoring...................................................................... 39 .5 Summarize and present the results.................................................................... 43 4 5 Measurable Outcomes.............................................................................................. 50 .1 A company......................................................................................................... 50 5 5.2 A chamber of commerce.................................................................................... 52 .3 An institute of directors...................................................................................... 53 5 5.4 A stock exchange............................................................................................... 55 6 Building on Scorecards.............................................................................................. 58 7 Annexes................................................................................................................... 61 7.1 Sample indicators............................................................................................... 61 7.2 Sample checklist scorecard.................................................................................. 64 7.3 Sample spreadsheet scorecard for family-owned businesses................................ 68 7.4 Sample web-based scorecard.............................................................................. 75 7.5 Sample pilot test and company feedback form................................................... 81 7.6 Selected references............................................................................................. 83 8 Cross-References...................................................................................................... 86 8.1 Index of takeaway points ................................................................................... 86 8.2 Index of examples............................................................................................... 86 8.3 Index of examples by type of scorecard user ...................................................... 87 8.4 Index of references by country or region............................................................. 88 8.5 Index of figures.................................................................................................. 92 8.6 Index of tables.................................................................................................... 92 iv Corporate Governance Scorecards Foreword This supplement builds on the extensive work of the Something was needed to encourage best practice in International Finance Corporation (IFC), a member of the governance, but without the intrusiveness of legislation. World Bank Group, on developing codes of corporate Part of the answer was scorecards, which had been inspired governance. Since the early 1990s, more and more by the experience of private sector investors assessing com- countries have adopted governance codes. The pace pliance with national codes. Later, institutes of directors, picked up with the groundbreaking work of the OECD stock exchanges, and regulators used scorecards to assess (Organisation for Economic Co-operation and Development) and promote governance reform. IFC has used them as a in the late 1990s and became a major trend. IFC encour- tool to help a variety of users identify weakness in gover- aged this trend by helping a large number of developing nance and to alert them to areas that require reform. and emerging markets develop their own codes. The hope was that codes and better governance would boost the Scorecards have now been used globally for more than 10 development of capital markets, help companies perform years, providing sufficient experience to make it possible to better, and make them better members of society. compile this supplement to the initial codification toolkit. This supplement offers a tool that readers can use for code In 2005, the then IFC Global Corporate Governance Forum, implementation—a next step after the successful comple- now merged into IFC Corporate Governance Group, pub- tion of a code. lished a toolkit, Developing Corporate Governance Codes of Best Practice, and began using it extensively to help Finally, let us emphasize that the ultimate beneficiaries of countries develop their own codes and notch up their gov- scorecards are companies. Although scorecards do check ernance standards. Many countries drafted codes, and the observance of codes, they are not mere compliance exercis- understanding of governance and its impact on companies, es. Measuring corporate governance helps companies know markets, and societies grew significantly in all of the world’s where they stand and helps them improve performance regions. through better strategy, decision making, risk management, control, and organization. Despite these advances, the mere existence of a local corporate governance code did not automatically trans- Peter Montagnon late into better practice. Regulators, stock exchanges, and Co-chair, Experts Group on Codes and Standards other organizations often put considerable effort into code Member, Private Sector Advisory Group development, only to face the new challenge of how to Associate Director, Institute of Business Ethics make good governance practices a working reality. Their work was often complicated by the limited experience most Christian Strenger developing countries and emerging markets have with vol- Co-chair, Experts Group on Codes and Standards untary tools as a means of changing corporate behavior. Deputy Chairman, Private Sector Advisory Group Academic Director, Center for Corporate Governance HHL Leipzig Graduate School of Management Corporate Governance Scorecards 1 X. In 1. Chapter Brief Name 1. In Brief by Christian Strenger Scorecards are tools for the assessment of corporate gov- This supplement tells you how to develop and ernance practices. They measure the observance of corpo- implement a scorecard: rate governance codes and encourage better governance • It synthesizes the experience of a large practices without the intrusiveness of legislation. number of countries. • It translates country experiences into a Key messages of this publication: step-by-step process. • Scorecards generate important information on • It highlights the key messages in the quality of governance practices. They can takeaway points. tell whether companies ignore codes or follow code • It contains numerous examples and case recommendations. They provide information on studies. the impact of governance codes. They can be used • It contains sample indicators and other to compare practices between companies and useful models. between countries. • It helps the user avoid costly • Scorecards encourage companies to improve misunderstandings. their governance. Comparisons to other com- panies provide an important indicator on how the The executive view: company stacks up against a peer group and can Text boxes highlight examples, takeaway points, and motivate companies to improve their governance. additional resources. Each type of text box is indicated as Scorecards are particularly useful when a (new) code follows: of corporate governance is introduced in a country. • Companies want concrete and useful infor- Examples mation. Most companies want quantifiable and The supplement describes a rich variety of comparable information on the quality of their practice. The different examples serve to governance practices. Companies want to know illustrate how scorecards have been developed and when and where they fall short so that they can act. implemented in real life. • The main beneficiaries of scorecards are Takeaway Points companies and their stakeholders. Scorecards TAKE AWAY Takeaway points summarize the critical messages can help companies improve their strategy, of the supplement. For the reader in a hurry, decision making, risk management, control, and consulting the boxed takeaway points found in each section organization. provides a rapid understanding of the issues in developing • Anybody can initiate a scorecard project. a corporate governance scorecard. An index of takeaway Scorecards are of interest to companies, regulators, points is provided in section 8.1. stock exchanges, institutes of directors, chambers of commerce, investors, academics, and more. Additional Resources Not all issues related to scorecards are ad- dressed in detail in the supplement. The “addi- tional resources” boxes offer a large number of references as a first step to answering possible further questions. 2 Corporate Governance Scorecards Introduction Chapter Name 2. Introduction X. 2. This is a supplement to IFC’s Toolkit 2: Developing Cor- the supplement cannot foresee all situations and eventuali- porate Governance Codes of Best Practice.1 The focus of ties. It is, however, intended to cover most of the issues that Toolkit 2 is the development of codes of corporate gover- might confront any institution, regulator, stock exchange, nance.2 This supplement focuses narrowly on how to use and so on, that has in mind to develop a scorecard and to scorecards to measure the observance and implementation provide some practical guidance on how to approach those of such codes. It does not cover the full panoply of gover- issues. nance assessment tools. What is the purpose of this supplement? One of the key values of scorecards is that they raise aware- This supplement provides practical guidance and a step-by- ness of good standards and practices at different levels of step approach on how to develop a corporate governance the market. Scorecards are part of a long-term, iterative scorecard. It also presents different approaches to scor- process to improve the governance culture within a country. ings based on the experience of different scorecard users Clearly, scorecards are not the only means to achieve this in different countries. The supplement also shows how Scorecards tell us whether we measure up “Good corporate governance brings real benefits to companies. It improves their decision making and risk management, ensures proper accountability, eases their access to capital, and gives confidence to creditors. But how do companies know whether their governance passes muster? Scorecards can help them measure their achievements and tell them where they still need to improve. This is not just about compliance. It’s about self-help.” - Peter Montagnon, Associate Director, Institute of Business Ethics, United Kingdom, PSAG Member goal. Nor are they a panacea. A variety of mechanisms may scorecards are adapted to local circumstances and the local enhance governance practices and standards in a market corporate governance framework. and among companies, and it is not the purpose of this publication to cover every possible mechanism. Scorecards generate numerical scores. In Section 4.5, “Summarize and present the results,” the supplement This supplement is not intended to be a full manuscript of shows a variety of useful information that can be created all the available tools or assessment techniques but more from such scorings. In Section 6, “Building on scorecards,” a guidance on various possible uses and applications of it also presents other potential uses of scorecards, such as scorecards. As with all IFC knowledge management tools, the basis for stock exchange indexes or tiers.3 1 Toolkit 2: Developing Corporate Governance Codes of Best Practice can be found here: http://www.ifc.org/wps/wcm/connect/topics_ext_content/ ifc_external_corporate_site/global+corporate+governance+forum/publications/toolkits+and+manuals/toolkit2_codes_of_best_practice. 2 A corporate governance code defines best practice in governance among companies. Most countries now have a corporate governance code. 3 The supplement does not go into detail regarding corporate governance ratings, indexes, or tiers. For more information on these, see D. Grimminger and P. Di Bendetta, Raising the Bar on Corporate Governance: A Study of Eight Stock Exchange Indices (World Bank and IFC, 2013). Corporate Governance Scorecards 3 What is a scorecard? Market-level goals 2. Introduction A scorecard is a quantitative tool to measure the level At the market level, the overarching goal is the develop- of observance of a code and/or a standard of corporate ment of safer and more efficient capital markets. One governance. Scorecards compare governance practices way to strengthen capital markets is to improve the im- to a benchmark. Typically the benchmark is a national plementation of the governance framework. Governance code of corporate governance or an international code or codes and standards are an important part of this frame- standard.4 Scorecards are not used principally to measure work. Scorecards encourage implementation of codes and regulatory compliance. Rather, scorecards measure the standards by benchmarking companies and countries over observance of a voluntary code of best practice. Scorecards time. Scorecards set expectation levels, generate incentives are used to assess a company’s governance practices, show for reform, help direct change, and can set in motion a progress over time, and compare different companies and process of continual improvement. even groups of companies within or across countries. Scorecards are tools to measure and motivate “A corporate governance scorecard is a measure to encourage and motivate adherence to good corporate governance practices. It can be usefully deployed by regulators to eval- uate market response to a corporate governance code and its recommendations, while companies might use it to guide their adherence to the recommended practices contained in a corporate governance code.” - Philip Armstrong, Senior Advisor Corporate Governance, IFC The original source of inspiration for many scorecards was Company-level goals the one developed by the German Financial Analysis and At the company level these goals begin with providing Asset Management Association (DVFA).5 The purpose of companies with a powerful analytical tool. Scorecards are the DVFA scorecard was to provide financial analysts and a useful basis for companies to start an analysis of their investors with a practical tool to evaluate the governance of governance practices. Scorecards help identify shortcomings listed German companies. In addition, the DVFA scorecard against locally defined standards and/or generally accepted served as a tool to measure the level of compliance of listed international standards of good practice. The findings of a companies with the German Corporate Governance Code.6 scorecard can, in turn, be used to help the company devel- op a corporate governance improvement plan. The ultimate What are the broad goals of scorecards? outcome should be better operational performance and Scorecards have goals at both the market level and the lower risk as a result of better governance practices. company level. Scorecards encourage a better governance culture and a better business climate “Scorecards can be useful in countries wishing to implement best corporate governance practices. Scorecards can support the efforts of the government and the business commu- nity to further strengthen the country’s business climate.” - Christian Strenger, Academic Director, Center for Corporate Governance HHL Leipzig Graduate School of Management, Deputy Chairman PSAG 4 For a discussion of the different benchmarks, see Section 4.3.2, “Choose the benchmark,” of this supplement. 5 For more information on DVFA, see http://www.dvfa.de/home/. 6 The Deutscher Corporate Governance Kodex is available at http://www.corporate-governance-code.de/. 4 Corporate Governance Scorecards 2. Introduction Scorecards support the growth of stronger financial markets “Scorecards will often start modestly, but as they grow to support better governance, stronger disclosure, and improved standards, the benefits from further development can be wide-ranging, particularly in building investment confidence and encouraging incoming capital.” - John Jarrett, Principal, BHJ Partners, and Executive Director, Chairmen’s Forum Scorecards help companies “I think that it is important to send a clear message: scorecards serve to improve the governance and performance of the company.” - Bistra Boeva, Bulgarian Corporate Governance Commission, PSAG Member It has been shown repeatedly that scorecards educate com- Below are three main user roles: panies on good governance practices and on local codes. 1. Initiator: The initiator is the institution that suggests Iterative scorecard assessments can create a virtuous cycle undertaking the development of a scorecard. The initiator by which companies assess and reform and ratchet up their will typically seek to test the concept with a number of local governance practices. stakeholders, establish whether a scorecard has utility, and encourage implementation. The initiator’s role is to catalyze The specific outcomes that can be expected from score- action. It may seek other institutions to lead and imple- cards and from better corporate governance practices are ment. IFC often finds itself in the role of initiator. described in Section 4.4.1, under the heading “Engage 2. Owner: The owner of a scorecard project is the institu- early adopters,” and in Section 5, “Measurable outcomes.” tion that takes a leadership role and primary responsibility Table 2.1 (on page 5) provides a sample of actual outcomes for implementation. Ideally, the owner is a local institution. taken from the case studies found in Section 5. Ownership with a local institution promotes sustainability through a knowledge transfer to local partners. Who can use a scorecard? 3. The beneficiary: All the institutions involved in the Potential users of scorecards include companies, regulators, development of a scorecard will derive some benefit. A stock exchanges, institutes of directors, and development regulator may extract information important for the devel- finance institutions (DFIs). Each is likely to have somewhat opment of sound policy, a stock exchange may enhance its different goals. Companies tend to be more interested image as a trading location, and a business association may in addressing the concrete day-to-day issues they face in provide a valuable service to its members. The ultimate ben- their governance. Regulators and stock exchanges tend eficiaries are the companies whose governance practices to be more interested in measuring code compliance and are being assessed. drawing conclusions about the effectiveness of the regula- tory framework. DFIs are usually interested in encouraging Though scorecards are often initiated by regulators, market-level change in corporate governance practices and anybody can initiate or own a scorecard. In practice, transferring knowledge and skills to local counterparts. institutions may play multiple roles. Each user will likely play a different role in the development What can scorecards help different users achieve? of a scorecard. It is useful to distinguish between the roles Scorecards bring different benefits to different users. Table of different users to see how and what each contributes. 2.2 (on page 6) shows a broad group of potential users and the benefits that can accrue to them. Corporate Governance Scorecards 5 2. Introduction Table 2.1: Sample of Measurable Outcomes For a small listed company: • Appointed personnel to improve and maintain good governance practices; • Developed written policies and procedures; • Enhanced transparency toward all shareholders and the markets; • Created recognition of the company as a governance leader and a quality investment; • Developed commitment to good governance at board and executive levels; • Created better understanding of governance and how it affects company operations; • Enhanced protection of minority shareholders; • Provided a better understanding of governance strengths and weakness; and • Led to a roadmap for future improvement. For a chamber of commerce: • Raised awareness of corporate governance issues; • Generated real-time information that allowed comparison of any company to a peer group; • Created a network of consultants to advise enterprises on their governance; • Led to the development of numerous governance action plans developed at the company level; • Plans led to actual changes in governance practices in numerous enterprises; and • Allowed generation of aggregated data on governance practices—broken down by sector, size, region, and the quality of governance. For an institute of directors: • Raised awareness of corporate governance and maintained public attention over a number of years; • Led to the development of governance action plans within listed companies; • Led to measurable improvement in governance practices of companies over time; • Created incentives for better governance through awards programs and disclosure; • Led to the creation of institutions (clubs and discussion groups) to perpetuate good governance practices; • Improved the reputation of the country for its corporate governance practices; and • Generated information useful to policymakers on the governance practices of listed companies, state-owned enterprises, and banks. For a stock exchange: • Measured changes in governance practices among listed companies over time; • Created collaborative relationships between the stock exchange and listed companies; • Created incentives to improve governance through competition between companies; • Improved public awareness of corporate governance; • Generated useful information for the stock exchange, regulators, and policymakers; and • Enhanced the reputation of the stock exchange and the country as an investment destination. For a regulator: • Permitted verification of levels of implementation of national code as well as legal compliance; • Provided indications of the effectiveness of codes and the degree of implementation of company law; • Permitted identification of governance practices where companies are relatively strong or weak; • Generated data on governance practices over time, thus permitting the identification of trends; and • Forced companies to conduct rigorous self-checking of their governance practices. 6 Corporate Governance Scorecards 2. Introduction Scorecards benefit different users “There has been strong interest in governance scorecards from many different users, including regulators, companies, investors, students, and researchers.” - Nguyet Anh Nguyen, Operations Officer Vietnam Corporate Governance Project, Vietnam Table 2.2: Different Users of Scorecards Who can use a scorecard? What can a scorecard help achieve? Companies, company boards, • Conduct self-assessments or facilitated self-assessments and receive individual board members, support through consultants and executives • Improve governance practices • Improve board function • Improve company reputation in the markets and among shareholders • Help report to regulators and stock exchanges Membership organizations • Encourage better governance practices among companies/members such as institutes of directors, • Assess the status of governance practices within a country chambers of commerce, or • Raise public awareness of governance issues business associations • Educate companies and the public on the impact of governance practices Self-regulatory organizations • Assess and encourage compliance with codes and basic elements of such as stock exchanges, as well company law as regulators and government • Create incentives for better governance institutions • Improve the function of the capital markets • Gather information to guide the development of law and codes and improve the regulatory framework • Develop market indicators/investment indexes • Provide a basis for companies to report on their governance • Enhance the reputation of the country’s capital market Development finance • Encourage the development of sound capital markets institutions, including IFC • Provide knowledge transfer to local counterparts on how to conduct scorecard evaluations • Raise awareness of the importance of governance Banks and other lenders • Supplement bank credit-review and credit-approval processes with assessments of governance • Make better lending decisions through better risk assessment Academia • Provide the basis for academic research This introduction has defined some basic terms and tices or the filling in of a questionnaire. What is involved concepts that are used throughout the supplement. One is a multifaceted, multiplayer project designed to create additional term that needs definition is scorecard project. A incentives, change practices, and develop new attitudes scorecard is not just a simple assessment of company prac- toward governance. Corporate Governance Scorecards 7 3. How to Use This Supplement 3. How to Use This Supplement The main body of the supplement (Section 4) is a step-by- the supplement practical and easy to use. Also each section step process that describes how to build a scorecard. The is in a different color in order to make it easier to use. remaining sections provide a discussion of outcomes, cases, and a variety of models, tools, and cross-references to make Below are the main sections of the supplement: Section 4, “The Process Step-by-Step,” begins with establishing the objectives of a scorecard project and ends with the development of final reports. Section 5, “Measurable Outcomes,” describes results. This section covers four case studies that relate outcomes from the perspectives of 5.1) a company; 5.2) a chamber of commerce; 5.3) an institute of directors; and 5.4) a stock exchange. Section 6, “Building on Scorecards,” contains a discussion of follow-on projects and what happens after a scorecard project is completed. Section 7, “Annexes,” contains 7.1) sample indicators; 7.2–7.4) model scorecards; 7.5) a feedback form; and 7.6) references. Section 8, “Cross-References,” helps you identify existing scorecard projects and locate 8.1) takeaway points and a discussion of scorecards by 8.2) the type of theme or issue, 8.3) the type of scorecard user, or 8.4) country or region. For example, you can use the cross-references to find a discussion on how to choose benchmarks, examples of scorecard projects implemented by a stock exchange, or examples of scorecards in Asia. This section also includes indexes of 8.5) figures and 8.6) tables. 8 Corporate Governance Scorecards 4. The Process Step-by-Step 4. The Process Step-by-Step This section describes how to conduct a scorecard project. 4.1 Establish clear and realistic goals It presents a standardized process based on the experience for the project of a number of countries. Any potential initiators or owners Environmental assessment of a scorecard project will need to adapt this process to Before beginning a scorecard project, there needs to be a respond to their local context and meet their local needs. brief in-country environmental assessment. This assessment (See Figure 4.1.) can be informal, but it should cover any and all factors that might influence the scorecard and its acceptance by Figure 4.1: Steps in Conducting a stakeholders: Scorecard Project • Legal traditions that affect governance practices; • Strengths and weaknesses of the corporate Steps governance framework; 1. Establish clear and realistic goals for • Strengths and weakness of governance practices the project among companies; • Company attitudes toward compliance with the law 2. Recruit the institutions to lead and versus codes of best practice; implement the project • Company willingness to participate and open itself • Find the project owner up to examination; • Engage key stakeholders • The powers, capacity, and willingness of regulators; 3. Develop the scorecard • Oversight activities and powers of stock exchanges, and so on. • Draft a delivery plan • Choose the benchmark The environmental assessment will help identify potential • Develop the scorecard structure stakeholders in a scorecard project, define partners, and • Select the platform predict the level of company cooperation. The environmen- • Solicit stakeholder feedback tal assessment also provides the context needed to set clear • Pilot test the scorecard and realistic goals and establish the scorecard approach. 4. Conduct the scorings (See Example 4.1.) • Engage early adopters • Promote the scorecard broadly • Conduct the scoring 5. Summarize and present the results Measurable Outcomes These steps lead to outcomes. The concrete results of score- card projects are summarized in Table 2.1, above, and are described in further detail in the case studies in Section 5, Eurasia Corporate Governance Codes and Scorecards “Measurable outcomes,” on page 50. Regional Workshop, Baku, 2011 Corporate Governance Scorecards 9 The objectives of stock exchanges 4. The Process Step-by-Step Example 4.1: Stock exchanges are also concerned with compliance but Initial Environmental Assessments tend to place more emphasis on encouraging companies to Help Determine the Approach improve their governance practices. Since companies may A successful scorecard project was under- also be considered the clients of a stock exchange, stock ex- taken in Vietnam, despite significant challenges. changes are also concerned about how companies will react to scorings and how scorecards add value to enterprises. Initially, neither companies nor regulators attributed much importance to corporate governance. Compa- A stock exchange will typically work closely with companies nies were not concerned with governance, despite and may include awareness-raising and training exercises existing laws and regulations, and were reluctant to as part of a scorecard project. The ultimate goal for a stock participate in a scorecard assessment. exchange is to show investors as well as potential listings As a result, the project took the approach of not that the stock exchange is a high-quality venue for share expecting strong company engagement or relying on trading. (See Example 4.2.) voluntary company involvement. The project made corporate governance assessments from the perspec- tive of an independent external investor using public- Example 4.2: ly available information. Scorings could thus be done Stock Exchange Objectives without the active collaboration of the company. Experience in Bosnia and Herzegovina Under these circumstances, companies were engaged had shown that implementing governance codes is at the end of the scorecard review. Having concrete difficult when incentives for good governance are scorecard results on hand then served to raise interest missing. Despite legal requirements for companies among companies and regulators. to adopt their own governance codes, few if any economic incentives existed for them to comply. As in many developing and transition economies where An initial environmental assessment paves the way for bank lending is the traditional source of finance, the setting clear and realistic goals. Having clear goals upfront cost of equity capital was not a compelling argument. helps guide decisions down the line. Different institutions Another major problem was that “comply or ex- will have different goals and will pursue different approaches. plain” was an unfamiliar technique for implementing codes; it had no history within the local regulatory The objectives of regulators culture, which was without the accompanying Regulators want to know how effective their regulations market mechanisms that generally exist in more and oversight are. They will want to use the scorecard developed markets to support/monitor adherence to project to refine their regulations and codes and to devel- code recommendations. Voluntary approaches and op techniques for enhancing compliance. Regulators may disclosure-based regulation were unfamiliar concepts. also be quite interested in legal compliance in contrast to In fact, the expectation that the markets would the penetration of voluntary codes. Working directly with encourage better governance practices simply companies is not typically in regulators’ remit and may not through disclosure was not borne out. figure prominently in their objectives. (Continued on page 10) Scorecards help regulators refine their governance framework “In Vietnam, the scorecard findings pinpointed regulatory weaknesses and helped the securities regulator make the case for corporate governance reform to line ministries. This resulted in a review of the Corporate Governance Guidance and of the Securities Law.” - Anne Molyneux, Director, CS International 10 Corporate Governance Scorecards 4. The Process Step-by-Step (Continued from page 9) Example 4.3: Example 4.2: Stock Exchange Objectives Membership Organization Objectives In the face of these challenges, the Banja Luka Stock Confecámaras (La Confederación Colom- Exchangea sought to enhance the image of the local biana de Cámaras de Comercio)a is a network of city equity market and attract foreign portfolio invest- chambers of commerce in Colombia. Confecámaras ment, thinking that the quality of the governance is the main force promoting good governance in of listed companies would crucially determine its the country. The distinguishing characteristics of its image. Investors appreciated well-governed compa- scorecard project are: nies and saw them as having less risk. Similarly, • Focus on closely held and family-owned an exchange with sound rules—and listings that businesses; complied with these rules—would benefit from a • Use of paid consultants to advise companies; superior reputation. • Web-based scorecard technology; The rules were all in place in Banja Luka, but the • Self-administered scoring and/or assisted scoring; exchange needed to enhance practice. The implica- • Innovative marketing campaign; and tion was a hands-on approach. Stock exchange staff • Wide-reaching scoring of over 335 companies. visited companies to explain the benefits of good The goals of Confecámaras focus tightly on governance, conducted seminars and training, and generating benefits for its members: provided direct feedback to companies on how to • Making members more competitive; improve their practices. • Enhancing member operating and financial Since change requires time, Banja Luka conceived its performance; scorecard as a long-term project, scoring companies • Professionalizing management and operations repeatedly over a four-year period. Still ongoing, each through better governance; iteration has resulted in improved understanding and • Providing easier and cheaper access to credit; an incremental improvement in governance practices. • Preparing for listing and enhancing reputation in a. See http://www.blberza.com the equity markets; • Improving relations with shareholders and helping resolve ownership conflicts; Objectives of chambers of commerce, industry • Improving relations with suppliers and clients; and associations, and institutes of directors • Providing members with valuable tools to improve The principal mandate of chambers of commerce, indus- the value of their business. try associations, and institutes of directors is to provide Confecámaras used the local small and family-owned value-adding services to their members. Meeting member businesses code (Guidance for Closely Held and Family needs comes first. The positive systemic effects of good Businesses)b as the basis for scorings. The code per- governance are secondary outcomes. Membership orga- fectly matched the profile of most of its membership. nizations often focus on operational outcomes of good Confecámaras was also keenly aware of the need to governance that companies find useful. These outcomes create incentives to participate. It designed the score- typically include: card to make the scoring as user-friendly as possible. • Better strategy and more professional business Online tools made it easy for companies to conduct practices; self-assessments, and consultants were available to • Better policies, procedures, and documentation; assist those that needed help. • Stronger control environment and reduced operational risk; Additional incentives were provided. Sixty consultants • Improved relations with stakeholders; and were trained to help companies develop policies and • Compliance with legal and reporting requirements. procedures. With a grant from Switzerland’s SECO These topics are of great practical interest, particularly to (State Secretariat for Economic Affairs)c economic smaller companies that lack the resources to implement cooperation program, Confecámaras made financial sophisticated governance systems. (See Example 4.3.) (Continued on page 11) Corporate Governance Scorecards 11 4. The Process Step-by-Step (Continued from page 10) Example 4.4: Example 4.3: Membership Organziation Objectives Scorecards to Promote Regional Integration contributions to companies to offset up to 50 percent The ASEAN Capital Markets Forum (ACMF) has devel- of consulting fees (up to approximately $430) for the oped and implemented a regional scorecard based on first 100 companies that requested support. the OECD Principles and other international standards a. See: http://www.confecamaras.org.co/ (in Spanish). of corporate governance. Six countries (Thailand, the b. Guía Colombiana de Gobierno Corporativo para Sociedades Philippines, Malaysia, Singapore, Indonesia, and Viet- Cerradas y de Familia. See: http://www.supersociedades.gov. co/web/documentos/guia%20colombiana%20de%20gobier- nam) were actively involved in the development of the no%20corporativo.pdf. ASEAN scorecard. The initiative is intended to: c. SECO, the Swiss government’s center of expertise for core issues relating to economic policy, has programs to facilitate • Raise corporate governance standards and prac- the integration of developing and transition economies into tices of ASEAN companies and establish common the world economy and reduce economic disparities. measures in the implementation of corporate www.seco-cooperation.admin.ch/index.html?lang=en. governance by publicly listed companies among the six member countries. • Showcase and enhance visibility and investability of Regional integration well-covered ASEAN publicly listed companies. In some cases scorecards are used to promote regional • Complement other ACMF initiatives and promote integration. European transition economies, for example, ASEAN as an asset class. often use scorecards to track the degree to which their governance practices approach European Union practices. In The use of the ASEAN scorecards is open to other Asia, the ASEAN (Association of Southeast Asian Nations) fi- ASEAN member countries. However, the adoption of nance ministers endorsed the ASEAN Capital Markets Forum the scorecards depends on the degree of readiness of (ACMF) plan to promote the development of an integrated participating countries, especially with young capital capital market through the use of an ASEAN scorecard.7 markets. (See Example 4.4.) Development finance institution objectives Red flags and caveats The goals of DFIs tend to be broader than those of local Finally, there is a role for the development of some “red stakeholders. Often the goal is to strengthen local institu- flags” (early warning of a danger or a problem) and caveats tions, with a much longer-term goal of creating a vibrant that may alert scorecard project initiators to potential capital market. DFIs will typically want to work with local difficulties or less-than-optimal outcomes. Examples are: partners to achieve these goals. Their overriding objective is • Unrealistic expectations: Expectations about what to create local capacity and transfer knowledge and respon- a scorecard can achieve are unclear or unrealistic. sibility to local institutions so that scorecards and programs Scorecards should not be relied on as the only tool to improve governance become iterative and self-sustaining. available to reform governance practices. They are Scorecards should be iterative and self-sustaining “I would emphasize the importance of sustainability. It may be easy to initiate a scorecard, but it will be up to the owner to keep the spirit alive, which means a long-term vision.” - Thierry Buchs, Head, Economic Cooperation Programme in Colombia SECO, Colombia The ASEAN Scorecard is among a number of major regional initiatives under the ASEAN Capital Markets Forum, aimed at raising Corporate Gov- 7 ernance standards and practices. For more details, see http://www.theacmf.org/ACMF/upload/asean_cg_scorecard.pdf. The ASEAN CG Scorecard assessed companies in six countries, based only on published annual reports. 12 Corporate Governance Scorecards not a cure-all. Scorecards should be part of a larger 4. The Process Step-by-Step strategy for governance reform that includes diverse institutions using a variety of approaches and tools Goal Setting and more effective enforcement mechanisms. • Lack of commitment and participation: There is 1. Scorecard projects should not be launched insufficient or less than wholehearted local commit- without clear and realistic goals. Many operation- ment and participation, especially from key regulators al decisions will rely on a clear initial statement of or companies. The local environment may not have goals. Some questions that need to be answered are: been closely scrutinized for its suitability. • Lack of ownership: No owner has been identi- a. Who should lead the project (be the owner), fied for the scorecard. Identification of an owner and what are the interests and contributions at the outset is essential if the scorecard project is of other stakeholders? to succeed and be sustained. The participation of a b. What is the primary outcome for different committed local owner is vital to generate value from institutions? Compliance checking? a scorecard project. Improvement of governance practices? Other? • Limited access: There is a problem with access to c. Is a scorecard the best tool for achieving the scorecard results. Access is a key incentive for compa- desired outcome? nies to participate. Scorecard data should be readily d. What types of enterprises are to be scored, available to participating companies. and why? 2. The initial goals should be captured in writing. The goals can be set down in a simple 4.2 Recruit the institutions to lead and memorandum of intent. This can be complemented implement the project and completed later by a delivery plan that provides The following two steps have as their objective finding greater detail. (See Section 4.3.1, “Draft a delivery strong leadership for the scorecard project and engaging key plan,” on page17) stakeholders. 3. An initial environmental assessment is helpful. The environmental assessment helps set 4.2.1 Find the project owner realistic goals, define approaches, and avoid potential The main role of the owner is to exercise leadership. Finding pitfalls. a suitable owner to spearhead and lead a scorecard project is critical. The owner could be any number of institutions. 4. Be aware of potential “red flags” and caveats However, in most cases it will be one of the following: —circumstances that may endanger the success • Stock exchange; of a scorecard project. • Securities exchange commission/capital markets regulator; • Institute of directors; governance and the benefits of a scorecard project will have • Chamber of commerce or business association; or greater implications for success than the choice of institu- • Banking regulator. tion. A good leader should have a deep interest in achieving While the leading institution is clearly of great importance, outcomes, the capacity to influence others, and the ability leadership is ultimately an individual quality. Finding a to muster resources. (See Example 4.5.) committed individual who understands the need for good The need for a committed owner “Without a committed and engaged institutional owner in the scorecard project, interest in the scorecard may lapse and reduce the overall impact of the program.” - Anne Molyneux, Director, CS International Corporate Governance Scorecards 13 4. The Process Step-by-Step Example 4.5: important initiator and owner of scorecard projects in Who Initiates the Project? Who East Asia. IDEA.net (Institutes of Directors in East Asia) Owns It? worked to implement scorecards in Indonesia, Malaysia, The roles of initiator and the owner of a scorecard are the Philippines, Singapore, and Thailand. defined under “Who can use a scorecard” on page In Vietnam, IFC initially acted as an initiator and owner 4. The initiating institution varies from one score- of a scorecard project that resulted in a sophisticated card project to the next. In Colombia, for example, analysis of the governance practices of the country’s SECO acted as the initiator. It provided guidance and largest 100 listed companies. IFC expects local institutions resources to Confecámaras (a local business chamber), to take over ownership of the scorecard project later. which was the owner of the scorecard project. Sometimes leadership comes from an unexpected source. In the Philippines, the scorecard was the brainchild of In Trinidad and Tobago, the head of Syntegra Change the Philippine Institute of Corporate Directors (ICD).a Led Architects,c a small consultancy dedicated to sustainable by its chief executive, the ICD was initiator and owner development, was an important source of inspiration for of three scorecard projects: one for listed companies, the Energy Chamber of Trinidad and Tobago to conduct another for state-owned enterprises, and one for banks. a scorecard project for its members. Similarly, in Indonesia, the Indonesian Institute for Cor- In summary, no country’s experience is exactly like an- porate Directorshipb took a lead in initiating corporate other’s. Different constellations of project initiators and governance scorecards designed to strengthen corpo- owners can work. What is the same is that successful rate governance practices in publicly listed firms and programs have good leaders. generate recommendations to regulators to strength- en the regulatory framework. a. See http://www.icdcenter.org/. b. See http://www.iicd.or.id/. A regional network of institutes of directors was an c. See http://syntegrachange.com/. Development finance institutions are often catalysts for should contact key stakeholders to explore whether a score- change and initiators of a scorecard project. DFIs should be card may help them achieve their goals. The initial contact alert to the potential of scorecards to help them achieve should include discussion of the following issues: their country goals. Where a scorecard project is called for— • What a scorecard project is; particularly in countries with young equity markets where • The broad goals of a scorecard project; code compliance has been shown to be a problem—DFIs • How a scorecard project might help meet the specific Ownership 4. Local institutions are best suited to do the job. Leadership and ownership of the scorecard needs to be local. Local institutions understand the local situation 1. It is important to understand the different goals best and are best placed to explain and implement a and roles of the initiator, the owner, and the ben- scorecard. eficiary. 5. Local capacity building is an important objective. 2. Finding the right individuals and/or institutions Working with and relying on local institutions is import- to own and lead is the key to success. It is the most ant, because a key goal is to develop local capacity and important task that a scorecard initiator will undertake. expertise in governance. 3. Individuals can be more important than insti- 6. DFIs can play a key supporting role. Some have tutions. Even if the right institutions are involved, it is experience in governance reforms and can act as an difficult to develop and implement a scorecard without initiator of a scorecard project and a source of continu- committed individuals. ing support. 14 Corporate Governance Scorecards 4. The Process Step-by-Step The importance of engaging stakeholders “Stakeholder management is probably the most important dimension of scorecard devel- opment, so as to reach acceptability, credibility, and sustainability. A sound engagement process determines whether you achieve your goals.” - Thierry Buchs, Head, Economic Cooperation Programme in Colombia SECO, Colombia needs of various stakeholders; • How responsibilities are shared with other Example 4.6: stakeholders; Ensuring Stakeholder Engagement • The role of the DFI in supporting the project; and through a Code-Drafting Group • Practical issues, including commitment of personnel and time as well as costs. In Azerbaijan, the scorecard was based on the Azerbaijani National Corporate Governance Stan- When meeting with stakeholders, the goal of DFIs will be dards, which were developed by a national corpo- both to inform and to assess the degree to which different rate governance taskforce. This taskforce included stakeholder organizations are willing and able to act as the central bank, the State Committee for Securi- owners. Section 2, “Introduction,” of this supplement ties, the Ministry of Justice, the Ministry of Finance, provides all of the information necessary to inform such a Azerbaijan Investment Company (a sovereign discussion. investment fund), and the Baku Stock Exchange. It was led by the Corporate Governance Division of 4.2.2 Engage key stakeholders the Ministry of Economic Development. Key stakeholders Similarly, in Bulgaria the key stakeholders had Once the project owner has been identified, key stake- already come together to develop the national holders need to be engaged. Key stakeholders might code of corporate governance. The Bulgarian include: code was developed by a taskforce comprising • Companies; the Bulgarian Stock Exchange-Sofia, the Financial • Institutes of directors; Supervision Commission, business representatives, • Chambers of commerce, trade associations, or governmental and civil society organizations, and business associations; academia. Eventually, the taskforce formalized itself • Stock exchanges; and became the National Corporate Governance • Professional associations, including associations of Commission (NCGC), an independent body under accountants, auditors, corporate lawyers, bankers, the patronage of the Bulgarian Stock Exchange and or company secretaries; the Financial Supervision Commission. The NCGC • Investor or shareholder associations; became the moving force behind the Bulgarian • Stock market and/or securities regulators; scorecard. • An economics ministry or department of commerce; • A central bank; and • Universities. Developing a stakeholder strategy Involving and engaging stakeholders is not just being polite. Not all of the stakeholders listed above need to be actively Stakeholders help make things happen. Failing to engage involved in a scorecard project. The IFC Toolkit 2: Develop- stakeholders means wasting the potential contributions of ing Corporate Governance Codes of Best Practice 8 contains other institutions, including their goodwill and resources. At strategies for how to manage stakeholder engagement. On worst, an absence of proper stakeholder engagement can the simplest level, Toolkit 2 suggests that stakeholders need result in active opposition to a scorecard project. to be assessed and divided into three broad categories, 8 IFC Toolkit 2: Developing Corporate Governance Codes of Best Practice, Volume 2, pages 31–48. http://www.ifc.org/wps/wcm/connect/topics_ext_ content/ifc_external_corporate_site/global+corporate+governance+forum/publications/toolkits+and+manuals/toolkit2_codes_of_best_practice. Corporate Governance Scorecards 15 depending on the degree to which they need to be en- In summary, code-drafting committees are invariably inter- 4. The Process Step-by-Step gaged. The three levels of stakeholders are those that need ested in encouraging code compliance. They are an existing to be: and tested forum that can bring committed stakeholders to 1. Informed; the table. 2. Consulted; or 3. Involved. Public-private stakeholder partnerships The same approach should be used for the scorecard project In many countries, scorecard projects are conducted by itself: assess the situation to ascertain which stakeholders private sector bodies such as an institute of directors or a are critical for success, then decide on the appropriate level chamber of commerce. Such membership bodies typically of engagement. A number of different stakeholder engage- have limited powers and often experience difficulty in get- ment strategies are described below. ting their members to participate in a scorecard assessment. Many membership bodies have thus decided to work with Stakeholder engagement through an existing regulators and stock exchanges to ensure the success of code-drafting group their scorecard. (See Example 4.7.) Scorecards often will use the local corporate governance code as their benchmark. Where there is a local governance The example shows how different stakeholders contribute to code, there will also have been a code-drafting group, which a scorecard project and how the group of key stakeholders may be an ideal forum for interacting with stakeholders. Its depends on local circumstances. The example also shows members will likely include all the key stakeholders needed the challenges facing purely voluntary scorecards. A combi- for a scorecard project. Also these stakeholders will already nation of regulatory authority and private initiative may be be well-informed regarding the importance of corporate necessary to achieve success. governance and will have a demonstrated commitment to governance reform. (See Example 4.6 on page 14.) In the end, each country requires a stakeholder strategy Example 4.7: exchange, which had the power to force disclosure. In a Public-Private Stakeholder memorandum of agreement between ICD, the PSE, and Partnerships the SEC, the PSE required listed companies to conduct self-assessments of their governance using the ICD The Philippine Institute of Corporate Directors had as its scorecard. objective encouraging better code compliance. However, it recognized that its ability to encourage compliance Though the PSE could demand disclosure, it was not was limited, since it was a private membership orga- the ultimate source of accountability. Under the mem- nization without enforcement powers. Between 2006 orandum of agreement, scorecards were to be formally and 2007, only 49 companies out of 200 decided to reported to the SEC. The SEC had been reticent to voluntarily submit to scoring. use the substantive regulatory tools at its disposal and wanted to pursue a private sector-driven oversight. In The ICD addressed this limitation by building a consor- addition to its disclosure requirement, the SEC con- tium of institutions with complementary characteristics. tributed its governance manual, the equivalent of a The core stakeholders were the Philippine Stock Ex- governance code, which was to influence the design of change (PSE), the Securities and Exchange Commission the scorecard. (SEC) and the Ateneo Law School. Each stakeholder brought attributes that contributed to the successful Two more stakeholders were to join the group. When it outcome of the scorecard. was shown that self-assessments were not fully unbiased, verification was introduced. Law students from the Ateneo ICD contributed its expertise in governance. It had a Law School conducted the verifications. The law students strong understanding of governance issues and, above brought educated manpower. By the fifth iteration of the all, had a clear vision and proven leadership skills. scorecard, over 200 companies participated, demonstrating These characteristics complemented those of the stock a consistent improvement of scores over time. 16 Corporate Governance Scorecards 4. The Process Step-by-Step Targeted engagement of regulators can contribute to success “There is a strong positive correlation between highly regulated industries or sectors and the quality of corporate governance implementation. This finding suggests that the absence of the regulator as a key stakeholder will discourage firms from using the scorecard.” - James Simanjuntak, Board of Trustees Member, Indonesian Institute for Corporate Directorship, Indonesia that is adapted to the local environment. In some countries, Stakeholder regulatory involvement will be the key to success. In others, a chamber of commerce may be perfectly capable of achiev- Engagement ing its objectives on its own. Broad stakeholder engagement is generally advisable for the sake of transparency. However, 1. Working together increases the likelihood of it is important to strike the correct balance between inform- success. IFC Toolkit 2: Developing Corporate ing, consulting, and involving, based on the local context. Governance Codes of Best Practice, Volume 2, con- tains a detailed discussion of stakeholder manage- ment. The toolkit should be consulted. ADDITIONAL RESOURCES: 2. Stakeholders bring expertise and support and Stakeholder Engagement reduce the costs that are borne by any one institution. 3. Involving key stakeholders is necessary to: IFC 2005. Toolkit 2: Developing Corporate Gover- a. Remove potential barriers; nance Codes of Best Practice. Vol. 2 (Process), Mod- ule 3: 31–38. Detailed description of how to assess b. Access additional financial and human re- the contribution of various stakeholders and develop sources and expertise; an engagement strategy, plus detailed insight into the c. Develop a fuller understanding of the gover- process of establishing and managing a code-drafting nance challenges; group. d. Educate influential stakeholders and decision http://www.ifc.org/wps/wcm/connect/topics_ext_ makers on the benefits of good governance; content/ifc_external_corporate_site/global+cor- porate+governance+forum/publications/tool- e. Prepare the way for subsequent action by kits+and+manuals/toolkit2 codes_of_best_practice. involving key decision makers; and IFC and SECO. 2005. Bank Corporate Governance f. Avoid overlapping initiatives. in Azerbaijan, Survey Results. Baku, Azerbaijan. 4. Consulting and working with stakeholders http://www1.ifc.org/wps/wcm/connect/0a2d23004ad- yields longer-term benefits, even if it takes time 2fac88dedbdb94e6f4d75/bank%2B_en_web.pdf?- and effort. MOD=AJPERES&CACHEID=0a2d23004ad2fac88d- 5. Consulting and working with stakeholders is edbdb94e6f4d75. transparent and fair. IFC and SECO. 2005. Company Corporate Gov- 6. A stakeholder strategy helps. It is important to ernance in Azerbaijan, Survey Results. Baku, define which stakeholders need to be a) involved, Azerbaijan. http://www1.ifc.org/wps/wcm/connect/ b) consulted, or c) informed. At the same time, one ff0bde804ad2fb2b8f7dbfb94e6f4d75/company_en_ size does not fit all: every stakeholder engagement web.pdf?MOD=AJPERES&CACHEID=ff0bde804ad- process is different. 2fb2b8f7dbfb94e6f4d75. Corporate Governance Scorecards 17 4.3 Develop the scorecard Each of these questions is discussed in this section and other 4. The Process Step-by-Step parts of the supplement. Other significant questions may The development of a scorecard involves answering a num- arise. It is important to write down the answers and their ber of questions and making a number of choices. These justification for future reference. They can be captured in choices need to be coherent and, as far as possible, consis- the form of a meeting summary, a memorandum of under- tently and objectively applied. For this reason, it is important standing, or more formal terms of reference. It may even- for the key stakeholders to discuss the alternatives and tually be necessary to deviate from the plan. However, it is develop a plan. always better to modify an existing plan based on changing circumstances than it is to proceed on an ad hoc basis. 4.3.1 Draft a delivery plan The delivery plan can be basic, but it should specify the 4.3.2 Choose the benchmark desired outcomes and how they will be achieved. Table 4.1 The purpose of a scorecard is to measure the observance of provides a list of questions to answer in developing the plan. a code of corporate governance. Therefore, it is necessary to choose an appropriate benchmark. Table 4.1: Key Questions to be Answered in the Plan Key Questions Alternatives What are the desired 1. Discussion of outcomes should be part of the process of initiating the outcomes? project. They should be formally agreed and written down. See Section 2, “Introduction,” and Section 4.1, “Establish clear and realistic goals for the project.” 2. What kinds of companies The usual choice is either listed companies or closely held and family- do you plan to focus on? owned businesses. Less common subjects are banks and state-owned enterprises—though the potential interest in scoring is arguably equal or higher. What code or standard do you 3. This question is inextricably bound up with the prior question. The type want to help implement? of company will determine the chosen code and define the benchmark. See Section 4.3.2, “Choose the benchmark.” What is the best platform to 4. The alternatives: a) text questionnaire; b) computer spreadsheet; or c) administer the scoring? Web-based application. See Section 4.3.4, “Select the platform.” 5. What financial and human The financial requirements of scorecard projects need not be large. Staff resources are needed and time and expertise tend to be the main constraints. Stakeholders may available? provide pro bono support. Avoid getting into excessive detail with the scorecard design at the What is the best structure 6. planning stage. Nevertheless, some basic questions should be discussed, for the scorecard? including a) how to deal with scoring legal versus code compliance; b) the degree to which the scorecard must follow the local code; c) how much the scorecard can interpret or adapt the local code; and d) the level of synthesis versus detail in the scorecard. How should you test and refine 7. Testing of the scorecard can be in the form of a) feedback from stake- the scorecard before using it? holders; b) pilot testing by companies; c) feedback from international experts; or d) all of the above. See Section 4.3.5, “Solicit stakeholder feedback,” and Section 4.3.6, “Pilot test the scorecard.” (Continued on page 18) 18 Corporate Governance Scorecards 4. The Process Step-by-Step (Continued from page 17) Table 4.1: Key Questions to be Answered in the Plan Key Questions Alternatives How can companies be 8. Getting companies to participate is often the greatest challenge. Partic- encouraged to participate, ipation can be mandatory or voluntary. Where it is voluntary, pay partic- and how should the scorecard ular attention to how to create incentives. See Section 4.4.1, “Engage project be promoted? early adopters,” and Section 4.4.2, “Promote the scorecard broadly.” Who fills in the scorecard? 9. The alternatives: a) self-administered scoring; b) self-administered scoring with external assistance; or c) full external scoring. See Section 4.4.3, “Conduct the scoring.” 10. What kind of reports are to be The type of report that is generated depends on the goals initially set for generated? the project. Review various types of reports to decide how final reports should look. See Section 4.5, “Summarize and present the results.” 11. Who has access to the raw data Circulation of reports depends on project goals. The alternatives are cir- and final reports? culation to a) the company only; b) the company and key stakeholders; c) regulators; or d) full public disclosure. Full public disclosure is discouraged in the short run. Companies are more inclined to reply honestly if they know they will not suffer public embarrassment. The benefits of public disclosure may come later, when companies are more comfortable with the idea and want to be able to compare themselves with their peers. 12. How frequently should scorings Scorings can be one-off exercises when the purpose is to take a snapshot be repeated? of the current governance environment. Iterations permit tracking of change over time and allow companies to learn and evolve. National benchmarks Guidelines on the Governance of State-Owned Enterprises, In most countries, a code of corporate governance exists which serves as a benchmark for SOEs. The European Con- that can serve as a benchmark.9 Generally, such codes are federation of Directors’ Associations (ecoDa) has produced aimed at listed companies. Fewer codes of governance have regional guidance for unlisted companies.12 The ecoDa been written for closely held businesses, family firms, banks, Guidance is important, because small and family enterprises or state-owned enterprises (SOEs).10 represent the preponderance of economic activity in most economies.13 International benchmarks Where there is no local code of governance, scorecards may Sector-specific and function-specific benchmarks use an international code of corporate governance as their Codes may also be sector-specific. At the time of writing, benchmark. A commonly used international benchmark Afghanistan, Georgia, Indonesia, Italy, Jordan, the Nether- for listed companies is the OECD Principles of Corporate lands, Nigeria, Qatar, and Singapore, among others, had Governance.11 Many scorecards draw on the OECD Prin- developed codes for banks. A scorecard was developed for ciples, including Azerbaijan, Kazakhstan, the Philippines, banks in the Philippines, and bank scorecards were being Trinidad and Tobago, and Vietnam. OECD also has published developed in Afghanistan and Georgia, based on central 9 The most complete and up-to-date listing of codes at the time of writing was available on the website of the European Corporate Governance Institute (ECGI): http://www.ecgi.org/codes/index.php. Other benchmarks are listed in the “Additional resources” at the end of this section. 10 Examples of closely held company codes exist in Albania, Belgium, Colombia, Finland, Egypt, Lebanon, Spain, and the United Kingdom. Egypt and Morocco have developed codes for state-owned enterprises. 11 The Organisation for Economic Co-operation and Development is a Paris-based forum for governments to exchange views on and promote effective economic and social policy. 12 The European Confederation of Directors’ Associations is a not-for-profit European membership organization of institutes of directors. 13 Though European in scope, the ecoDa Guidance is relevant for other countries as well. Corporate Governance Scorecards 19 4. The Process Step-by-Step Benchmarking unlisted companies “The ecoDa Guidance responds to the need for governance norms and policies in large and small unlisted companies. Unlisted companies want to know how well they comply with best practice. Unfortunately, most don’t. Scorecards help companies see how well they stack up.” - Patrick Zurstrassen, Chairman, European Confederation of Directors’ Associations (ecoDa), Brussels, PSAG Member bank requirements. The Basel Committee is an authoritative do not typically provide any indication of how to ascertain international source on bank governance and an obvious whether an adequate internal audit function exists. In this source of bank benchmarks. Codes also exist on investment case, function-specific codes can help develop relevant indi- funds, other financial intermediaries, and even service pro- cators and make the scoring more meaningful. IFC has used viders such as audit firms. (See Example 4.8.) the standards of the Institute of Internal Auditors15 (which provides best practices for the organization of the internal Function-specific refers to key governance-related functions. audit and other control functions) to elucidate the general For example, disclosure and transparency are key gover- requirements of governance codes. nance functions. UNCTAD14 has scored companies on their compliance with its Guidance on Good Practices in Corpo- In principle, any type of enterprise in any sector can be sub- rate Governance Disclosure. Other function-specific codes ject to scoring. Even specific governance functions, such as exist on audit committees, internal controls, non-executive financial reporting or controls, can be scored. Where nation- directors, and remuneration. al benchmarks are missing, international benchmarks can be used. But even where high-quality international codes and Function-specific codes are useful for filling in gaps in standards are available, the best benchmark for a scorecard governance codes. For example, governance codes often is, in principle, a national code. This is because one of the suggest that companies have an internal audit function but main purposes of a scorecard is to help strengthen the local Example 4.8: Afghanistan has a regulation on corporate governance A Benchmark for Banks, Composed of for banks but does not have a governance code for Banking Regulation and Best Practice banks. Instead of creating a new one, the ABA estab- lished a working group that used the regulation on In early April 2013, a large German bank, which pro- corporate governance as a base and added provisions to vides correspondent bank services to Afghan banks, it based on international best practice. The added pro- informed the Afghan banks that it would no longer visions came from the Basel Committee’s Principles for be able to offer correspondent bank services for U.S. Enhancing Corporate Governance. The result was the dollar transactions after June 30, 2013. The Afghanistan Corporate Governance Code for ABA-member banks— Banks Association (ABA) asked the USAID (United States a combination of legal requirements and best practice Agency for International Development) FAIDA (Financial that was in line with current international requirements. Access for Investing in the Development of Afghanistan) program whether it could bring in a private sector spe- This benchmark was then used for declarations of cialist to specify what correspondent banks are looking compliance to the central bank and as the basis for the for—regarding banking standards and bank corporate Afghanistan Bank Corporate Governance Scorecard, governance practices—from prospective correspondee which in turn helped Afghan banks meet the requisite banks. international requirements. 14 The United Nations Conference on Trade and Development is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues. 15 The Institute of Internal Auditors (IIA) is an international professional association of internal auditors. It produces a variety of guidance and stan- dards on internal auditing, risk management, governance, internal control, information technology audit, education, and security. 20 Corporate Governance Scorecards governance framework and lend legitimacy to and encour- may be incomplete or may conflict with other codes and 4. The Process Step-by-Step age compliance with the national code. legislation. The question then arises whether the benchmark can be used at all or whether it needs to be revised first. Missing benchmarks Results of a scorecard project based on a flawed benchmark At times, there is no local code of governance that is a can have dubious utility and may damage the credibility of suitable benchmark. In the absence of a local code, a sound governance reform efforts. It appears that a precondition for strategy is to benchmark against a recognized international the success of any scorecard project is a code or benchmark code. (See Example 4.9.) of acceptable quality. Weak benchmarks In a perfect world, a country would set down basic corpo- Sometimes a national code of corporate governance exists rate governance requirements in company law. A strong but is too weak to serve as the benchmark. Such a code code of corporate governance would then describe best Example 4.9: a benchmark: its own diverse membership base. The Using an International Benchmark Energy Chamber’s membership had a significant number When There Is No Local Code of listed companies and even state-owned enterprises. But most chamber members were family businesses. As In early 2012, Trinidad and Tobago did not have a gover- a consequence, no single code could serve as a bench- nance code of its own that could serve as a benchmark. mark to evaluate the governance practices of all. Yet the Energy Chamber of Commerce of Trinidad and Tobagoa wanted to conduct a scoring of its members to In the end, the chamber decided to create a scorecard ascertain the quality of their governance practices. composed of three different codes. The composite benchmark was then modified to come up with three A number of alternative benchmarks were considered. variants of the main scorecard. The OECD Principles One was the governance code of Jamaica, an island were used mainly for the composite benchmark and for country of somewhat similar size and with a similar legal listed companies, ecoDa Guidance was used for closely tradition. Another was the U.K. Code of Corporate Gov- held companies, and the OECD Guidelines for SOEs for ernance, which was very advanced and had the advan- state-owned enterprises. tage of coming from a country on which Trinidad and Tobago had based its legal system. Another option was Similarly in Vietnam, IFC conducted a scoring based on the OECD Principles of Corporate Governance, which the OECD Principles. In Azerbaijan, the local code was represented an international consensus on governance considered insufficient and was supplemented by the practices. The work of the International Corporate Gov- OECD Principles. ernance Network was also considered. a. For information on the Energy Chamber, including its work on corporate governance and corporate social responsibility, see The Energy Chamber faced another problem in selecting http://www.energy.tt/#. The tortoise and the hare (understanding limitations within the local environment) “In some markets it is safer to go very slow, acknowledge weaknesses in the existing code, allow for the new code to be developed through a proper consultative process, leave time for testing it, and then engage in developing the scorecard. The process must not be imposed from the outside, as this will yield only temporary and superficial results. Local institutions must be owners of the product to ensure its full implementation and acceptance.” - Merima Zupcevic Buzadzic, IFC Operations Officer Corporate Governance, Europe and Central Asia Corporate Governance Scorecards 21 practice that goes beyond these legal requirements. This Section 4.1, “Establish clear and realistic goals for 4. The Process Step-by-Step code would serve as the benchmark for a scorecard project the project.” Typically, when law and compliance are designed to measure corporate governance practices. In severely lacking, reform efforts should first focus on reality, finding an appropriate benchmark can be much more encouraging basic legal compliance. challenging. (See Example 4.10.) 2. Can legal compliance be part of a scorecard that is, in principle, designed to measure adherence to Even though weak benchmarks should raise concerns voluntary best practice? about the viability of a scorecard, the perfect can be the Most governance codes repeat key requirements enemy of good; even if a code is not perfect there is often of company law. A scorecard thus typically mixes value in getting a scorecard started. The challenge is in mandatory and voluntary indicators, with the result deciding what represents “acceptable quality” for a code. that the objectives of the scorecard (legal compli- The scorecard project stakeholders will need to decide ance versus encouraging best practice) may become whether the flaws in the local code are so great that the unclear. Therefore, scoring code observance may by benchmark cannot be used or if contradictions between the definition mean checking legal compliance. code and law are so large as to make scoring impractical. 3. How do you design a scorecard when both legal requirements and best practice are combined in a The use of the law as a benchmark single code? An important issue is whether the law (company or banking law) can be the benchmark for a scorecard. Consider the Where legal requirements and best practices are following questions: combined, scorecards should either have separate 1. Is it appropriate to focus governance reform efforts sections for each or clearly mark which indicators on encouraging observance of a governance code of are legally required and which are voluntary. This will best practice when compliance with basic allow for a clear distinction between legal compli- elements of company law is a bigger problem? ance and code observance for analytical purposes and when developing reports. The answer should emerge from the environmen- tal analysis that precedes a scorecard project. See In practice, it may be hard to focus a scorecard exclusively on best-practice requirements. Many codes have been draft- ed in such a manner as to combine both legal requirements Example 4.10: and best practice. Furthermore, certain stakeholders—reg- Dealing with Gaps in the Code ulators in particular—are keenly interested in ascertaining and the Law whether companies comply with the basics. The solution is In Nigeria, the logical code on which to build a to clearly distinguish between the two, both in scorecards scorecard would have been that of the Securities and in the reports that are generated from scorings. (See Commission.a However, the code had gotten ahead Example 4.11 on page 22.) of the law, and there were conflicts between the mandatory and voluntary provisions of the law and It is not unusual for scorecards to measure compliance with the code. The key question the Nigerian experience the law. In fact, it is often a key goal of stakeholders—reg- raised was whether underlying legislation needed to ulators in particular. Using scorecards to check compliance be revised before a scorecard could be done. with basic elements of company law was an explicit goal in Azerbaijan, Colombia, Serbia, and Trinidad and Tobago. In Moldova, the development of a scorecard was not considered possible because of the quality of the A special case is the benchmarking of corporate governance benchmark code. The existing code is currently being in the banking sector. Banking is a heavily regulated sector revised and may become the basis for a scorecard because of concerns for systemic stability. Moreover, regulato- project in the future. ry supervision tends to cover bank governance in addition to bank operations. Example 4.12 (on page 22) includes an illus- a. For the Securities Commission Code of Corporate Gover- nance for Public Companies in Nigeria, see www.sec.gov.ng tration of the Afghan Bank Corporate Governance Scorecard, which contains both mandatory and voluntary provisions. 22 Corporate Governance Scorecards 4. The Process Step-by-Step Example 4.11: Standards for Listed Companies measures compliance Measuring Legal Compliance versus with mandatory governance provisions. Observance of Best Practice The scorecard clearly distinguishes between mandatory (M) In addition to tracking voluntary best practice, the and optional (O) provisions of the code. The summary re- Palestinian Scorecard of Corporate Governance ports generated by the scorecard also differentiate between compliance with mandatory versus voluntary indicators. Answers Weight/ Weight Score Criteria: Yes Partially No II. Shareholder Rights and Stakeholder Relations Weight: 15% II 1. Are shareholders and/or proxies given adequate notice (within a maximum M of 14 days) of shareholders’ meeting along with items of agenda and meeting by 5% 0.00% direct mail/email and newspaper advertisement (within a maximum of 7 days?) II 2. Do shareholders who hold 15% or more of the company have the right to call for M 5% 0.00% an extraordinary public assembly meeting? II 3. Does the invitation to the stakeholders clearly stipulate the right of O shareholders who own in aggregate 10% or more to add items on the agenda of the 5% 0.00% public assembly meeting? II 4. Does the company provide the right for minority shareholders who hold 10% of O 5% 0.00% the company to elect a respresentative on the board? Source: Palestinian Capital Market Authority. Example 4.12: The scorecard was loosely modeled on the Philippine Legal Compliance and Best Practice bank scorecard of 2009, used color coding, and clearly Combined in a Bank Scorecard distinguished between mandatory requirements and voluntary (desirable) practices. In Afghanistan, to restore lost correspondent banking relationships with foreign banks, one of the measures The scorecard also generated reports that distinguished implemented by the Afghanistan Banks Association is between regulatory compliance and observance of to strengthen corporate governance practices among voluntary practices. DAB plans to require banks to submit its member banks. The ABA and Da Afghanistan Bank the scorecard as part of its regular supervision, starting in (DAB, the central bank) worked together to strengthen 2014. A delay in introducing the scorecard was intended bank governance by developing a benchmark composed to allow banks sufficient time to come into legal compli- both of legal requirements and best-practice provisions. ance and have the opportunity to score at least 70 percent (See Example 4.8 on page 19.) on the scorecard, which corresponds to the score if a bank complies fully with the law. Governance Scorecard for ABA-member Banks SNo Survey questions Inadequate Adequate Exceeded Mandatory or Weight Status Score Desirable Part 1. Evidence of the Bank’s Commitment to Good Governance Does the bank have a BOS-approved Corporate Governance Policy that guides conformance with the Corporate Governance (CG) Code for ABA-member banks? No, or if yes, then it Yes, conforms to all (Bos-approval of a CG Policy indicates that the bank accepts the doesn’t conform to all provisions of the CG Yes, both CG Manual 1 D 2% Exceeded 200% importance of good CG: to provide a basis for its future development and provisions of the Code for ABA- and CG Policy corporate performance, to support trust in its activities as a recipient of CG Code for ABA- member banks depositors’ funds and shareholders’ capital, and to enable it to contribute member banks to the successful development of the banking system of Afghanistan and the efficiency of the national economy.) Yes, but it is one of Yes, and this is the Does the bank have someone identified to lead annual review of the bank’s many of the D 2% Adequate 200% A No person’s primary CG Policy and assess compliance with its provisions? person’s responsibility responsibilities Source: Afghanistan Banks Association. Corporate Governance Scorecards 23 4. The Process Step-by-Step Choosing the ADDITIONAL RESOURCES: Benchmark National and International Codes That Can Serve as Benchmarks 1. Scorecards are used principally to benchmark performance against codes. Most countries now For the most extensive listing of national and international have at least one code of corporate governance, codes: European Corporate Governance Institute (ECGI): and many have multiple codes. http://www.ecgi.org/codes/index.php. 2. Companies with different ownership struc- A regional code for unlisted companies: European Con- tures have different benchmarks. Most gover- federation of Directors’ Associations (ecoDa) Corporate nance codes are addressed to listed companies. Governance Guidance and Principles for Unlisted Compa- However, there are also codes that can serve as a nies in Europe: http://www.ecoda.org/Publications.html. benchmark for SOEs and closely held firms and Widely recognized global standards: OECD Principles of family businesses. Corporate Governance: http://www.oecd.org/corporate/ 3. Sector-specific codes also exist. The main oecdprinciplesofcorporategovernance.htm. sector-specific governance codes are for financial Perspective of large international investors: International services companies, including the banking industry, Corporate Governance Network (ICGN) Global Corporate investment fund managers, private equity and Governance Principles: https://www.icgn.org/. sovereign wealth funds, and insurance. International benchmark on the governance of state- 4. There are also function-specific codes and owned enterprises: OECD Guidelines on the Corpo- standards (for example, audit committees, in- rate Governance of State-Owned Enterprises: http:// ternal audit, disclosure, or remuneration). They www.oecd.org/corporate/ca/corporategovernanceof generally serve to add needed detail. Scorecards may state-ownedenterprises/oecdguidelines oncorporategov draw on function-specific codes when the national ernanceofstate-ownedenterprises.htm. code lacks detail or is largely principles-based. Function-specific benchmark focusing on governance dis- 5. A local code is often the best benchmark. closure, try the United Nations Conference on Trade and One of the key objectives of a scorecard project is to Development (UNCTAD) Guidance on Good Practices in encourage use of the local code. Feedback from a Corporate Governance Disclosure: http://unctad.org/en/ scorecard provides valuable information on the Pages/DIAE/ISAR/Corporate-Governance-Disclosure.aspx. quality of the local code and its contribution to the International standards of internal control: Committee of local corporate governance framework. Sponsoring Organizations of the Treadway Commission 6. International codes can provide a suitable (COSO): http://www.coso.org/. benchmark where no local code exists. A number International standards on internal audit: Institute of of international codes and standards can serve as Internal Auditors (IIA) website: https://na.theiia.org/ potential benchmarks. Pages/IIAHome.aspx. 7. Scorecards should clearly distinguish between International guidance on bank governance: Basel compliance with mandatory legal provisions and Committee work on Banking Supervision (1999–2006) observance of voluntary best practice. In princi- Enhancing Corporate Governance for Banking Organisa- ple, scorecards are designed to benchmark obser- tions: http://www.bis.org/press/p060213.htm and http:// vance of voluntary best practice, not legal compli- www.bis.org/publ/bcbs122.htm. ance. But in fact, corporate governance codes often combine voluntary and mandatory provisions. Certain For the Basel Committee’s 2010 pronouncement, see the stakeholders—in particular regulators and central Basel Committee on Banking Supervision Principles for banks—are keenly interested in benchmarking basic Enhancing Corporate Governance 2010: http://www. legal compliance. bis.org/publ/bcbs176.htm. 24 Corporate Governance Scorecards 4. The Process Step-by-Step The importance of a well-structured scorecard “A well-structured governance scorecard is an important piece of governance transparen- cy. Its concise criteria provide relevant information that can be readily compared, making it an effective tool for all stakeholders to assess companies’ fulfillment of best practice.” - Christian Strenger, Academic Director, Center for Corporate Governance HHL Leipzig Graduate School of Management, Deputy Chairman PSAG 4.3.3 Develop the scorecard structure general categories in a listed company code most often are After the benchmark has been identified, the structure of as follows: the scorecard needs to be developed. The structure needs to • Shareholders rights; emulate the structure of the code, provide a comprehensive • Minority shareholder protection; picture of governance practices, and generate a numerical • The board of directors; score. The following basic tasks in developing the scorecard • Transparency and disclosure; structure are discussed below: • The control environment; and • Stakeholders. 1. Agree on broad indicator categories; 2. Select and adapt specific indicators; Codes from different countries will combine or order these 3. Set the performance scale; categories in different ways. In some cases, shareholder 4. Decide whether weightings are needed; and if so, rights and minority shareholder protection may be com- 5. Select weightings. bined. Similarly, transparency and disclosure may be com- bined with the control environment. A significant number 1. Agree on broad indicator categories. of codes do not cover the role of stakeholders in corporate In most cases the benchmark will be the national code of governance. Others add the concept of commitment to corporate governance. This code will likely describe best good governance practices. Whatever the specific break- practice in corporate governance in listed companies. The down, the underlying governance principles are the same. Example 4.13: The Use and Adaptation of Indicators from the OECD Principles Vietnam undertook a scoring of its listed enterprises Another use of the OECD Principles comes from the in 2010 (based on 2009 data), 2011 and 2012. The Philippines, where the Institute of Corporate Directors structure of the Vietnamese scorecard mirrored the scored local banks between 2003 and 2004. The struc- indicator categories of the OECD Principles: ture of the bank scorecard drew mainly on the board • The rights of shareholders; practices section of the OECD Principles:a • Equitable treatment of shareholders; • The board; • Rights of stakeholders; • The chairman of the board; • Disclosure and transparency; and • Members of the board; • Responsibilities of the board. • Board meetings; However, the individual indicators needed to be • Board committees and board issues. adapted to better fit the Vietnamese context. a. It is worth noting that the OECD Principles are not specifically Detail was added to guide raters on how to apply designed to address bank governance. They are addressed prin- the OECD’s general principles to the reality and the cipally to governments to guide them on how to structure their legal and regulatory framework and not first and foremost as a specifics of Vietnamese enterprises. tool to assess companies. The use of the extensive pronounce- ments of the Basel Committee on bank governance may have served as a useful supplement to the generic OECD benchmark. Corporate Governance Scorecards 25 The distinct governance challenges faced by different card user to quickly target indicator categories that require 4. The Process Step-by-Step enterprise types are reflected in the detail of their respec- attention. Once the general indicator categories are identi- tive codes and scorecards. For example, a key governance fied, scores on individual indicators provide direction on the challenge for family-owned enterprises is establishing clear specific areas that require reform. distinctions between the economic rights of family members as shareholders versus their rights to direct and manage the 2. Select and adapt specific indicators: family enterprise. For SOEs, important issues are political Benchmark codes do not automatically generate useable influence over board members and CEOs, as well as board indicators. It is almost always necessary to: empowerment and autonomy. For banks, governance prac- • Focus on the critical recommendations of the code; tices that have an impact on risk and systemic stability are of • Identify which indicators are good for these critical overriding concern. recommendations; • Shorten and simplify the language used in the Irrespective of the nature of the code, the scorecard should code; and use the same categories as the code and should be struc- • Add some explanatory detail to clarify the indicator tured in the same way in order to draw better conclusions and help the user of the scorecard understand the about code observance. (See Example 4.13 on page 24.) intent of the code’s recommendations. Indicator categories permit scorecard users to identify areas Example 4.14 shows specific indicators under the category in which the company’s governance is strong or weak. For of Transparency and Disclosure. Each indicator is subject example, a scorecard may show that a company is strong to evaluation and receives a numerical score, which will be in board practices but weak in disclosure. Reporting gover- used in the calculation of a final aggregate score that com- nance performance based on categories allows the score- bines the scores of the indicator categories. Example 4.14: Transparency and Disclosure Indicators in a Spreadsheet-based Scorecard Source: FYR Macedonian Scorecard. 26 Corporate Governance Scorecards 4. The Process Step-by-Step Making use of code-drafting groups “Include people who were originally involved in the development of the code. They can communicate the original drafters’ intent and help ensure that the spirit of the original code is respected.” - Ralitza Germanova, Associate Operations Officer, IFC Corporate Governance Group Selecting good indicators involves identifying the key recom- In this example, indicators for independent judgment mendations of the code. It requires the ability to discern be- might be the percentage of independent board members, tween what is truly fundamental and what is not. Once the examples of board discussions in which management or a key recommendations are identified, they need to be pared chairman were challenged, or instances where outside direc- down to their essence. Paring down code recommendations tors were able to raise new issues. Such detailed indicators requires strong reasoning and drafting skills. are useful to illustrate how a principle is implemented in practice. Detail is also useful to make the scorecard more At the same time, many codes are principles based and understandable and usable. do not provide indicators that are useful for measuring benchmarking. For example, a code may suggest that a Adapting the scorecard is necessary. But some adaptations board have the capacity for independent judgment and need to be avoided. Sometimes scorecard developers add decision making. Yet it may not offer any details about how or remove indicators, based on their personal preferences. to achieve this. Thus scorecard developers often need to Not infrequently, the role of stakeholders in governance is add indicators that help the user of the scorecard provide a removed. In other cases new requirements are added. response. Modifications, when taken too far, can mean that the Example 4.15: Assigning Scores to Indicators, Based on There is no implementation a Qualitative Difference in Performance 1 There is some implementation In Colombia, the points awarded for each indicator cor- 2 respond to a level of performance in Deming’s cycle—a Policy implementation is supported four-step process used by businesses for the control by documentation 3 and improvement of processes and products. Deming’s Tracking and evaluation of cycle seeks to identify the degree to which processes are implementation 4 self-sustaining and ensure continual improvement. The cycle is a persistently recurring succession of: There is a cycle of continuing 5 improvement after checking (P) Planning; Source: Confecámaras. (D) Doing (implementation); (C) Checking; and practice receive a 3. Companies that regularly track per- (A) Action in response to checking. formance receive a 4, and companies that repeatedly act on the results of checking receive the highest score. Colombian companies thus receive what is referred to as This scoring technique is different from a normal perfor- a PDCA score. Companies that have no implementation mance scale. The approach does not measure more or receive a numerical score of 1. Companies that have less implementation. Rather, it seeks to measure qualita- some level of implementation receive a 2. Companies tive differences that make good governance a continual that have formalized documentation for a governance and self-correcting process. Corporate Governance Scorecards 27 scorecard no longer measures adherence to the benchmark performance assessment approach with five levels of grada- 4. The Process Step-by-Step but rather to a new standard that corresponds to the views tion is shown in Example 4.15 on page 26. of the scorecard developer. Additions and subtractions should elucidate but not modify the benchmark code. 4. Decide whether weightings are needed. It needs to be decided whether to weight different indica- Developers often try to make scorecards as objective as tors. The assignment of weightings to specific indicators possible. Frequently they do so by trying to find quantifi- and to indicator categories tends to be the part of scorecard able indicators. Where quantifiable indicators are available, design that provokes the most debate. Weightings elicit they should be used. However, it is important to distinguish debate because the choice is ultimately subjective. between what is measurable and what matters. The adage, “you manage what you measure,” may be true, but not ev- The assignment of weightings is an attempt to identify erything that is quantifiable is relevant. Furthermore, more is factors that have a greater impact on the governance of the not always better. It is far from certain whether a board with enterprise and, in turn, on its riskiness and performance. It 50 percent independent directors is any better than a board is commonly argued that a specific indicator (such as the with only 35 percent independent directors. presence of a strong internal audit function) reduces risk and is of greater importance than another indicator (such as In the end, the assessment of the quality of any company’s whether the company has a dedicated corporate secretary governance practices will contain subjective elements. It is to manage board affairs). better to recognize and accept a certain level of subjectivity in assessments than to assume that what is measurable However, empirical studies have had a great deal of difficul- is automatically a good indicator. The principal goal of ty identifying which indicators correlate to risk and perfor- scorecards is to alert the user and the company to gaps in mance and, consequently, which should be weighted more compliance—that is, a particular governance practice exists or less. In addition, studies suggest that the relevance of or does not exist. Thus a simple “yes” or “no” response to a indicators depends on a large number of additional factors, question is not only plausible but also useful. including the level of development of the legal framework, civil society institutions, and the market. (See “Additional A list of potential indicators based on the OECD Principles resources: Papers that examine the link between indicators is included in Annex 7.1, “Sample indicators.” Additional and performance,” on page 29.) sample indicators appear in Annexes 7.2–4. Weightings are not, in fact, necessary to create a good 3. Set the performance scale. scorecard. If the purpose of the scorecard is to serve as a A choice needs to be made regarding the points awarded compliance checklist, then the weightings are not important for different responses. The scorecard illustrated in Example and can be equal (or neutral). A scorecard based on neutral 4.14 (page 25) awards 1 point for complete fulfillment of an weighting provides a very simple insight. It shows, for exam- indicator. Nonfulfillment yields 0 points, and partial fulfill- ple, that Company A complies with 61 percent of a bench- ment yields 0.5 points. A simple yes-or-no response is also mark while Company B complies with only 20 percent. This possible. Alternatively, if the scorecard is able to describe information still has considerable value in evaluating and different gradations in governance, and if the individuals guiding enterprises—though it in no way purports to make who are filling in the scorecards are able to distinguish a statement about performance or risk. meaningfully between different levels of performance, a 1–5 point scale may be more appropriate. Indeed, scorings have 5. Select weightings (if they are needed). been done on a 1–10 scale. If you decide to assign weightings, assign them based on the perceived relevance of the indicator. In Example 4.14, Introducing gradations may appear to give a scorecard more on page 25, the five indicators have different weightings, accuracy. However, the use of more gradations requires for a total potential score of 100 percent in the category a much higher level of sophistication in scorecard design, of transparency and disclosure. Question 4.2, which de- because it requires developing intermediate indicators. It mands timely and full disclosure of all material information, also requires a great deal of sophistication and judgment in is considered the most important and is given the highest conducting the assessments. An example of a sophisticated weighing at 35 percent. The presence of internal rules 28 Corporate Governance Scorecards 4. The Process Step-by-Step Example 4.16: Neutral Indicator Weightings Mixed with Weighted Indicator Categories The scorecard that was conducted in Vietnam used a neutral or equal weighting for indicators but applied weightings to indicator categories. The total number of indicators and weightings by category are shown in the table below. Indicator category Number of indicators % of total score Contribution of each indicator to final score The rights of shareholders 21 15% 0.7% Equitable treatment of 18 20% 1.1% shareholders Role of stakeholders in 8 5% 0.6% corporate governance Disclosure and transparency 32 30% 0.9% The responsibilities of 31 30% 1.0% the board Total 110 100% Source: Vietnam Scorecard. Developing the in the scorecard should serve to elucidate the intent of Scorecard the original code. 6. It is best to start with a limited number of perfor- mance gradations. A large number of gradations can give a 1. Governance codes tend to be the principal false sense of accuracy. “Yes,” “no,” and “partly” responses benchmark and source of indicators for scorecards. are easily filled in and are sufficient to permit solid analysis. 2. To allow conclusions to be drawn about code Gradations measuring performance on a qualitative scale observance, the scorecard needs to emulate the (such as the Deming cycle) result in a more sophisticated structure and content of the code. scorecard that may require more skill to complete. 3. A good scorecard will need to adapt the text of 7. Quantitative indicators are not necessarily better the code. Using and adapting codes to develop score- than qualitative indicators. Some level of subjectivity cards means a) identifying the critical recommendations in a scorecard assessment needs to be accepted. Gover- of the code; b) selecting key indicators; c) restating the nance is an intangible quality that has resisted attempts code recommendations clearly and concisely; and d) at quantification. adding explanatory text when needed. Scorecards may 8. You can choose to weight different indicators or require revision as codes change. not. Some scorecards try to associate the score with the 4. Adapting codes for use as scorecards requires quality of governance and, by extension, performance skill. A strong knowledge of governance is required, as and risk. To do so they assign weights to indicators. The are excellent reasoning and drafting skills. empirical evidence is mixed on the ability to correlate specific indicators to risk or performance. If the purpose 5. Deviations from the local code should be mini- of the scorecard is to measure code observance, then it mized. The more the scorecard deviates from the code, is sufficient to simply count the number of indicators a the less it is possible to use the findings as a measure of company complies with. adherence to the local code. Additions and subtractions Corporate Governance Scorecards 29 4. The Process Step-by-Step ADDITIONAL RESOURCES: Daines, R., I. Gow, and D. Larcker. 2009. Rating the Papers that examine the link between ratings: How good are commercial governance ratings? indicators and performance Rock Center for Corporate Governance at Stanford Uni- versity, Working Paper Series No. 1, Stanford University Bhagat, S., and B. Black. 1999. The uncertain relationship School of Law, Law & Economics Research Paper Series, between board composition and firm performance. Paper No. 360. Business Lawyer 54: 921–63. Dionne, G., and T. Triki. 2005. Risk management and Bhagat, S., and B. Black. 2001. The non-correlation be- corporate governance: The importance of independence tween board independence and long-term firm perfor- and financial knowledge for the board and the audit mance. Journal of Corporation Law 27 (2): 231–74. committee. HEC Montreal, Working Paper No. 05-03. Black, B. 2001. The corporate governance behavior and Ertugrul, M., and S. Hegde. 2009. Corporate governance market value of Russian firms. Working Paper No. 212, ratings and firm performance. Financial Management Emerging Markets Review 2. (Spring) 38 (1): 139–60. Black, B., H. Jang, and W. Kim. 2006. Does corporate Gugler, K., D. Mueller, and B. Yurtoglu. 2003. Corporate governance predict firms’ market values? Evidence from governance and the returns on investment. ECGI Finance Korea. Journal of Law, Economics, and Organization 22 Working Paper No. 06/2003. (2): 366–413. Gupta, P., D. Kennedy, and S. Weaver. 2009. Corporate Black, B., I. Loveb, and A. Rachinsky. 2006. Corporate governance and firm value: Evidence from Canadian governance indices and firms’ market values: Time series capital markets. Corporate Ownership & Control (Spring) evidence from Russia. Emerging Markets Review 6 (3) 293–307. (December) 7 (4): 361–79. Hitz, J-M., and N. Lehmann. 2012. The usefulness of Chen, K., Z. Chen, and K. C. Wei. 2004. Disclosure, corporate governance ratings. Faculty of Economic corporate governance, and the cost of equity capital in Sciences Georg-August-Universität Göttingen. emerging markets. Working Paper No. 2004/05-13, De- Renders, A., A. Gaeremynck, and P. Sercu. 2010. partment of Accounting, Hong Kong University of Science Corporate-governance ratings and company perfor- and Technology. mance: A cross-European study. Corporate Governance: An International Review (March) 18 (2): 87–106. that require fair disclosure to all shareholders is considered Examples and illustrations of these three different platforms relatively less important and receives a weight of only 10 follow the table. percent. Text document scorecards The value in the Answers column is multiplied by the Scorecards that are in the form of printed questionnaires weighting to calculate a point score for the indicator. In the have the advantage of simplicity. They are a traditional example, partial fulfillment of any indicator would reduce data-collection method that everyone is familiar with. (See by one-half the number of points awarded. The scorecard is Example 4.17 on page 31.) completed for all of the indicators, thus permitting the cal- culation of a score by indicator category and an aggregate The ICD scorecard project placed importance on verification score for the company. of the responses. It provided room for information sources as well as for clarifying remarks to justify the response. Score- 4.3.4 Select the platform cards in Indonesia and Thailand also used text documents. Scorecards are administered principally in three different forms: 1) text documents (paper questionnaires); 2) spread- Spreadsheet scorecards sheets; and 3) Web-based applications. Table 4.2 (page Example 4.18 on page 31 shows the scorecard of the 30) shows that each has advantages and disadvantages. German Financial Analysis and Asset Management 30 Corporate Governance Scorecards Association (DVFA).16 The DVFA scorecard served as a tool Web-based scorecards 4. The Process Step-by-Step for measuring the level of compliance of German listed Example 4.19 (on page 32) shows a Web-based scorecard. companies with the German Corporate Governance Code. It Web-based scorecards are among the most user-friendly and was the inspiration for many subsequent scorecard projects, have the most attractive user interface. in particular, those conducted in transition economies. The DVFA scorecard differs from the ICD scorecard by having The Web scorecard functions as follows: The scorecard additional columns that assign weightings to each indicator. presents respondents with a first question. If the question is The spreadsheet also automatically calculates a score, once answered in the affirmative, a subsequent question is posed. an indicator has been evaluated and entered into the spread- If a respondent answers “no,” the scorecard stops, assigns a sheet. This approach has the advantage of immediately sum- score, and moves on to the next indicator topic. marizing the key governance characteristics of the company and highlighting areas that need attention. It can be used to The score is referred to as the “implementation level.” provide immediate onsite feedback to companies. Each implementation level corresponds to a qualitative Table 4.2: Advantages and Disadvantages of Different Platforms Scorecard Advantages Disadvantages Text Document • Sample scorecards are available for Data need to be transferred into a com- • immediate adaptation and use puter database for calculation and analysis • Does not require the responding company Data transfer from paper to computer is • to input data into a computer an opportunity for errors • Some people, in particular top executives, Respondents do not always answer the • feel more comfortable responding on questions directly paper rather than with technology Handwritten feedback may be difficult • to read or interpret Spreadsheet • Sample spreadsheets are available for Unattractive user interface • immediate adaptation and use Spreadsheets are cumbersome for • • Spreadsheets are widely used tools inexperienced users • Inexpensive Comparisons between multiple companies • • Tool is highly portable on a laptop or a require additional data manipulation and tablet analysis • Can calculate results automatically Web-based • Attractive user interface Requires webpage • • Easy access for companies by simply Webpage requires development of an • providing a webpage link underlying database • Easy to use for most users Fewer people have the skills needed to • • Allows high degree of control over develop a Web-based survey application responses (limiting responses to “yes” or than a spreadsheet or a text questionnaire “no” or by forcing choices) May be more costly if a webpage • • Results are calculated at the moment designer is used data are entered May be rigid and limit nuanced or • • Analytical feedback can be provided to qualitative responses the user instantaneously • Comparison to a peer group can be provided instantly, if there has been a sufficient number of users 16 The Deutsche Vereinigung für Finanzanalyse und Asset Management (DVFA) is a professional membership organization for investment professionals in Germany. For more information, see http://www.dvfa.de/home/dok/35613.php. Corporate Governance Scorecards 31 4. The Process Step-by-Step Example 4.17: Text Documents as a Platform This scorecard of the Philippine Institute of Corporate to companies to fill in as a self-assessment, was later Directors (ICD) was administered as a text document. checked for accuracy by Ateneo law students. Written The section is reproduced below regards the Equitable feedback was subsequently put into a computer for Treatment of Shareholders. The questionnaire, given analysis and definitive scoring. Source: Corporate Governance Scorecard for Publicly Listed Companies (Philippine Institute of Corporate Directors, 2007). Example 4.18: Spreadsheets as a Platform The DVFA scorecard was developed on an Excela than assessing performance as poor, fair, or good. The spreadsheet. The structure of the scorecard is similar to part of the scorecard that is illustrated shows indicators that of the ICD scorecard in Example 4.17, though the under the category of Reporting and Audit of Financial DVFA scorecard asks for a yes-or-no response rather Statements. Source: The DVFA Scorecard for German Corporate Governance. a. Excel is a registered trademark associated with the Microsoft Office System. 32 Corporate Governance Scorecards improvement in governance practices. For example, a “yes” Explanatory text helps the respondent fill in the scorecard 4. The Process Step-by-Step answer to Implementation Level 1 (complying with the properly. The webpage gives an explanation of the informa- legal baseline) generates a score of 1 point; Level 2 (under- tion that is required and the conditions that must be met in standing the need to professionalize governance) yields 2 order to answer “yes.” Such explanations also provide an points; Level 3 (significant concrete steps) yields 3 points; opportunity to educate scorecard users on good governance and Level 4 (advanced governance practice) yields 4 points. practices, thus giving the webpage format a secondary The approach is similar to that of the Colombian scorecard educational and training benefit. described in Example 4.15, on page 26. Example 4.19: the two previous examples. The illustration below is a The Web as a Platform screenshot of a webpage. The screen shot deals with The Energy Chamber of Trinidad and Tobago one indicator: the role of board members versus the used this scorecard to evaluate the governance of its role of executives in family businesses. Performance is membership. The layout of the scorecard differs from graded into four different implementation levels. Source: Syntegra Change Architects Corporate Governance Scorecards 33 Web-based scoring is particularly well-suited to situations 4. The Process Step-by-Step The Platform where companies are expected to assess themselves or where a large number of companies are to be surveyed. It is less suited to situations where an active dialogue with the company is desired, or where the purpose is to devel- 1. The choice of platform depends on the time, op a subtle understanding of the company’s governance financial, and human resources available. The practices. choice also depends on the number of companies to be scored, the degree of interaction desired with the A Web-based scorecard need not be more complex or ex- company, and the sophistication of companies. pensive to develop than a spreadsheet; the Web scorecard 2. A text questionnaire or spreadsheet is easy of the Energy Chamber of Trinidad and Tobago was devel- and simple. A text questionnaire is understood by oped using a simple and relatively inexpensive Web-based everyone and is good for self-assessment. tool called SurveyMonkey.17 However, it does require human resources that are capable of understanding the 3. Spreadsheet scorecards typically need to be basic characteristics of webpage and database design. administered to ensure proper data input and avoid accidental alterations to the spreadsheet. The fact that they need to be administered makes them a 4.3.5 Solicit stakeholder feedback good choice when interaction is desired with the Once a working version of the scorecard has been company. completed, it should be reviewed by key stakeholders. 4. A Web-based scorecard is well-suited to Stakeholder involvement and feedback can generate self-assessment. They are easy to fill in and provide greater stakeholder “buy-in.” In addition, soliciting stake- instantaneous feedback. They also double as training holder feedback ensures that the scorecard: tools. Web-based surveys require a bit of experience • Properly reflects the critical recommendations of to develop. The Web is a good way to reach a large the underlying code; number of companies that may also be geographically • Is clear, understandable, and easy to use; distant. • Is of a reasonable length (with sufficient indicators to reflect the code, but not so many as to make it unwieldy); • Has weightings that have been properly ADDITIONAL RESOURCES: considered; Web-based Survey Tools • Is in a form (platform) that helps achieve the goals; and Free or paid survey tools can be used to develop a • Is administered effectively. scorecard. The choice will depend on the features Stakeholder feedback is typically received on two levels: 1) required by the implementer of the scorecard project. local feedback and 2) feedback by international experts. Deciding which to use will require research. Below is Local stakeholders are well-suited to provide insight into a small selection of survey tools for consideration. A local conditions and the particularities that influence the simple Web search will turn up more. design of the scorecard. Their input keeps the scorecard FreeOnLineSurveys: http://freeonlinesurveys.com/ relevant and alerts developers to potential pitfalls. Kwik Surveys: http://kwiksurveys.com/ Experienced international experts are also available to LimeSurvey: http://www.limesurvey.org/ provide feedback and advice on scorecards. International Pollmill: http://pollmill.com/ feedback is particularly useful when the benchmark code is international and for clarifying the intent of interna- Survey Expression: http://www.surveyexpression.com/ tional codes of best practice. It also helps ensure that the SurveyMonkey: http://www.surveymonkey.com/ scorecard benefits from the latest thinking on good gover- nance practices. (See Example 4.20 on page 34.) 17 SurveyMonkey is a registered trademark of the company by the same name. 34 Corporate Governance Scorecards 4. The Process Step-by-Step Stakeholder feedback helps ensure proper scorecard design “Poor stakeholder feedback may lead to poor design of the scorecard, unnecessary indica- tors, redundant questions, or indicators that are not realistic. Without company feedback, the benefit of the scorecard may become questionable.” - James Simanjuntak, Board Trustee Member, Indonesian Institute for Corporate Directorship 4.3.6 Pilot test the scorecard Stakeholder Pilot testing is not always needed. Some countries take an “external investor perspective” in their scorings. This means Feedback that companies are externally assessed based on publicly available information. Companies do not actually fill in the 1. Gather stakeholder feedback. Stakeholder scorecards, and consequently the user-friendliness of the feedback improves the scorecard, promotes the scorecard is less important. The external investor perspec- program, and provides legitimacy. Gathering and tive was used originally in the Philippines, has been used in responding to stakeholder feedback helps avoid Vietnam, and is planned in Mongolia. potential pitfalls. Think of it as both good quality control and risk management. Where companies are expected to actively collaborate in a 2. Feedback from local stakeholders is critical. scoring, pilot testing provides important feedback on the Feedback should be sought from the key stakeholders user-friendliness and understandability of the scorecard. Pilot but, in particular, from companies. testing was conducted in Afghanistan (for the Bank Corpo- rate Governance Code), in Vietnam, and in other countries. 3. International feedback is useful when the For a sample form you can use to assess the scorecard and underlying code is international. It is also useful the scorecard process, see Annex 7.5, “Sample pilot test and when local experience and expertise are limited, and company feedback form.” to keep the scorecard up-to-date with international developments. Some foreign experts have consider- able experience in administering scorecards. Example 4.20: Association, ecoDa, and members of the Bulgarian Gathering Stakeholder Feedback Corporate Governance Commission as well as many others. These experts provided advice on the content To provide additional legitimacy to scorecards in of scorecards as well as on the process by which they Azerbaijan, FYR Macedonia, Montenegro, and Serbia, were administered. drafts were discussed by local stakeholders, including regulators, businesses, and academics. Stakeholder In Azerbaijan, stakeholder feedback came from mem- review was informal yet effective. Very welcome was bers of the national Corporate Governance Taskforce, the involvement of securities and exchange commis- which included the central bank, the State Commit- sions that provided fine tuning and moral support for tee for Securities, the Ministry of Justice, the Ministry the development and use of the tool. of Finance, Azerbaijan Investment Company (a sover- eign investment fund), and the Baku Stock Exchange. IFC has also organized feedback on scorecards In addition, IFC coordinated a panel of international from its network of international experts. With the experts, mainly from its Private Sector Advisory help of IFC, countries benefited from the advice of Group, to provide an international perspective. experts from the Finnish Professional Board Members Corporate Governance Scorecards 35 countries, the traditional rationale for good governance— 4. The Process Step-by-Step access to capital or lower cost of capital—is a meager Pilot Testing incentive. This is especially true in emerging markets and late transition economies, where companies have tradition- 1. Pilot testing a scorecard can reveal problems ally met their capital needs through banks and continue to early on. Test runs are advisable when compa- view banks as a preferred source of finance. nies are expected to self-assess or contribute to an assisted self-assessment. Pilot testing helps ensure Nor is it sufficient to promote a scorecard project based that the scorecard works and that company concerns on benefits that accrue broadly to the country, such as are understood and addressed. It is also a way to strengthening the capital markets. These goals are often demonstrate the value of scorings and get additional championed by international financial organizations or companies to buy into the program. donors that pursue macroeconomic objectives. Companies need to be shown how they will benefit directly. 2. The “external investor” approach to score- cards reduces the need for pilot testing. The ex- What’s in it for me? The following benefits may appear ternal investor approach does not rely on the company self-evident to governance experts. But in practice they must to participate in the assessment. Engagement with be explained. companies is pursued in a subsequent phase, once the For all companies: scorecard results have been gathered. • Reducing internal risk through a tighter control environment • Reducing legal risk through better systems of 4.4 Conduct the scorings compliance • Improving and making operational decision Companies can be convinced to participate in a scorecard making more rigorous project in a number of ways. Mandatory participation is • Improving shareholder relations often viewed as an effective approach. Participation of listed • Enhancing company reputation among clients companies was made mandatory in the Philippines, where a Securities Exchange Commission requirement was important Example 4.21: in overcoming initial reticence among companies to conduct Corporate Fears self-assessments. Where companies are assessed externally, based on publicly available information, there is little need In Indonesia, corporate fears were overcome by to engage them, since they will be assessed whether they providing training to and hosting discussions with want to be scored or not. boards of directors. Board members had the op- portunity to ask questions and raise specific doubts 4.4.1 Engage early adopters regarding corporate governance principles and the Participation is voluntary for some scorecards. The new administration of the scorecard. Kazakhstan Stock Exchange scorecard, for example, is a voluntary self-assessment tool. For companies to participate In the Balkan region, companies wanted to under- voluntarily, they need to be convinced of the benefits of a stand why they should be subject to a scorecard scorecard project. If there has been proper stakeholder assessment. Some were concerned that the score- engagement from the beginning, the business community card was a regulatory requirement in disguise and will be more likely to support the scorecard. Even so, com- were afraid that stock exchanges and regulators panies in all countries tend to be wary of rules, regulations, would use the results against them. Others felt that scorecards, and even voluntary codes, as these are often the scorecard was an unreliable tool, since corporate viewed as harbingers of future regulatory intrusions. So a governance was an intangible value that could not first task is to overcome such fears. (See Example 4.21.) be measured. Others questioned why a scorecard was necessary on top of the national governance For companies to voluntarily participate in a scorecard, they code. Each of these arguments against scorecards need a credible answer to the question, “What’s in it for had to be addressed and rebutted. me?” The promised benefits cannot be theoretical. In many 36 Corporate Governance Scorecards • Improving capacity to sell products, both at For SOEs—from the perspective of the SOE: 4. The Process Step-by-Step home and abroad • Reducing political intervention • Improving board relations and board productivity • Improving clarity and definition of both policy • Introducing better policies and procedures, and commercial objectives including board procedures • Greater attention to commercial objectives For listed companies: and better understanding of costs of policy • Enhancing company reputation in the markets objectives • Improving communication with shareholders • Enhancing efficiency • Improving systems and processes for financial For financial institutions: reporting and disclosure • Complying with regulation and international For family businesses: standards • Avoiding or managing family conflicts • Enhancing and broadening the spectrum of • Helping the company through its growth phase risk management • Professionalizing management • Meeting expectations and needs of partners • Preparing for expanded ownership base and • Creating better systemic stability new capital investment For SOEs—from the state’s (owner’s) perspective: • Greater ease and efficiency of oversight Engaging • Reducing financial and political risk to the state • Improving clarity and definition of both policy Companies and commercial objectives • Improving accountability 1. Regulators can make a scorecard assessment mandatory. Mandatory approaches to governance assessment are rarely used in developed markets but Example 4.22: may fit the business culture of many emerging and Incentives for a Small Listed Company transition economies. 2. An external assessment that takes the Galenika Fitofarmacija,a a small company in the Repub- “investor’s perspective” and uses publicly avail- lic of Serbia, is listed on the Belgrade Stock Exchange. able information does not require the same level It conducted a scoring that eventually led to a pro- of company buy-in or engagement. However, found improvement in governance practices. Notwith- ex post engagement is necessary to implement reform. standing the company’s satisfaction with the final re- sults, its initial reaction was skepticism. The argument 3. Where participation is voluntary, companies that it would benefit from easier and cheaper access need to be shown tangible benefits. Scorecard to capital did not convince Galenika Fitofarmacija, organizers need to understand and convincingly because the company was in no need of cash. communicate the positive outcomes that accrue to business. Using success stories to illustrate benefits is Other factors persuaded Galenika Fitofarmacija to smart. participate. For instance, the project might poten- 4. Company feedback and engagement must tially be useful in enhancing the company’s image be sought actively. Companies should be informed and improving relations with minority shareholders and consulted at early stages of a scorecard project with whom there had been occasional conflict. The to ensure that they understand the benefits, that role of the local chamber of commerce was also key. their fears are assuaged, and that legitimate concerns Galenika Fitofarmacija had always had excellent rela- are met. Company participation is more likely to be tions with the chamber and wanted to assist it in its forthcoming if the scorecard is designed to be a use- new scorecard initiative. Also, IFC brought technical ful tool to help companies achieve their objectives. expertise and manpower to conduct the assessment, giving the company confidence that the scoring 5. Early adopters provide leadership. In all things, would be completed professionally, successfully, and there are early adopters and followers. Early adopters at low or no cost. can be trendsetters. Winning the participation of a. A more detailed case study of Galenika Fitofarmacija corporate leaders can convince others to follow. appears in Section 5.1, “Measurable outcomes: Company.” Corporate Governance Scorecards 37 Often the understanding of governance among companies is tional, there is room for innovation and creativity. Corporate 4. The Process Step-by-Step such that it is hard for them to make the link between their governance is often viewed as an arcane topic, but there governance practices and their day-to-day problems—even really is nothing mysterious about it. And it does not need when their problems are either due to or exacerbated by to be boring. Promotional campaigns not only can demystify governance failures. Generally, a constructive, open, and pro- governance for people who are not familiar with the topic, active discussion with individual companies serves to illustrate but they also can make vague concepts appear crystal clear. how better governance practices help them better navigate This is particularly important when dealing with closely held their daily challenges. (See Example 4.22 on page 36.) or family-owned businesses. (See Example 4.24 on page 38.) 4.4.2 Promote the scorecard broadly Awards programs Broad promotion of the scorecard is different from engag- Another way to promote scorecards and raise awareness is ing companies as discussed in Section 4.4.1, “Engage early to provide awards to good performers. Organizing awards is adopters,” above. Engagement provides substantive reasons relatively easy, once a sufficient number of companies have for participating in a scorecard project. Substantive reasons participated in the scorecard project. Identifying winners are good, but not good enough to get a large number of is simply a question of ranking companies based on their companies to participate. Promotion focuses on getting aggregate scores. However, some technical issues need to the message out to a larger number of potential partici- be considered. pants. Promotion uses tools such as seminars, press events, advertising, launch events, and competitions to motivate Since awards are based on a ranking, and since a ranking is participation. All are designed to raise awareness of the a comparison of performance, it is critical that the compa- scorecard project and to educate companies and the public nies are evaluated on the same basis. If the same scorecard on its benefits. is used, then this should be the case—in principle. But you must exercise care when the basis of the scorecard is a Promotion through seminars, conferences, self-assessment. Unchecked self-assessments are generally and the media unreliable as the basis for an award. Articles and professional gatherings can be an important part of scorecard promotion, as noted in Example 4.23. External assessments are more objective but may also have Even though such promotional approaches are fairly conven- weaknesses. For instance, they may not be comparable if Example 4.23: In the Balkans, the first step in a series of promotional Promotional Activities activities was the publication of articles in the national media to convey the purpose and function of score- In the Philippines, the Philippine Institute of cards. Next came conferences and seminars (most Corporate Directors held an annual working meeting notably those organized by stock exchanges), which with key stakeholders (regulators, stock exchange, highlighted success stories from companies that had un- industry associations, professional associations, and se- dergone scorecard assessments. These provided a way lected listed companies) to discuss governance and get to invite more companies to participate. their input to update the scorecard. Articles in the leading business newspapers in In Indonesia, promotional activities conducted by the FYR Macedonia, panel discussions at the annual Indonesian Institute for Corporate Directorship included conferences of the Sarajevo and the Belgrade stock 1) publishing and distributing scorecard results to all exchanges, and discussions at the Milocer Forum orga- companies, regulators, and other local and international nized by the Association of Montenegrin Economists bodies with an interest in corporate governance issues; described the benefits of scorecards and showed that 2) conducting a seminar on the results; 3) conducting a they were tools to help companies comply with and as- paid one-day training program; and 4) honoring corpo- similate the best-practice recommendations of corporate rate governance leaders with awards. governance codes. 38 Corporate Governance Scorecards 4. The Process Step-by-Step Example 4.24: Speaking Clearly to Companies on Issues of Relevance The Colombian Confecámaras scorecard project was Enhance liquidity and controls Access to sound business advice accompanied by an innovative awareness campaign that got right to the point and showed that the topic of governance need not be without humor. Banner adver- tisements (shown below) appeared in the print media as well as on the Confecámaras website, http://www. confecamaras.org.co/. The bubble text Such advertisements were considered important factors The bubble text reads: “There’s no in promoting the scorecard and winning the partici- reads: “There’s no lack of businesses lack of businesses where a witchdoctor pation of family-owned enterprises in Colombia. The with unexplained is the manager’s advertisements were accompanied by an outreach liquidity problems.” advisor.” program that included radio, print, television, and the Internet. Prevent conflicts between owners Don’t let a clown run the business The bubble text The main text reads: “Prevent The main text reads: “Begin to The bubble text reads: “There’s no conflicts with your owners, self-implement best practices reads: “There’s no lack of businesses improve decision making, in corporate governance with lack of businesses where there’s a prepare succession, and be the online tools developed for where disoriented daily fight between transparent with the corporate Colombian SMEs.” offspring are ready owners.” governance program offered to provide their by chambers of commerce and advice.” Confecámaras.” Source: Confecámaras. the individual assessors differ from one company to the success in the Balkans, Indonesia, India, a number of MENA next. To preserve the credibility of a scorecard award, pay (Middle East and North Africa) countries, the Philippines, and special attention to the comparability of data and to an others. Award ceremonies are an excellent opportunity to: equal application of the assessment criteria. • Bring together governance leaders; • Highlight success stories; Since the public identification of a winner can raise sensitivi- • Exchange experiences on governance practices; and ties, you must reduce potential bias and the margin for error • Throw the spotlight on governance. to an absolute minimum in an awards program. It is often They are also much appreciated by members of business advisable to establish a short list of the best companies and chambers and institutes of directors, who see them as a then undergo a second review to ensure the accuracy of the positive, nonintrusive way to encourage good governance, data and the fairness of the comparison. To minimize bias, and who value them as a benefit of membership. a common practice is to use an external body of experts to review the results of the competition. A word of caution A governance award does not necessarily predict better Awards based on scorecards have been organized with performance or lower risk. It is seldom acknowledged that Corporate Governance Scorecards 39 4. The Process Step-by-Step Promoting Scorecards Broadly 1. Promotion is needed to get voluntary partici- target is family-owned businesses, which typically have pation. Promotion helps inform a larger number of a less sophisticated understanding of governance and potential participants of the benefits of the scorecard need to know in no uncertain terms what problems can project and of good governance. be solved and how good governance helps them. 2. A variety of promotional techniques exist. These 4. Awards programs can be effective. They are easy include articles in the printed press, conferences, panel to organize and have a powerful promotional impact. discussions, training, and radio and television inter- Companies and top executives are often motivated by views. Since each has advantages and disadvantages, competition and comparison. Awards programs in- consider a mix of approaches. evitably garner good press coverage. But give special attention to reducing the potential for bias and error in 3. Innovative promotional approaches can the scorings. And take appropriate precautions to ensure make the benefits of governance clear. Innovative that an award is not interpreted as financial advice. messages can be especially important when the Enron had in place award-winning governance and man- project. If the owner of the program is a regulator interested agement control systems when it folded,18 and untoward in measuring compliance, objective verification of the data is activities are not unheard of among governance award of overriding concern. Regulators are unlikely to accept un- winners. Awards organizers should be careful to communi- checked self-assessments as a tool for compliance checking. cate that there may not be any direct link between an award On the other hand, if the owner is a chamber of commerce and future performance or risk, and that awards in no way or an institute of directors, the objective will be to sensitize imply an endorsement or investment advice. Organizers also its membership base to governance issues, provide informa- may wish to consider that, if an award winner later performs tion on what good governance is, and collect data. In this below expectations, their own reputation may suffer. case a self-administered approach may be more attractive, because member companies will find it less intrusive and 4.4.3 Conducting the scoring have more control over the outcome. In practice, scorecards There are three ways to conduct a scorecard assessment: often use a mix of approaches. 1) external assessments done by individuals outside the company who collect and analyze data; 2) self-assessments, External assessments particularly when the scorecard is on a Web-based platform; External assessments may be undertaken with or without and 3) assisted self-assessments, a mixed approach. Table 4.3, the participation of the company. In Example 4.25 on page on page 40, shows advantages and disadvantages of each. 41, the company both sought out external evaluation and collaborated by providing assessors access to company staff The choice of approach depends on the goals of the scorecard and information. The advantage of self-assessment “With the self-rating approach, companies are more involved.” - Jonathan Juan Moreno, Former Executive Director, Philippine Institute of Corporate Directors, the Philippines 18 C. Free, M. Stein, and N. Macintosh, Management Controls: The Organizational Fraud Triangle of Leadership, Culture and Control in Enron (Ivey Business Journal Online, July/August 2007). 40 Corporate Governance Scorecards 4. The Process Step-by-Step Table 4.3: Advantages and Disadvantages of Assessment Approaches Scorecard Advantages Disadvantages Administration External assessment • Greater objectivity in scoring Company concern about confidentiality • • Greater consistency in scorings of data between companies Company concern about how the • • Familiarity of external assessors with findings will be used and potential legal governance issues implications • Training is only required for a limited Number of companies that can be • number of external assessors scored is limited due to human resource • Creates a sense of external constraints accountability More costly • Self-assessment • May be easier to get companies to Absence of governance expertise in • participate many companies makes findings of • Reduces workload and costs for organizers uncertain quality • Permits scoring of a larger number of Bias is high • companies Less critical assessment of governance • • Companies like control over the practices assessment and the findings Need to train individuals at all companies • • Best protects potentially sensitive on how to properly respond to scorecard company data questions • From company perspective, less No sense of external accountability • external accountability Reduced incentive to reform • Assisted • Has same advantages of external • Reduces the disadvantages of a self-assessment assessment plus more self-assessment but has the same • Reduces work for companies and disadvantages as an external assessment. enhances quality of scoring • Reduces work for assessors • Allows for a collaborative dialogue between external experts and internal staff • Teaches companies how to conduct their own analyses • Can be a training/learning opportunity External assessments that do not rely on the company for with companies directly. In addition, it serves to illustrate the information are sometimes referred to as taking the “exter- limitations of publicly available data by emulating the condi- nal investor perspective” (as in Vietnam). Taking the external tions under which external investors operate. investor perspective means relying on publicly available information to evaluate the entity (as would be the case Self-assessments for any portfolio investor). Those conducting the assessment In a self-assessment the company evaluates itself. Self-as- gather information from websites, public statements by sessments were used in the initial year of the Philippine the company and its board, the media, regulatory filings, scorecard. Furthermore, most Web-based assessments (such and so on. as those of Colombia and Trinidad and Tobago) are self- assessments. Self-assessments are the form of scoring most The external investor approach has the disadvantage of rely- easily accepted by companies. They have the advantage of ing only on information that reaches the public’s eye. But it using the company’s own resources to fill them in and are may be the only approach when it is not practical to engage thus well-suited to scoring a large number of companies. Corporate Governance Scorecards 41 4. The Process Step-by-Step Example 4.25: External Assessment Brings Expertise Ultimately, the scoring helped Galenika Fitofarmacija’s board recognize that good governance was useful for: IFC conducted an external assessment for Galenika • Improving relations with shareholders; and Fitofarmacija,a a company listed on the Belgrade Stock • Improving the company’s reputation in the Exchange. The assessment started with a day of talks investment and business community. with the chief executive and the corporate secretary. IFC The company embraced the scorecard as an appropriate received documents for analysis and then conducted tool to improve governance, because it: interviews for one week. With that information, IFC • Was easy to use; produced an initial scorecard and then presented the • Proposed a systematic approach to governance final results to the board. analysis; and The overall rating and, in particular, the company’s • Allowed comparison to other companies. performance in the disclosure and transparency subcate- In Republika Srbska, the Banja Luka Stock Exchange gory motivated the board to learn how it could improve. conducted external assessments, taking it upon itself to The company called on IFC again, this time to undertake visit companies, meet with staff, and fill in scorecards a more detailed governance assessment and provide onsite. Such visits were an opportunity for a dialogue tailored advice. IFC recommended simple, practical, and between the exchange and the company and permitted cost-effective improvements to Galenika Fitofarmacija’s a sophisticated and collaborative assessment of gover- governance practices. nance practices. A more detailed case study of Galenika Fitofarmacija appears in Section 5.1, “Measurable outcomes: Company.” a. b. A more detailed case study of Banja Luka Stock Exchange appears in Section 5.4, “Measurable outcomes: A stock exchange” In principle, self-assessments work because companies know encourage reform at the company level, especially where their own governance best. Plus, self-assessments are in assessment includes an in-depth dialogue between the their interest; if companies understand the importance of company and external governance expert. good governance and conduct a sincere analysis, self-assess- ments can have a profound impact. However, self-assess- Training needs ments are vulnerable to bias, and it is typically only gover- Whatever option is chosen, and irrespective of who con- nance leaders (companies that have strong commitment to ducts the scoring, the individuals who administer the score- good governance) that extract benefits from the process. card need to receive basic training on how to do so. Below is a list of training points for assessors: Assisted self-assessments 1. General information on corporate governance: As a result, scorecards that aim at encouraging real change a. Why governance is important, and what tend to use assisted self-assessments. In the Philippines, constitutes good governance; for example, the tendency toward bias in self-assessments b. The purpose of governance codes, including their was recognized early on and the approach was changed. In basic content and structure. subsequent years the scorecards that were filled in by the 2. Specific information on the conduct of a scorecard company were supplemented by publicly available data and assessment: checked by law students who verified the information. (See a. The purpose of scorecards; Example 4.26 on page 42.) b. The structure of the scorecard; c. Indicators and how to assess compliance; In summary, the tradeoff between external assessments d. How the scorecard calculates and weights; and self-assessments is a tradeoff between objectivity and e. How to decide whether a company complies, getting the buy-in of companies. Self-assessments are often when judgment is involved; the best way to break the ice, get companies involved, and f. What data are confidential, and how to treat familiarize them with the issues. External assessments can confidential information. be most objective. A mixed approach is often best suited to 42 Corporate Governance Scorecards 4. The Process Step-by-Step Example 4.26: Enhancing Objectivity and Reducing assertions made by companies were not just a matter Bias through Assisted Self-Assessments of opinion, but rather were backed up by evidence and documentation. In some cases, students challenged the The goal in a scorecard project is to take an accurate assumptions made by those filling in scorecards. snapshot of the enterprise. This means reducing sub- In Indonesia, the Indonesian Institute for Corporate jectivity and enhancing the accuracy and reliability of Directorship used a group of well-trained assessors and the assessments. As in accounting, the objective is to had the assessment results reviewed by corporate gover- provide a “true and fair view.” But unlike financial state- nance experts. In Bulgaria, self-assessments were verified ments that look mainly at numbers, scorecards contain by the Bulgarian Corporate Governance Commission mainly qualitative indicators. Some level of subjectivity through interviews. and judgment must be accepted. Nevertheless, there are At times external consultants can contribute. In the actions that can ensure the unbiased collection, treat- Balkans, consultants developed and administered ment, and analysis of even qualitative data. scorecards. In Colombia consultants were available for As mentioned elsewhere in this supplement, students assisted self-assessments and for post-assessment imple- from Ateneo Law School in the Philippines were used mentation work. The advantage of using consultants is to verify the accuracy of company self-assessments. The that the right ones bring experience and expertise. primary task of the law students was to ensure that the The importance of training and unbiased assessment “Irrespective of who does the scoring, they need to be well-trained. It cannot be a biased institution.” - Kiril Nejkov, IFC Operations Officer Corporate Governance, Europe and Central Asia Example 4.27: the key points was to explain the value of good gover- Enhancing the Quality of Scorecards nance, the reason for corporate governance codes, and through Training and Proper Procedure the utility of knowing how well companies complied with the code. Technical issues regarding how to fill in It was broadly understood in the Balkan countries that scorecards were also covered. the training of companies, stakeholders, and scorecard The scorecard project in Vietnam took a number of administrators was a prerequisite for success. Most local steps to ensure accuracy and consistency and to reduce institutions had only a basic understanding of gover- bias in external assessments. First, raters received nance and the impact of good (or bad) governance thorough training to reduce variability of assessments. on the life of the enterprise. Companies, in particular, Second, to ensure that no single company was rated by were unfamiliar with specific governance techniques one person, scorers specialized in particular indicators and how governance affected their performance, their and then rated a group of companies on that indica- stock price, their relations with shareholders and other tor. This ensured that the same critical eye was applied stakeholders, and the impact on strategy and risk. to different companies, which is important because As a result, preparatory training received considerable different scorers tend to assess compliance differently attention. Training was made available to stock ex- even when presented with identical facts. Finally, each changes, consultants who were used to conduct assist- assessment was cross-checked and audited to ensure ed self-assessments, companies, and regulators. One of consistency across ratings. Corporate Governance Scorecards 43 g. How to ensure comparability between different partners until they are able to conduct scorings themselves. 4. The Process Step-by-Step assessors; and In the long run, the goal is to give local counterparts the h. How the findings of the scorecard will be used, tools and to create a self-sustaining process. and what reports are to be generated. In the Balkan countries, IFC’s local partners continued Training should be adapted to the specific scorecard and to undertake scorecard assessments after initial IFC in response to the local context. (See Example 4.27 on involvement. The Banja Luka, Belgrade, and Sarajevo stock page 42.) exchanges, the Institute of Directors of Macedonia, the Serbian chambers of commerce, and CEED Consulting all Providing companies and other became repositories for skills and knowledge on how to institutions with support use scorecards and provide advice on good governance Scoring requires experience and expertise. Precisely how practices. to interpret data and how to assign a numerical score under different circumstances requires good judgment. 4.5 Summarize and present the results Even when proper training is provided, experienced hands Once data have been collected, the next step is to convert provide invaluable assistance. IFC typically guides local them into useful information. What is useful depends on the user. For companies, a simple gap analysis to show where their governance falls short of the benchmark code Conducting the is already sufficient information to develop an action plan. Scoring Regulators, on the other hand, are more interested in the effectiveness of the regulatory framework so they can adjust 1. Companies tend to be most comfortable with self-assessments. Companies are often concerned regarding the confidentiality of findings. Self-assess- ADDITIONAL RESOURCES: ments maintain a high level of privacy. Lessons learned from 2. External assessments can provide greater scorecard projects objectivity. External assessors are more likely to be even-handed in their evaluations of different compa- Center for International Private Enterprise (CIPE). nies. Steps can be taken to enhance the objectivity of 2007. Philippines Stock Exchange commits to good assessments and reduce bias. corporate governance. Overseas Report, Special Edition for Asia (September) 34. 3. Assisted self-assessments are a good way to en- ter into a dialogue with companies. This dialogue IFC. 2008. Governance scorecards as tools for break- can motivate the company and lead to action plans through results. Private Sector Opinion 8. Washing- designed to improve governance practices. ton, D.C.: IFC. http://www1.ifc.org/wps/wcm/connect/ 4. In any case, assessors need training. The training f6597c0048a7e6d3a887ef6060ad5911/GCGF%2BP should cover governance basics, the specific character- SO%2Bissue%2B8%2B5-13-08.pdf?MOD=A- istics of scorecards, and how to conduct scorings. JPERES. 5. Training is not enough; experience is necessary. IFC. 2011. Corporate governance scorecard: Assessments are most effective when they are guided Versatile tool for companies, investors, and reg- by experience. An experienced party such as IFC can ulators: Experiences from Southeast Europe and provide important guidance at the beginning of a East Asia. Lessons Learned (March). Washington, scorecard project or during its first year of iteration. D.C.: IFC. http://www1.ifc.org/wps/wcm/connect/ 6. The ultimate goal is to help local institutions topics_ext_content/ifc_external_corporate_site/ conduct scorecard projects themselves. Donor global+corporate+governance+forum/publications/ support is never permanent. A sustainable system of les sons+learned/ll_scorecards. governance monitoring is a valuable outcome. 44 Corporate Governance Scorecards 4. The Process Step-by-Step Scorecards help generate information that leads to concrete steps “. . .[S]corecards monitor corporate governance practices; signal commitment to take concrete, practical steps; and can help track progress on the journey . . . .” - Stefanus S. Handoyo, IFC Operations Officer Corporate Governance, East Asia and Pacific their oversight. They require more analytical information on mented with more analytical information. In Example 4.28, multiple companies, which will give them insight into the a report should highlight that the information disclosure governance practices in the market. and commitment categories are relatively weaker and would probably merit further attention by the company. For reports Individual company reports to be meaningful, they need to be developed by the people The simplest form of reporting is an individual company who conducted the original company analysis. To be com- report. If the scorecard was administered in the form of a plete, narrative reports should include recommendations for computer spreadsheet, a report can usually be generated, how to improve governance practices. once the final indicator scores are introduced. This can be done onsite with the company, where results can be shared Webpages are capable of generating instant individual- with staff and serve as the basis for discussion and the devel- company reports. Depending on the survey software used, opment of an action plan. (See Example 4.28.) Web applications can provide a comparison to a peer group of other companies. Some Web software is able to calculate If reports are used to advise companies on how to improve running averages as more and more respondents fill in their their governance practices, spreadsheets should be supple- scorecards. (See Example 4.29 on page 45.) Example 4.28: A Spreadsheet-based Performance Summary for an Individual Company The diagram below illustrates scorecard results for a single company. Scorecard for Corporate Governance in Bulgaria© Summary of the Results of the Two-tier System Companies Scorecard/Evaluation Form for Corporate Governance in Bulgaria Corporate Governance— Protection of Shareholder Rights commitment (incl. Stakeholders) Cooperation between the Standard Management and Supervisory Standard Weighting: 20% Weighting: 10% Standard Partial Score: 80% Partial Score: 60% Weighting: 10% Partial Score: 90% Information Disclosure Corporate Governance Management Board Standard Total Score Standard Weighting: 20% Weighting: 10% Partial Score: 63% Standard Score: 79% Partial Score: 78% Internal Control and Audit Supervisory Board Standard Standard Weighting: 20% Weighting: 10% Partial Score: 90% Partial Score: 85% Corporate Governance Scorecards 45 4. The Process Step-by-Step Example 4.29: Web-generated Report for an highlighted in red. Scores from 2 to 3 are coded in yel- Individual Company low, and those from 4 to 5 are coded in green. . The following individual-company report was generated Companies tend to appreciate clear, constructive, and by the Confecámaras website. The results immediately immediate feedback. However, as with all automatically alert the reader to areas requiring attention. It shows generated reports, interpretation requires care. Such gaps in performance and alerts the reader to priority reports can only be the beginning of a discussion. (For areas through color coding. Scores ranging from 0 to the specific indicators that fall under each of the blocks, 1 are deemed to require immediate attention and are see Annex 7.4, “Sample Web-based scorecard.”) Priority Gray Red Yellow Green BLOCK 1 BLOCK 5 High BLOCK 7 BLOCK 8 BLOCK 6 BLOCK 10 BLOCK 17 BLOCK 15 BLOCK 17 BLOCK 9 BLOCK 2 Medium BLOCK 13 BLOCK 4 BLOCK 16 Low BLOCK 3 Source: Confecámaras. Note: The color coding results from the assessment described in Example 4.15 on page 26. Rankings In the example, performance is divided into indicator cate- When scorings are done for large numbers of companies, it gories as described in Section 4.3.3, “Develop the scorecard is possible to generate comparisons and rankings. Rankings structure.” The chart shows that, on average, Vietnamese do not necessarily provide indications of performance or risk, companies perform best in the equitable treatment of share- but they do show which companies observe good gover- holders category. They perform less well on average in the nance practices. There can be little doubt that the compa- responsibilities of the board category. nies at the bottom of the list underperform their peers and need to review their governance practices. (See the list of The columns also reveal where compliance is uniform and company rankings in Example 4.30) where there is greater variability of practice around the average. The analysis shows that adherence to disclosure Country surveys and transparency requirements is fairly uniform, while the When sufficient numbers of companies are assessed, it may role of stakeholders shows considerable variability. Variability also be possible to draw conclusions about the quality of can be taken as a proxy for level of compliance. The greater governance within the market. Example 4.31 (on page 46) variability around the role of stakeholders category might shows the findings of the IFC Vietnam Corporate Gover- suggest that enforcement should be improved. nance Scorecard Report (2012).19 The Vietnam scorecard project had the objective of developing information on gov- The Vietnam Corporate Governance Scorecard Report uses ernance practices in the Vietnamese market that would be and presents data in further innovative ways. Since data were useful for policymakers. Since Vietnam did not have its own collected over a three-year period, the evolution of gover- corporate governance code, the underlying benchmark was nance practices could be tracked over time. So while the the OECD Principles of Corporate Governance. report shows that the average performance of enterprises 19 For a copy of the report, see http://www1.ifc.org/wps/wcm/connect/region__ext_content/regions/east+asia+and+the+pacific/publications/ corporate+governance+scorecard+for+vietnam+2012. 46 Corporate Governance Scorecards 4. The Process Step-by-Step Example 4.30: Rankings of Company Compliance with Azerbaijan Corporate Governance Code Ranking Company % Score Ranking Company % Score 1 DemirBank 99 19 Akkord Industry Construction 2 Azerbaijan Leasing Company 93 Investment Corporation 64 3 Ismayilli Gushchuluq 90 20 Azer-Turk Bank 59 4 Sumgait Technology Park 89 21 Institute of Machine-Building 5 Azerigasbank 88 Technologies 59 6 Gilan Gabala Food Production 88 22 UniTravel 53 7 Azmark Dısh Tıcaret 86 23 Sheki-Ipek 51 8 Azerbaijan Investment Company 82 24 Azerlotereya 50 9 The International Bank of Azerbaijan 82 25 Alatava 2 40 10 Metanet A 81 26 Surabad Gushchuluq 40 11 Business Service Center 80 27 Color Group 38 12 Rabitebank 78 28 Sweet Production 38 13 Turan Bank 78 29 Muller Interyer 33 14 Embafinance 76 30 Alhambra 27 15 Agrarcredit 75 31 Caspel 24 16 Ata Holding 74 32 Esder 17 17 FX Beauty Company 73 33 Azerstar 8 18 Tamiz Shahar 71 Source: Azerbaijan Ministry of Economic Development. Note: Average score is 63% Example 4.31: Reporting Performance by Indicator Category Maximum Average Minimum 78.0% 74.0% 78.0% 61.0% 61.3% 58.6% 55.0% 48.5% 44.7% 43.2% 39.0% 36.1% 29.3% 29.4% 24.3% 19.3% 17.7% 0.0% Overall The rights of The equitable The role of Disclosure and Responsibilities CG Score shareholders treatment of stakeholders transparency of the board shareholders Source: Vietnam Corporate Governance Scorecard Report (2012). Corporate Governance Scorecards 47 stayed the same between 2009 and 2011, the variability in Additional analyses provided invaluable information to 4. The Process Step-by-Step governance practices was considerably reduced. Stated dif- help frame the policy dialogue on corporate governance. ferently, compliance improved. Other factors being equal, a The report suggests that good governance did in fact have lesser variability in governance practices is positive, as more a positive impact on performance of enterprises. It also companies approach the norm. provides clues regarding the factors that correlate with good governance. For example, foreign ownership correlated positively with good governance, while state ownership Example 4.32: correlated negatively. (See Example 4.32.) Reporting on the Relationship Between Foreign Ownership and Good Governance The report relates governance practices to profitability (including return on assets and return on equity), company Foreign Ownership Proportion size, company sector, board size, the number of non-execu- 27.3% tive directors, gender diversity, board member tenure, and so on. To perform this more sophisticated analysis, the Vietnam scorecard collected additional contextual data that are not 17.4% 18.2% usually part of a basic scorecard. 14.0% International comparisons International comparisons allow countries to see how well they compare to a regional or global peer group. Example 4.33 shows the results of an IDEA.net (the Institute of Direc- Top 25 CG Middle Bottom All Firms tors in East Asia Network)20 scorecard study. Scored 25 CG 25 CG Companies Scored Scored Companies Companies Source: Vietnam Corporate Governance Scorecard Report (2012). Example 4.34: Banking Sector Governance Practices Example 4.33: International Comparisons Using TOP 30: More likely from the banking sector Scorecards Country Average Score (Majority Listed-Firms) Year Philippines* Thailand Indonesia 2011 NA 77** NA Other Sectors 2010 NA 80 NA 17 2009 NA 82 66.50 Banking 2008 72 75 64.96 13 2007 65 NA NA 2006 54 71 61.26 2005 53 69 NA Source: J. Simanjuntak, IDEA.net Corporate Governance Scorecards (Indonesian Institute for Corporate Directorship, Vienna Scorecard Seminar Presentation, May 2012). Source: : Indonesian Institute for Corporate Directors (2013). 20 IDEA.net is an East Asian forum of institutes of directors that work together to develop their educational and service capacity. 48 Corporate Governance Scorecards Clearly, for a valid comparison between countries, each represented among the best governance performers, com- 4. The Process Step-by-Step country needs to be assessed using the same benchmark. pared to other sectors within the ASEAN region. IDEA.net used the OECD Principles as the basis for its score- card, because the principles were a recognized and accepted Reporting against a function-specific benchmark international benchmark. In addition to sector-specific analyses, reports may contain information on important governance functions, such as the Reporting against a sector-specific benchmark reporting and control environment. Disclosure is an important As noted in Section 4.3.2, “Choose the benchmark,” bench- governance function. The table in Example 4.35 shows an marks may be sector-specific or function-specific. A number analysis and report on the disclosure of governance practices. of scorecards have been used to examine the governance of This scoring used UNCTAD’s Guidance on Good Practices in specific sectors, including the Vietnam scorecard21 and a sur- Corporate Governance Disclosure as its benchmark. vey in Azerbaijan22 to assess the banking sector. The ASEAN scorecard has also been used for sector-specific assessments. The table provides a quick insight into the practices of 100 Example 4.34, on page 47, shows how banks are strongly emerging-market companies. While disclosure of financial Example 4.35: A Scorecard Analysis Using a Governance Disclosure Benchmark Top 10: Most prevalent disclosure No. of Bottom 10: Least prevalent No. of items reported by enterprises disclosure items reported by enterprises 100 emerging-market enterprises reporting 100 emerging-market enterprises reporting Financial and operating results 100 Decision-making processes for approving 53 related-party transactions Company objectives 100 Existence of plan of succession 51 Composition of board of directors 99 A code of ethics for the board and waiv- 49 (executives and non-executives) ers to the ethics code Governance structures, such as commit- 96 Duration of current auditors 45 tees and other mechanisms to prevent conflict of interest Nature, type, and elements of related- 94 Policy on “whistle blower” protection for 45 party transactions all employees Role and functions of the board of 93 Professional development and training 43 directors activities Composition and function of gover- 92 Process for appointment of internal 40 nance committee structures auditors and scope of work and respon- sibilities Critical accounting estimates 88 Anti-takeover measures 10 Risk management objectives, system, 88 Rotation of audit partners 10 and activities Ownership structure 87 Compensation policy for senior execu- 3 tives departing the firm as a result of a merger or acquisition Source: UNCTAD Secretariat, Review of the Implementation Status of Corporate Governance Disclosures: An Examination of Reporting Practices Among Large Enterprises in 10 Emerging Markets (TD/B/C.II/ISAR/CRP, 2008). http://unctad.org/en/Docs/c2isarcrp1_en.pdf. 21 IFC, Corporate Governance Scorecard for Vietnam 2012 (November 2012). http://www1.ifc.org/wps/wcm/connect/region__ext_content/regions/ east+asia+and+the+pacific/publications/corporate+governance+scorecard+for+vietnam+2012. 22 IFC and SECO, Bank Corporate Governance in Azerbaijan, Survey Results (Baku, Azerbaijan, 2005). http://www1.ifc.org/wps/wcm/connect/ 0a2d23004ad2fac88dedbdb94e6f4d75/bank%2B_en_web.pdf?MOD=AJPERES&CACHEID=0a2d23004ad2fac88dedbdb94e6f4d75q. Corporate Governance Scorecards 49 and operating results is near perfect, disclosure of the deci- 4. The Process Step-by-Step sion-making processes for approving related-party transac- tions is among the weakest.23 Since the potential for abuse Summarizing of related-party transactions is a critical concern in many and Presenting markets, weak disclosure practices in this area would be a clear cause for alarm. the Results 1. The simplest reports are those for individual Public disclosure companies. A company report can be the same One issue that deserves additional consideration is the spreadsheet that was used to collect data. Web- degree to which the information generated by scorecards is based reports are also quick and simple. However, made public. Getting companies to agree to participate in a automatically generated reports need to be analyzed, scorecard often means assuring them that the findings will understood, and presented by actual people. Num- remain confidential—or at least not identifiable. On the oth- bers are merely the basis for narrative reports with er hand, disclosure is clearly one of the best ways to induce recommendations. companies to effect change. 2. There are several other reporting options. Ag- gregated and more analytical reports describe country Public disclosure need not be made during the first iter- practices and provide international comparisons. ations of a scorecard. In the Philippines, the plan was to Rankings provide important information on compara- gradually increase disclosure over time. An often used tive performance. Sector-specific and function-specific solution is to identify only good governance performers. An reporting is also possible. awards program can provide incentives to both strong and 3. Reports should respond to the goals of the poor performers. scorecard project stakeholders. A clear vision of the problems that need to be solved—and the infor- mation needed to begin to address these problems— drives the scorecard project toward good reporting. 4. Reports should lead to action. Regardless of the type of report (company, sector-specific, func- tion-specific, or country), reports should drive toward action and make recommendations. 5. Proper consideration must be given to disclo- sure strategy. Public disclosure of information that can be associated with individual companies usually dissuades companies from participating in score- cards. However, companies usually accept disclosure of aggregated data and the identification of award winners. For the final summary report, see Corporate Governance Disclosure in Emerging Markets (UNCTAD, 2011). The report can be found at 23 http://unctad.org/en/Docs/diaeed2011d3_en.pdf. 50 Corporate Governance Scorecards 5: Measurable Outcomes 5. Measurable Outcomes This section focuses on the outcomes that were achieved as The company had a good reputation and carried no debt. a result of scorecard projects. It also provides information The benefits of a governance assessment were thus unclear. on how projects were conducted. It offers a more nuanced view of scorecard projects from the perspectives of: However, a number of factors persuaded Galenika Fitofar- 5.1 A company; macija to participate. The role of the local chamber of com- 5.2 A chamber of commerce; merce was important, because the company had always 5.3 An institute of directors; and enjoyed an excellent relationship with the local chamber 5.4 A stock exchange. and wanted to assist it with the project. Galenika Fitofar- macija also realized that the project might potentially be 5.1 A company useful in enhancing its image and improving relations with its minority shareholders. The case of Galenika Fitofarmacija24 Galenika Fitofarmacija, a Serbian company listed on the How it happened Belgrade Stock Exchange since 2001, manufactures The review resulted in targeted governance recommenda- herbicides, insecticides, fungicides, rodent poisons, and tions and the provision of some practical consulting advice. fertilizers. It is a company with 150 employees and sales of IFC provided additional value through a follow-on full cor- approximately $35 million in 2012. porate governance assessment that included the provision of sample governance policies and supporting documen- Background tation, such as sample articles of association, a dividend Founded in 1955, the company initially had almost 2,000 policy, and an executive remuneration policy, among others. shareholders. Later, it underwent a period of ownership Galenika Fitofarmacija could not use some of these items consolidation and now has approximately 1,400 share- because of conflicts with Serbian legislation, but others, holders, with 54 percent of the company held by four such as the dividend policy, were applicable with only minor individuals and many of the remaining shares held by modification. employees. Market capitalization in the beginning of 2014 was approximately $27 million. Another outcome of the IFC review was that Galenika Fitofarmacija appointed a fulltime corporate secretary to Rationale professionalize its governance. The company already had In 2010, the local chamber of commerce approached Galeni- a corporate secretary (corporate secretaries are required ka Fitofarmacija to participate in a scorecard project spon- under Serbian legislation); however, the corporate secretary sored by IFC. The benefit of participation, as presented to the was in reality the chief administration officer, who already company, was better access to the capital markets. Galenika fulfilled an array of functions. The appointment of a dedi- Fitofarmacija’s initial reaction was that it was not in need of cated corporate secretary focused attention on governance external capital and did not need to improve its governance. Transparency need not hurt companies “Many companies in transition economies fear transparency. Resistance to transparency is deeply embedded in our culture. But, our experience shows that fears regarding greater transparency are largely unsubstantiated.” - Slavica Pekovic, General Affairs Manager, Galenika Fitofarmacija, Serbia 24 Website address: http://www.fitofarmacija.rs/en-gb/po%C4%8Detna.aspx. Corporate Governance Scorecards 51 and improved Galenika Fitofarmacija’s capacity to improve Overall, the board felt that the scorecard process added 5. Measurable Outcomes 5. Measurable Outcomes its governance practices. Under the new corporate secre- tangible value to the enterprise. The board of directors also tary, governance policies were formalized and documented. felt that good governance would be a future selling point in any potential European expansion. Transparency improved dramatically. In just one year, Galenika Fitofarmacija moved from a position of weakness Summary of outcomes to one of strength in disclosure. It became the first Serbian As a result of its participation in the scorecard activity, company to make its dividend policy public. It also disclosed Galenika Fitofarmacija: its articles of incorporation, remuneration policies, its code • Appointed personnel to improve and maintain of corporate governance, the résumés of board members good governance practices; and top management, annual and semiannual financial • Developed written policies and procedures; statements, and information on general assemblies, includ- • Enhanced transparency toward all shareholders ing agenda items and minutes, on the Web. and the markets; • Created recognition of the company as a gover- Such practices brought the company close to international nance leader and a quality investment; levels of best practice. In recognition of Galenika Fitofar- • Developed commitment to good governance at macija’s commitment to good governance, the Belgrade board and executive levels; Stock Exchange included the company’s shares in the BELEX • Created better understanding of governance and 15 stock index, which drew a positive reaction from inves- how it affects company operations; tors. Shortly after its inclusion in the index, the company • Enhanced protection of minority shareholders; experienced a period of greater trading volume. • Provided a better understanding of governance strengths and weakness; and Board members and executives found that using the score- • Led to a roadmap for future improvement. card helped them better understand governance and how good governance can reduce the potential for procedural conflicts between controlling and minority shareholders. Scoring a Company 1. Closely held companies can benefit from bet- 3. Transparency helps even in small to medium ter governance. Closely held and small and medium enterprises. Greater transparency did not damage the enterprises (SMEs) are often skeptical about the value of business or reveal confidential business information to governance. Frequently they demand proof that good competitors. On the contrary, better transparency en- governance will somehow benefit them in the form of hanced the reputation of the company in the public’s eye. better financial or operational performance. Galenika 4. People make the difference. Better governance Fitofarmacija shows how small and medium companies is ultimately the result of competent and committed benefit from good governance. individuals. It is reasonable to look to chambers of 2. Good governance affects reputation. A key moti- commerce, consultants, or other institutions as sources vator for governance reform is its reputational impact. of inspiration. However, it ultimately comes down to Good governance sends important signals to clients, people. Without the commitment of key members of shareholders, and the markets. Galenika Fitofarmacija Galenika Fitofarmacija’s management team and board, wanted to be recognized as an European Union company, the potential for good governance would not have been not just as a local enterprise. realized. 52 Corporate Governance Scorecards 5.2 A chamber of commerce some 70 percent of the Guidance represents requirements 5. Measurable Outcomes found in the law. The Confecámaras scorecard thus had The case of Confecámaras elements of a compliance check in addition to a bench- Confecámaras25 is a network of 57 city chambers of com- marking against best practice. merce in 32 different regions in Colombia. It is the main force promoting good governance in family businesses in Its design included a simple methodology that businesses the country. The Confecámaras scorecard project: could apply with ease. The methodology was tested by dif- • Focuses on closely held and family-owned businesses; ferent interest groups, such as companies, consultants, and • Encourages action by paying consultants to students. It went through various iterations of development advise firms; and feedback before a definitive version was achieved. • Uses a Web-based scoring; • Permits self-administered scoring or assisted scoring; The scorecard also needed to have a Web-based platform • Employs an innovative marketing campaign; and for ease of use. And there had to be business logic behind • Is wide-reaching, having conducted scorings of the scoring. It used the Deming cycle, which corresponded 170 companies. well with best practices in business management systems, specifically for quality control and management. (See Example 4.15, on page 26.) Colombian businesses were Speaking clearly familiar with such quality control techniques as a result of to SMEs the application of ISO standards and certifications. “Companies have limited patience. You have to talk Rationale to them in a language they can understand. The goals of the Confecámaras scorecard project emanate Scorecards have to be to from the organization’s strategic goals: the point, easy to understand, and user-friendly.” • Help closely held and family firms become more - Francisco Prada, Head of the Corporate efficient and more effective; Governance Division, Confecámaras, Colombia • Improve the capacity of boards to act professionally; • Enhance the competence and capacity of management; • Contribute to the solution of family conflicts, A key factor that distinguishes chambers of commerce is that which are a major cause of business failures; the membership of most chambers is composed of closely • Improve the governance culture of Colombian held companies and family businesses. Unlike regulators, enterprises; who can require compliance, chambers must demonstrate to • Introduce clarity when family affairs and business their membership how good governance delivers benefits. affairs become intertwined; Background • Increase the transparency of firms; and The benchmark used for the Confecámaras scorecard was • Encourage compliance with basic elements of company law. Colombia’s Guidance for Closely Held and Family Businesses (the Guidance).26 Governance codes for closely held and How it happened family businesses differ from codes for listed companies; The program generated considerable public awareness and inter- they usually take the form of suggestions rather than rules, est in the use of the tool. Confecámaras conducted workshops and they focus on the governance challenges that are char- to inform and attract businesses, and it launched a sophisticated acteristic of closely held firms and family businesses. and wide-reaching media campaign to promote the website and to help companies understand the scoring concept. In the end, Even if closely held and family-owned business governance over 350 companies were scored. Companies were offered the codes are usually framed as voluntary guidance statements, services of consultants to do assisted scorings. After the scorings they tend to repeat some elements of company law. Thus were completed, Confecámaras provided subsidized consulting 25 La Confederación Colombiana de Cámaras de Comercio. 26 Guía Colombiana de Gobierno Corporativo para Sociedades Cerradas y de Familia (in Spanish). See http://www.supersociedades.gov.co/web/documentos/guia%20colombiana%20de%20gobierno%20corporativo.pdf. Corporate Governance Scorecards 53 services to develop remedial action plans. As a result, a large 5. Measurable Outcomes number of enterprises benefited from action plans and reforms. Paying attention to incentives Summary of outcomes “An astute use of incentives The Confecámaras scorecard project: contributed significantly to the success of the Philippine • Raised awareness of corporate governance issues; program. We listened to • Was used to assess over 350 companies; companies and made sure • Generated real-time information that allowed the scorecard was user-friendly and responded to their needs. Of course, the involvement of regulators was comparison of any company to a peer group; also important to encourage companies to participate.” • Created a network of consultants to advise - Jesus Estanislao, Chairman, PSAG Member, Philippine enterprises on their governance; Institute of Corporate Directors, the Philippines • Led to the development of numerous governance action plans at the company level, which in turn led to actual changes in governance practices in numerous enterprises; and 5.3 An institute of directors • Allowed generation of aggregated data on gov- The case of the Philippine Institute of ernance practices—broken down by sector, size, Corporate Directors region, and the quality of governance. The Philippine Institute of Corporate Directors (ICD) was founded in 1999 to promote governance reform in the Philippines. Some of the distinguishing characteristics of the Scoring by a Chamber ICD scorecard project are: of Commerce • Stock exchange and regulator support; • The wide package of training and learning activi- 1. Recognizing and responding to the problems ties offered by ICD that complemented the score- of closely held and family-owned businesses is card process; important. Companies need to feel that the score- • The reliance on self-evaluations and publicly avail- card helps them respond to their challenges and able data for scorings; problems. • Validation of data by university volunteers; and 2. Scorecards must be simple, be user-friendly, • The benefits and pitfalls of regional collaboration. and contain commonsense explanations of com- plex questions. In Colombia, Web-based scoring Background was found to respond well to entrepreneurs’ needs. It is important to understand the context for the ICD scorecard A user-friendly marketing campaign is also important project. In the mid-2000s, a wide variety of studies showed to generate awareness. that the Philippines was in urgent need of corporate gover- 3. Scorecards should provide immediate feed- nance reform. In 2007, CG Watch 200727 placed the Philip- back. Immediate feedback maintains company pines second to last in corporate governance among a group interest and helps the entrepreneur understand the of 11 Asian countries. In addition, the World Bank’s 2008 purpose and utility of the scorecard project. Doing Business report ranked the Philippines 144 out of 178 countries for the ease of doing business.28 The protecting in- 4. The assistance of external experts is funda- vestors portion of the Doing Business report (which tracks key mental. External experts not only make the filling governance indicators) ranked the Philippines 141 out of 178. in of the scorecard more effective, but they also An examination of nine Asian economies showed that rules provide the bridge between analysis and implemen- and regulations in the Philippines were broadly in line with tation. Expert advice is necessary to help businesses international standards.29 At the same time, it highlighted respond to the findings and implement reform. significant differences between rules and practices. Imple- 27 CLSA, in collaboration with the Asian Corporate Governance Forum (2007). https://www.clsa.com/assets/files/reports/CLSA_ACGA_CGWatch2007_Extract-2.pdf. 28 World Bank, Doing Business (2008). http://www.doingbusiness.org/reports/global-reports/doing-business-2008/. 29 S. Cheung and H. Jang, Scorecard on Corporate Governance in East Asia (2006). Available at SSRN: http://ssrn.com/abstract=964908 or http://dx.doi.org/10.2139/ssrn.964908. 54 Corporate Governance Scorecards mentation was the problem. In the Scorecard on Corporate information was to simulate the conditions under which 5. Measurable Outcomes Governance in East Asia, the Philippines ranked among the markets and investors would assess companies. In 2007, top in rules, while fund managers and analysts ranked it the approach was modified to allow companies to respond toward the bottom on practices. when they felt the public data did not fully reflect reality. It permitted companies to perform a preliminary self-evalu- Rationale ation, followed by a validation of the self-evaluation, con- The approach of the ICD has been summarized as “moving ducted by a team of students from the Ateneo Law School from talk to action.” Specific ICD goals were to: working under the direction of ICD. • Call the attention of companies to the importance of corporate governance; For ICD, the scorecard was part of a larger reform plan. It • Encourage companies to develop roadmaps for included the establishment of new institutions, including: governance reform; • The ICD Chairmen’s Circle, which brought together • Educate boards, executives, and the public on chairmen who were committed to better gover- good governance practices; nance practices; • Collect data on company practices; • A Circle for Corporate Secretaries; and • Use benchmarking analysis to develop tools and • A Professional Director’s Program designed to help training for members; and directors professionalize their governance practices. • Influence policymakers. Each of these initiatives was designed to help profession- How it happened alize governance and recognize companies and individuals Generating participation was difficult. Initially, scorings for performance above the norm. For each, the ICD score- were voluntary. To get more companies to participate, the card served as an important tool for assessing progress. ICD followed a three-pronged approach: 1. Use regulatory muscle; Over the years, firms reacted increasingly well to the score- 2. Adapt the scorecard and the scoring process to card project. Scorecards allowed companies to undertake better meet company needs; and a structured analysis of their governance practices. In 3. Allow strong performers to publicize their ranking many cases, this led to a new acceptance of governance and thus enjoy a reputational benefit. as an important aspect of the company’s operations. The The scoring was rolled out so that it was initially available impact went beyond raising awareness. Many companies only to regulators and subsequently to the public. In the developed roadmaps for governance reform and put new first years of the scorecard (2005–2006), companies were governance practices in place. reluctant to change. There was an indication that only about 20 percent of companies showed improvements in Finally, the number of enterprises participating in the scor- their governance practices. Reluctance was attributed to: ing (approximately 130) was a sufficiently large proportion • Powerful controlling shareholders; of the listed-company sector that the scorings provided a • A corporate culture that distrusted disclosure; and statistically relevant picture of the state of governance in • The cost of implementation. the Philippines as a whole. Armed with such evidence, ICD was better able to work with regulators and companies on ICD found new approaches that created better participation further reform efforts. and had a real impact on practices. In 2006, it achieved a broad consensus on how to alter the questionnaires Summary of outcomes and the scoring process. A key lesson was that permitting The ICD scorecard project: companies to comment on scorecard project design helps • Scored hundreds of listed companies, banks, and SOEs; ensure better support and participation. • Raised awareness of corporate governance and maintained public attention over a number of years; Initially, ICD conducted assessments based on publicly • Led to the development of governance action available data. The choice to rely on publicly available plans within companies; Corporate Governance Scorecards 55 • Led to measurable improvement in governance 5. Measurable Outcomes practices of companies over time; The cost of capital • Created incentives for better governance through as an argument for awards programs and disclosure; good governance • Led to the creation of institutions (clubs and discussion “The argument based on access to capital is groups) to perpetuate good governance practices; only theoretical for most • Improved the reputation of the country for its companies. A lot of corporate governance practices; and companies here have easy access to money. We work closely with them to help them understand • Generated information useful to policymakers the other benefits that good governance brings.” on the governance practices of listed companies, - Nebojsa Vukovic, CEO Deputy and Head of Listing, SOEs, and banks. Education and PR Department, Banja Luka Stock Exchange, Bosnia and Herzegovina Scoring by an 5.4 A stock exchange Institute of The case of the Banja Luka Stock Exchange Directors The Banja Luka Stock Exchange (BLSE)30 in Bosnia and Herzegovina illustrates how difficult it can be to implement 1. Incentives for businesses to participate are governance codes when incentives are missing. Despite legal important. ICD adapted its scorecard to make it requirements for companies to adopt their own governance user-friendly and responsive to company needs. codes, there were few economic incentives to comply. It also built awards programs and institutions that allowed companies to receive reputational benefits Background from good governance. As in many developing countries and transition economies, bank lending is the traditional source of finance in Bosnia 2. Mandatory participation in a scorecard is and Herzegovina. So improved access to capital was not a possible. ICD partnered with key public bodies, such compelling argument for better governance. To illustrate, as the Philippine Stock Exchange and the Securities Banja Luka had only one small initial public offering during and Exchange Commission, that made scorings the three years preceding the writing of this supplement. mandatory. Trading on the BLSE is almost purely secondary. 3. The Philippine scorecard was successful in part because the scorecard was part of a larger In 2006, the Securities Commission (SC)31 adopted corporate tactical plan. The scorecard was a component of a governance standards for joint-stock companies that were number of other projects, including clubs, recognition based on company law as well as the OECD Principles. These awards, seminars, and educational events. Togeth- standards were voluntary and were enforced on a “comply er, these programs reinforced the message of good or explain” basis. In 2009, a more forceful approach was tak- governance. en. The new company law required listed companies on the 4. Partnering with stakeholders is important as Official Market of the Banja Luka Exchange to adopt their a way to compensate for limited resources. The own codes of corporate governance or accept the SC code. costs of implementation can be high for a scorecard The scorecard was designed to track compliance with both project, particularly when it is conducted by nongov- company law and the recommendations of the SC code. ernmental organizations or emerging institutes of directors. For ICD, the partnership with Ateneo Law Rationale School was crucial for providing the human resourc- The rationale for the scorecard project was as follows: es necessary to validate the self-evaluations conduct- • Begin to measure corporate governance quantitatively; ed by the companies. • Help monitor compliance with stock exchange disclosure requirements; 30 Federation of Bosnia and Herzegovina has two stock exchanges: the Sarajevo Stock Exchange and the Banja Luka Stock Exchange. 31 The Securities Commission of Federation of Bosnia and Herzegovina, http://www.komvp.gov.ba/site/index.php/en/ 56 Corporate Governance Scorecards • Provide data to track the implementation and differences in perceptions can be even greater. Having a 5. Measurable Outcomes effectiveness of regulation and codes; small group that gathered and analyzed data helped create • Provide input into future market regulation and consistent assessments and made possible greater compa- revisions of governance codes; rability. Second, assessors were able to work with the same • Alert companies to the governance expectations of companies over a number of years and were thus able both the stock exchange and investors—and to poten- to build on past knowledge and to enhance their assess- tial future requirements; ments over time. Repeated contacts with the same compa- • Provide data that are useful for the creation of stock nies provided a much deeper understanding of the issues. exchange tiers based on the quality of governance; The total number of companies scored was limited to 16 in • Help guide the stock exchange in designing its 2012. Over the years, the figure ranged from 15 to 20. Those educational activities; and companies that were asked to volunteer for scoring tended to • Create incentives for change through media be the most relevant and largest companies on the BLSE. Small- pressure. er companies were not approached, since it was expected that their size would preclude the implementation of best-practice How it happened governance structures. To better track change over time, the The BLSE initially developed the scorecard in cooperation with BLSE retained essentially the same sample of companies. the LOK Institute for Economic Research and Organization from Sarajevo, with support from IFC and the SC. The score- Rather than rely on publicly available data, the BLSE project card later underwent adaptation to ensure conformity with gathered information directly from companies, contacting from changing law and codes as well as the gradually increasing one to four people within each company. Company secretaries levels of compliance. BLSE sought to minimize changes in the were usually the first stop for conducting the scorecard. Over scorecard over the years to ensure comparability over time. the years, consultations included other positions, such as the The BLSE implemented the scorecard and used it to evaluate a CFO, always making an effort to avoid repeatedly going back to group of 15–20 listed companies over several years. the same person, as a way to generate a varied perspective. The scorecard was a combination of requirements under The benefit of gathering information directly from the compa- company law and recommendations under the SC code of ny was that it was possible to involve companies themselves best practice. About 50 percent of the questions related to in the scoring. Under the alternative, using publicly available company law with the remainder being best practice. The data, there is less contact with company executives and there- inclusion of questions on company law was not because the fore fewer opportunities for interchange and education. BLSE used the scorecard as a legal compliance-checking mech- anism; in fact, compliance with the company law require- Scorings themselves were fairly rapid. BLSE staff made ap- ments of the scorecard was about 90 percent. The inclusion pointments and drove to the companies to fill in the ques- of company law items was to generate data to help the BLSE tionnaires. The scores for individual items were discussed assess compliance on an aggregate level and to illustrate to onsite with the company—though they were not subject to foreign investors requirements under the company law. negotiation. Over time, both the companies and the BLSE staff became adept at filling in the scorecards and were The BLSE scoring was an external assessment—neither a able, under good circumstances, to complete two or three self-assessment conducted by companies nor an assisted scorecards in a single day. In earlier years, meetings with self-assessment. Two BLSE staff members conducted the in- companies required more time and explanation. In subse- formation gathering and analysis. Over the years a number quent years, the process became much more efficient. of other groups assisted the BLSE in its scorings, including IFC staff and representatives of the Faculty of Economics at Repeated contacts with the companies allowed BLSE to the University of Banja Luka. However, the essential core of observe and guide change. For example, a scoring during analysts remained the same. the first year might require the explanation of a dividend policy. In the second year, a company might simply answer Having a small and stable core of people assigned to the that it had no dividend policy. In a following year it might project brought multiple benefits. First, different peo- report that such a policy was being discussed at the board ple naturally interpret the same data differently. Since level, and in a final year the company might report “yes,” many governance indicators are subject to interpretation, that a dividend policy had been adopted. Corporate Governance Scorecards 57 The findings of the scorings were confidential. Not even the • Improved public awareness of corporate governance; 5. Measurable Outcomes names of the companies that were scored were disclosed. • Generated useful information for the stock ex- However, the winner of the scoring was announced and change, regulators, and policymakers; and publicly recognized. Average scores were disclosed to the • Enhanced the reputation of the stock exchange public. Keeping information confidential was necessary to and the country as an investment destination. achieve better participation. Promising confidentiality was also useful in presenting the scoring as a tool to help com- panies rather than a tool to simply grade them. Scoring by a The scorings were accompanied by a number of educational Stock Exchange and awareness-building activities, which made scorecards more effective. For example, 20 seminars were conducted on 1. Closely held companies can benefit from better such issues as risk governance, control, audit, disclosure, and governance. Closely held and small and medium developing annual reports. BLSE made presentations, wrote ar- companies are often skeptical about the value of governance. Frequently they demand proof that good ticles, and posted information on webpages to share with the governance will somehow benefit them in the form of media. These complementary activities helped companies turn better financial or operational performance. the results of scorings—for example, weak internal control procedures—into action. Complementary activities demystified 2. Classic arguments in support of governance are not always relevant to companies. The justification good governance and made change easier and more realistic. for good governance needs to be recast to focus on Real change resulted. Because the Banja Luka scorecard the operational and performance benefits of good was conducted over a number of years, and by a core governance. group of the same people, it was possible to track gov- 3. Scorecards may include items that measure ernance over time. Both the numbers and the qualitative compliance with law. However, these should be impressions coming from ongoing contact with companies classified separately from the “comply or explain” confirmed that practices improved. requirements typically found in a best-practice code. A clear distinction should be made between voluntary A sense of competition arose between companies and and mandatory. Scorecards are not principally de- provided incentives for improvement. Companies value signed as tools for legal enforcement and should not their reputation and are concerned about the reputational be the basis for sanction. impact of the scorecards. Though final scores were not 4. A small, stable group of assessors can enhance revealed, companies were generally aware through informal the quality and uniformity of assessments. Con- contacts how their performance compared to others. tinuing contact between a limited group of assessors and the company also permits the development of The process educated companies and executives on gover- constructive relations with firms. nance issues and raised their awareness of how governance 5. Repeated scoring generates better information affects firm performance and operations. Articles also ap- and better outcomes. The repetition of scorings per- peared in the press. Though indirect, information generated mits an ever deeper understanding of the company. from the scorings provided feedback that was useful for the It also helps educate the company and develop trust development of new regulation. that is useful when the company is ready to accept advice. Also, scorings become considerably more Summary of outcomes efficient with repetition over time. The Banja Luka scorecard effort produced the following 6. Confidentiality is important in getting compa- outcomes: nies to participate. Though disclosure can have a • Measured changes in governance practices among powerful impact on company practices, it can be han- listed companies over time; dled in ways that may make it more comfortable for • Created collaborative relationships between the companies to participate. Performance incentives can stock exchange and listed companies; be produced by awards and recognition programs. • Created incentives to improve governance through competition between companies; 58 Corporate Governance Scorecards 6: Building on Scorecards 6. Building on Scorecards Scorecards have knock-on effects “Scorecards are not the end of the process. Actually, they’re just a beginning. They lead us to the next step: other corporate governance activities, better tools, codes, and guidelines.” - Bistra Boeva, Member, Bulgarian Corporate Governance Commission, PSAG Member Reform is never a static process. Scorecard projects open companies. For many companies, scorecards are often a new opportunities for future work and evolution. The most first taste of corporate governance. Once they understand common forms are: and feel comfortable with the issues, companies often want • A change in ownership of the scorecard project; to consider further steps, which requires more in-depth • In-depth assessments of companies; and analyses and tailored responses. Scorecards may open the • Knock-on projects. way for advisory services and the use of additional tools to assess governance practices. The first form—change in ownership of the scorecard proj- ect—is an intentional outcome when IFC is the owner of The third—knock-on projects—push the good governance a scorecard project. IFC often takes the lead as an initiator agenda ahead. For example, scorecards can lead to other or even the owner, because local capacity is limited. Once governance activities, including awards programs, new tools the first iteration of a scorecard project is completed, local for assessing governance, codes and guidelines, and new institutions are typically interested in carrying on the work techniques for working with companies. (See Example 6.1.) themselves. They become owners. Another interesting knock-on project is the development The second—in-depth assessments of companies—amounts of corporate governance indexes for stock exchanges. to further work on corporate governance with individual (See Example 6.2 on page 59.) Example 6.1: When the Indonesian Institute for Corporate Director- Building on Scorecard Projects ship was given the responsibility to conduct ASEAN The Vietnamese scorecard project was scorecards in Indonesia for publicly listed compa- initially conceived as an IFC project to promote the nies, the results provided important feedback to the implementation of good corporate governance Financial Service Authority of Indonesia. It used the principles in Vietnam and to provide a framework for information in formulating a corporate governance future policy discussions and corporate governance roadmap for Indonesia and for the revision of rules development. It was intended to raise awareness and and regulations in the Indonesian capital market and educate regulators, companies, investors, and the banking sector. marketplace. It was to provide a common metric and In FYR Macedonia, a scorecard for listed companies language on corporate governance in Vietnam. The was developed by the Macedonian Institute of scorecard proved to be highly effective in achieving Directors. This was followed by a scorecard devel- these goals. In Vietnam, the initial scorecard project oped by the Macedonian Stock Exchange to promote led to an eventual change in local listing rules. the benefits of listing for closely held companies. The scorecard for the closely held companies in due (Continued on page 59 ) Corporate Governance Scorecards 59 6. Building on Scorecards (Continued from page 58) Example 6.2: Example 6.1: Building on Scorecard Projects Corporate Governance Indexes and Listing Tiers course became one of the primary tools for the Macedonian Institute of Directors to provide services One of the first listing tiers based on corporate governance to family-owned businesses. Counterintuitively, the was developed for the Novo Mercado in Brazil. More and development of the scorecard for listed companies more, indexes and listing tiers are being created for emerg- was initiated by the Institute of Directors, and its ing markets. Indexes can be built based on geographical owner later became the stock exchange, and the location, capitalization, sector, or any other measurable situation was reversed for family-owned businesses. characteristic of companies. Increasingly, indexes are being The work of the Institute of Directors was also trans- developed based on the quality of corporate governance. lated into tailored services to companies. In one case, In China, the Shanghai Stock Exchange developed its SSE the scorecard results helped the Institute of Directors Corporate Governance Index. The Borsa Istanbul Stock develop tailored training services for Fersped, a diver- Exchange has its Corporate Governance Index, and the sified logistics company from Skopje.a The scorecard Moscow Stock Exchange reports plans to introduce a and the subsequent training led to the development corporate governance index. In Vietnam, the scorecard of recommendations to improve the governance led to the introduction of two stock exchange indexes structures and policies of the company. These recom- (HNX 30 and HOSE 30) that use governance practices as mendations were currenlty being implemented . a criterion for inclusion. In Bulgaria, the scorecard project led to the development of the Bulgarian Stock Exchange Award plans based on scorecards have been orga- Corporate Governance Index. nized in Balkan countries, Indonesia, a number of In each case, a stock exchange index uses a form of MENA countries, the Philippines, and others. In the scorecard to assess the companies that will go into Philippines, the scorecard project became the basis the index. The development of a scoring methodolo- for regular conferences and led to the formation of gy is thus an important first step toward the develop- business groups, or “circles,” within the Institute of ment of a stock exchange index. Corporate Directors to meet regularly and discuss These indexes, or tiers, may be viewed by investors governance issues. The Philippine scorecard for listed as having less governance risk and potentially better companies also encouraged the central bank and the performance. From the perspective of companies, Ministry of Finance to introduce an SOE scorecard. inclusion within an index may imply better capacity to After conducting a scorecard project in Bulgaria, raise financing and a potentially lower cost of capital. the National Corporate Governance Commission eventually undertook a number of related activities to promote the use of the Bulgarian code. These ac- tivities included awards designed to recognize good corporate performers, a review and revision of the original code of governance, and the development of a governance index for the stock exchange. a. For more information on Fersped, see http://www.fersped.com.mk/default.aspx?Lan=EN. Launch of the Azerbaijan Corporate Governance Standards, Baku, 2011 60 Corporate Governance Scorecards 6. Building on Scorecards Building on Scorecards 1. The story does not end with scorecard projects. 4. The initiators and owners of the scorecard project Scorecard projects generally lead to change—in the insti- should be alert to other opportunities. Initiators and tutions that take ownership of the scorecard as well as in owners should not be taken by surprise. They should be the form of additional knock-on projects. aware of the possible options that a scorecard project 2. Scorecard owners should be aware of potential can open for further corporate governance work, such opportunities to engage directly with companies. as awards programs, business forums for discussion, Once companies have undergone an initial scoring, they academic research, and the development of corporate are likely to understand the benefits of good governance governance indexes. better and may request further assistance. 5. Governance indexes are becoming more and more 3. A shift of scorecard ownership to local partners is common. They are increasingly present in emerging common. Ownership by local institutions is an opportu- markets. nity to create sustainable local support for governance reform. It needs to be encouraged. ADDITIONAL RESOURCES: Corporate governance indexes Aguilera, R. V., and K. A. Desender. 2012. Challenges Lei, L. (no date). The determinants of corporate gov- in the measuring of comparative corporate gover- ernance and the link between corporate governance nance: A review of the main indices; in Research and performance: Evidence from the U.K. using a cor- Methodology in Strategy and Management, Vol. 7, porate governance scorecard. Thesis Proposal, School C. L. Wang, D. J. Ketchen, and D. D. Bergh, eds. (Em- of Business, National University of Singapore. erald, Forthcoming). Available at SSRN: http://ssrn. Martynova, M., and L. Renneboog. 2010. A corpo- com/abstract=1995615. rate governance index: Convergence and diversity of Bhagat, S., and B. Bolton. 2006. Board ownership national corporate governance regulations. Working and corporate governance indices. University of Col- Paper No. 2010-17, Tilburg University. orado at Boulder Working Paper. http://www.law. Pekcan, Y., S. Atan, and C. Sivacioglu. 2012. Cor- yale.edu/documents/pdf/SanjaiBhagatPaper.pdf. porate governance as a quantitative indicator and a Bhagat, S., B. Bolton, and R. Romano. 2007. The study on Istanbul Stock Exchange Corporate Gover- promise and peril of corporate governance indices. nance Index in Turkey. Journal of Business, Economics Yale Law School, John M. Olin Center for Studies in & Finance 1 (1): 77–91. Law, Economics, and Public Policy, Research Paper Sarkar, J., S. Sarkar, and K. Sen. 2012. A corporate No. 367, ECGI - Law Working Paper No. 89/2007. governance index for large listed companies in India. Grimminger, D., and P. Di Bendetta. 2013. Raising the SSRN Working Paper Series. http://papers.ssrn.com/ Bar on Corporate Governance: A Study of Eight Stock sol3/papers.cfm?abstract_id=2055091. Exchange Indices. Washington, D.C.: World Bank and IFC. Corporate Governance Scorecards 61 7. Annexes 7. Annexes 7.1 Sample indicators Adaptation may also require the addition of detail. So while the OECD Principles contain no discussion of dividend The sample indicators in Table 7.1 were developed from policy, dividends are a profit distribution that would fall the OECD Principles of Corporate Governance (2004).32 The under the principle related to shareholders sharing in corpo- OECD Principles are, in fact, a framework code; that is, they rate profits (OECD II.A.6). Indicators that might be used to are a distillation of good policy that is addressed principally to measure the implementation of this principle could be the governments to guide them on how to structure their legal disclosure of a clear dividend policy and timely payment of and regulatory frameworks. They are not, first and foremost, dividends after they have been declared. Further adapta- a code addressed to companies. As a consequence they need tions of the OECD Principles are illustrated in the Vietnam to be adapted for the purposes of a company scorecard. scorecard in Annex 7.2. Adaptation means the exclusion of certain principles and Table 7.1 summarizes those parts of the OECD Principles recommendations that are addressed to governments (and not that are addressed to companies and that are best suited to companies). For example, Chapter I of the OECD Principles, for the development of indicators for a company scorecard. which addresses government’s responsibility for establishing a sound governance framework, is not included in the table. TABLE 7.1: SAMPLE INDICATORS Categories and Indicators OECD Reference 1. Shareholders rights II 1.1. Basic shareholder rights are ensured such that shareholders enjoy: II.A. 1.1.1. Secure ownership registration II.A.1 1.1.2. Ability to convey or transfer shares II.A.2 1.1.3. Ability to obtain relevant information on a timely basis (see Section 4. on Transparency and II.A.3 Disclosure, below) 1.1.4. Effective participation and voting in shareholder meetings II.A.4 1.1.5. Right to elect the board members II.A.5 1.1.6. Sharing in corporate profits II.A.6 1.2. Shareholders participate in and are informed on basic decisions: II.B 1.2.1. Amendments to governing documents II.B.1 1.2.2. New share authorization II.B.2 1.2.3. Extraordinary transactions II.B.3 1.3. Shareholders can participate effectively and vote in the GSM (general shareholder meeting) II.C 1.3.1. Sufficient and timely information is available on the GSM II.C.1 1.3.2. Shareholders can question the board on fundamental issues II.C.2 1.3.3. Shareholder input on certain key decisions is possible II.C.3 1.3.4. Voting in absentia is permitted II.C.4 1.4. Control structures that are not proportional to share ownership are disclosed II.D 1.5. The control structure of the enterprise is transparent and is allowed to change based on the needs of II.E the shareholders 32 OECD, OECD Principles of Corporate Governance (2004). http://www.oecd.org/corporate/. 62 Corporate Governance Scorecards TABLE 7.1: SAMPLE INDICATORS continued 7. Annexes Categories and Indicators OECD Reference 1.5.1. Rules for change of control exist and are transparent to all shareholders II.E.1 1.5.2. Share transactions occur at transparent prices and under fair conditions for all shareholders II.E.1 1.5.3. Anti-takeover devices are not used to shield management from accountability II.E.2 1.6. Ownership rights of all shareholders are facilitated II.F 1.7. Shareholders are allowed to consult with each other on issues concerning their interest II.G 2. Minority shareholder protection and equitable treatment of shareholders III 2.1. Shareholders within the same class are treated equally III.A. 2.1.1. Within a class, all shares carry the same rights III.A.1 2.1.2. Investors have the right to information on their rights before purchase III.A.1 2.1.3. Changes in rights subject to approval of shareholders of that class III.A.1 2.1.4. Minority shareholders should be protected from abuse by controlling shareholders III.A.2 2.1.5. Minority shareholders should have recourse to effective redress III.A.2 2.1.6. Beneficial share owners have a right to instruct custodians or nominees on how to vote III.A.3 2.1.7. There should be no impediments to cross-border voting III.A.4 2.1.8. Shareholder meeting procedures should ensure equitable treatment of all shareholders III.A.5 2.1.9. Shareholder meeting procedures should not make it unduly difficult to vote III.A.5 2.2. Insider trading and abusive self-dealing are prohibited III.B 2.3. Members of the board and key executives disclose any material interest in any matter or transaction III.C with the company 3. Stakeholders in governance IV 3.1. Legal and mutually established rights of stakeholders are respected IV.A 3.2. Performance-enhancing mechanisms for employee participation are permitted IV.C 3.3. Stakeholders have a right to access to timely, relevant, and reliable information on IV.D governance issues in which they have a right to participate 3.4. Stakeholders and in particular employees have the right to whistle blow to the board without risk of IV.E retribution 4. Transparency and disclosure V 4.1. Material information is disclosed on: V.A 4.1.1. Financial and operating results V.A.1 4.1.2. Company objectives V.A.2 4.1.3. Major share ownership and voting rights V.A.3 4.1.4. Remuneration policy for board members and executives V.A.4 4.1.5. Qualifications of board members V.A.4 4.1.6. Selection process of board members V.A.4 4.1.7. Other board memberships V.A.4 4.1.8. Independence of board members V.A.4 4.1.9. Related-party transactions V.A.5 4.1.10 Foreseeable risks V.A.6 4.1.11. Issues regarding employees and other stakeholders V.A.7 4.1.12. Governance structures V.A.8 4.1.13. Governance policies and governance codes V.A.8 Corporate Governance Scorecards 63 TABLE 7.1: SAMPLE INDICATORS continued 7. Annexes Categories and Indicators OECD Reference 4.1.14. Process by which governance codes or policies are implemented V.A.8 4.2. High-quality standards for financial reporting are used V.B 4.3. High-quality standards of nonfinancial reporting are used V.B 4.4. High-quality standards of audit are used OECD 1999 IV.B 4.5. An independent external audit is conducted of the financial reports V.C 4.6. The independent external auditor is qualified and competent V.C 4.7. The independent external auditor is accountable to shareholders V.D 4.8. The independent external auditor exercises due professional care V.D 4.9. The dissemination of relevant information to shareholders is timely, cost-effective, and equitable V.E 5. The board of directors VI. 5.1. Board members act on a fully informed basis VI.A 5.2. Board members exercise duties of loyalty and care VI.A 5.3. Board members act in the interest of the company and its shareholders VI.A 5.4. Board members treat all shareholders fairly VI.B 5.5. The board applies high ethical standards VI.C 5.6. The board takes into account the interests of other stakeholders VI.C 5.7. The board fulfils these key functions: VI.D 5.7.1. Reviews and guides strategy, major plans, risk policy, annual budgets VI.D.1 5.7.2. Sets performance objectives and monitors implementation VI.D.1 5.7.3. Oversees major expenditures, acquisitions, and divestitures VI.D.1 5.7.4. Monitors and improves corporate governance practices VI.D.2 5.7.5. Selects and replaces key executives VI.D.3 5.7.6. Monitors executive performance VI.D.3 5.7.7. Develops incentive compensation plans for executives VI.D.3, 4 5.7.8. Ensures formal and transparent board member nomination VI.D.5 5.7.9. Monitors and manages potential conflicts of interest VI.D.6 5.7.10. Monitors and manages related-party transactions VI.D.6 5.7.11. Ensures the integrity of the company’s financial reporting VI.D.7 5.7.12. Ensures the integrity and independence of the external audit VI.D.7 5.7.13. Ensures the integrity of the company’s systems for internal control, including risk manage- VI.D.7 ment and compliance 5.8. Oversees the process of disclosure and communications VI.D.8 5.9. The board is capable of objective independent judgment VI.E 5.9.10. Independent board members should oversee issues where there is a potential conflict of interest VI.E.1 (financial reporting, controls, related-party transactions, nominations, and remuneration) 5.10. Committee mandates, composition, and procedures should be well-defined and disclosed VI.E.2 5.11. Board members should be committed to their responsibilities VI.E.3 5.12. Board members have access to accurate and relevant information to fulfil their roles on a timely basis 64 Corporate Governance Scorecards 7.2 Sample checklist scorecard A.12 Are AGM policies and processes in the past two 7. Annexes years (notices and information) sufficient for share- The following checklist is an example of an adaptation of holders to evaluate individual board nominations? the OECD Principles that was used to conduct scorings in Vietnam.33 Though the structure follows the OECD Principles A.13 Do shareholders effectively vote (receive information closely, the Vietnam scorecard includes additional detailed on, make their views known, and vote) on board indicators where the OECD Principles are either general or and key executive remuneration annually? silent, or where Vietnamese practices require a different A.14 Did the external auditor attend the AGM and ex- approach. The questions are supported by explanatory press his or her views on audit issues? criteria to help assessors determine if the area is “observed,” A.15 Did the shareholders effectively approve the ap- “partially observed,” or “inadequate or not observed.” pointment of the external auditor? A. Rights of shareholders (Scorecard weighting: 15%) A.16 Did information provided to shareholders for the appointment of the external auditor include mention OECD Principle II: The corporate governance frame- of auditor independence? work should protect and facilitate the exercise of shareholder’s rights. A.17 Is a full report provided to the AGM on the board of directors’ performance? A.1 Are the voting rights of shareholders clear and unequivocal? A.18 Is a full report provided to the AGM on the supervi- sory board’s performance? A.2 Does the company offer ownership rights, more than basic rights (voting rights, right to freely trans- A.19 Did the AGM notices include explicit information on ac- fer shares, and right to timely information)? cessible systems for proxy voting and voting in absentia? A.3 Do shareholders have the right to nominate and A.20 Did AGM meeting minutes and the company remove members of the board of directors and the website disclose individual resolutions, with voting supervisory board? results for each agenda item? A.4 Are the dividend and dividend payment policies A.21 Are there additional items included in the AGM min- transparent? utes not included on the original meeting notice? A.5 Do shareholders have the right to approve major corporate transactions (mergers, acquisitions, divest- B. Equitable treatment of shareholders (Scorecard ments, and/or takeovers)? weighting: 20%) A.6 Was the AGM (annual general meeting) held within OECD Principle III: The corporate governance frame- four months of the end of the fiscal year? work should ensure the equitable treatment of all A.7 Are there adequate company systems for share- shareholders, including minority and foreign share- holder attendance at the AGM? holders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. A.8 Are the AGM shareholder meeting notices effective? B.1 Does each share in the same class of shares have the A.9 Are the policies and processes for shareholders to same rights? ask questions at the AGM clear, and is time provided for on the agenda? B.2 Does the company have a “one share, one vote” policy? A.10 Does AGM information of the past year record op- B.3 Can minority shareholders affect the composition of portunities for shareholders to ask questions? the board? A.11 Was the attendance of the chairman/head of super- B.4 Are directors required to be re-nominated and visory board/other board members/CEO at the last re-elected at regular intervals? AGM evident? B.5 Is cross-border voting facilitated by the company? 33 IFC, Corporate Governance Scorecard for Vietnam 2012 (November 2012). http://www1.ifc.org/wps/wcm/connect/region__ext_content/regions/ east+asia+and+the+pacific/publications/corporate+governance+scorecard+for+vietnam+2012. Corporate Governance Scorecards 65 B.6 Is the company group structure clearly and transpar- C.3 Have mechanisms been introduced that facilitate 7. Annexes ently described? communication to board members of illegal and B.7 Is there evidence of structures/mechanisms that have unethical company practices? the potential to violate minority shareholder rights? C.4 Do company policies/information recognize the B.8 Are there mechanisms that provide effective redress safety and welfare of employees? for complaints of shareholders? C.5 Do company policies/information mention the envi- B.9 Do shareholders have the right to approve funda- ronment? mental company changes? C.6 Are stakeholders able to directly communicate on B.10 How many days before the AGM were the meeting company performance with the board of directors, notices sent out? board of management, and supervisory board? B.11 Can a small shareholder place an item on the AGM C.7 Is there some company recognition of its obligations agenda? to the broader community? B.12 Are there company policies in place that effective- C.8 Is there a clear framework for the enforcement of ly prohibit the misuse of information by directors, creditors’ rights? management, and staff? B.13 Were there any known cases of insider trading D. Disclosure and transparency (Scorecard weighting: 30%) involving the company directors, management, or OECD Principle V: The corporate governance frame- staff in the past year? work should ensure that timely and accurate disclo- B.14 Are there effective company policies for the company sure is made on all material matters regarding the to approve relevant RPTs (related-party transactions)? corporation, including the financial situation, perfor- B.15 For large company transactions, does company mance, ownership, and governance of the company. policy require the provision of information to explain D.1 Is there evidence that the concept of “material infor- RPTs and require shareholder approval of RPTs above mation” is well-understood by the company? a certain threshold? D.2 Does the annual report give a full and clear picture B.16 Were there cases of noncompliance with requirements of the financial performance of the company? relating to related-party transactions in the past year? D.3 Are the financial reports disclosed in a timely manner? B.17 How does the board deal with declarations of con- D.4 Did the company provide quarterly and semiannual flict of interest? reports in the past year? B.18 Does the company have an effective investor rela- D.5 Do the CEO and chief accountant certify the annual tions/information policy and program? financial statements, audited and unaudited? D.6 Does the company use internationally accepted C. Role of stakeholders (Scorecard weighting: 5%) accounting standards? OECD Principle IV: Recognize the rights of stakehold- D.7 Does the annual report include a full and clear pic- ers established in law or mutual agreements and ture of company operations, its competitive position, foster co-operation with stakeholders. and other nonfinancial matters? C.1 Does the company recognize company obligations D.8 Are details of current largest shareholdings provided? (in law and agreements) to key stakeholders and D.9 Are directors’ (board of directors and supervisory engage them? board) shareholdings disclosed? C.2 Does the company provide a range of perfor- D.10 Are senior management’s shareholdings disclosed? mance-enhancing employee benefits to align com- D.11 Are the company shares broadly held? pany and employee interests? 66 Corporate Governance Scorecards D.12 In the annual report, is board member experience D.31 Does the company have a policy and process to ensure 7. Annexes disclosed? continuous ad hoc disclosure of important matters? D.13 In the annual report, are non-executive directors D.32 Does the company provide easy public access to and specifically identified? contact details for the investor relations person or unit? D.14 Does the annual report specifically identify “inde- pendent” directors? E. Responsibilities of the board (Scorecard weighting: 30%) D.15 Does the annual report disclose board of directors/ OECD Principle VI: The corporate governance frame- supervisory board meeting attendance of individual work should ensure the strategic guidance of the directors? company, the effective monitoring of management D.16 Is the basis (level and mix) of board remuneration by the board, and the board’s accountability to the disclosed in the annual report? company and the shareholders. D.17 Does the latest annual report identify the company’s E.1 Has the company promulgated good corporate gov- main executives and their responsibilities? ernance guidelines? D.18 Does the latest annual report disclose the remunera- E.2 Does the company have clear company values and tion of key executives? direction, led by the board of directors? D.19 Does the company have a policy requiring disclosure E.3 Does company corporate governance guidance of related-party transactions? disclose the material transactions that must be ap- D.20 Are statements requesting directors to report their proved by the board? transactions in company shares evident? E.4 Is the chairman’s role at board meetings clearly described D.21 Does the annual report explain foreseeable in the company corporate governance guidance? business risks? E.5 Is the chairman a non-executive director? D.22 Does the annual report include a separate, quality E.6 Is the chairman “independent” of the company? corporate governance report? E.7 How many board of directors members are D.23 Does the company have an annual external audit non-executive? undertaken by an authorized auditor? E.8 What percentage of the board of directors is D.24 Do AGM and/or company documents refer to the “independent”? “independence” of the external auditor? E.9 Is there evidence of the board of directors being a D.25 If a change of auditor is noted in the past two years, “balanced board”? were the reasons for the change disclosed? E.10 Does company information and director information D.26 Is there a policy that prevents the external auditor clearly state/disclose the number of board seats each from undertaking non-audit services? director holds? D.27 Is the external auditor’s opinion publicly disclosed? E.11 Does the company have a board induction policy D.28 Have there been any accounting/audit qualifications and program for new appointments to the board of or queries related to the financial statements in the directors and supervisory board? past two years? E.12 Do the board of directors and supervisory board D.29 Does the company provide a variety of communica- undertake an annual self-assessment/evaluation? tion methods? E.13 Did board of directors and supervisory board mem- D.30 Is the information on the company website compre- bers and CEO participate in corporate governance hensive and accessible? training and report this? E.14 How often did the board of directors meet in the past year? Corporate Governance Scorecards 67 E.15 How often did the supervisory board meet in the E.24 Do company documents cover/explain internal con- 7. Annexes past year? trol structures, policies, and practices? E.16 Are there mechanisms in place to ensure that board E.25 Does the internal audit function provide an indepen- members receive adequate notification of the board dent evaluation of the internal control process and meeting for all board of directors/supervisory board risk management of the company annually? meetings? E.26 Does the company report on the activities of internal au- E.17 Do the board of directors and supervisory board dit in its annual report and/or supervisory board report? keep meeting minutes and resolution records of E.27 Is there evidence of the supervisory board oversight each meeting? of the external auditor? E.18 Has the board of directors established board of di- E.28 Is there evidence of the supervisory board’s review and rectors committees (audit committee, remuneration approval of the annual report and financial statements? committee, and human resource committee) or a E.29 Does the supervisory board report include discussion designated board of directors person? of the supervisory board supervision of operation- E.19 Is there evidence that the board of directors receives al and financial conditions of the company and regular management reports on the company activi- performance of the board of directors, management ties and its financial position? board, and executive officers? E.20 Is there evidence that the board of directors is responsi- E.30 Does the supervisory board report include reference ble for the strategy and business plans of the company? to the supervisory board’s performance, issues dis- E.21 Does the board of directors have responsibility for and cussed, and decisions taken? oversee the risk management system of the company? E.31 Does the supervisory board report on its evaluation of E.22 Do the board of directors/supervisory board assess the coordination between the supervisory board, board the CEO and key executives annually? of directors, management board, and shareholders? E.23 Was there any evidence of noncompliance of the company over the last year? Most companies are closely held or family-owned businesses and face their own governance challenges. 68 Corporate Governance Scorecards 7.3 Sample spreadsheet scorecard for family-owned businesses 7. Annexes The OECD Principles refer primarily to listed companies. Yet most companies are closely held or family-owned businesses, which face their own specific governance challenges. The scorecard example in Table 7.2 is for family-owned businesses. It is a spreadsheet program, which allows easy data collection and permits an immediate calculation of results. TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS Name of Company _______________ Country _________________________ Date ____________________________ OVERALL SCORE 0% (3) (4) (1) (2) Score per Comments & Remarks; Grading Weight- category Source of Information; (1–10) ing % (in %) Recommendations 1. Commitment to Corporate Governance (CG) 20 FOUNDATIONS: the basic formalities of CG are in SOURCES OF INFORMATION: place – the company’s charter (or similar document or documents) and founding documents provide for appropriate CG structures and processes (which reflect COMMENTS & REMARKS: the realities in the company, rather than being based 1.1. 0 30 0% solely on statutory forms, etc.); the company’s board shows leadership and commitment to CG and sets SUMMARY an appropriate “tone at the top”; management is RECOMMENDATIONS: committed to good CG practices; CG is observed in substance (no form over substance). POLICIES AND FUNCTIONS: key CG policies and SOURCES OF INFORMATION: functions have been established and are func- tioning – the company has a written CG code, code of conduct/ethics, key policies/rulebooks on the board COMMENTS & REMARKS: and treatment of shareholders; it has appointed a company secretary and/or CG officer/board committee 1.2. 0 30 0% SUMMARY that monitors compliance with such policies, rule- books, and codes and coordinates periodic reviews RECOMMENDATIONS: of key CG-related policies and practices; board and management are familiar with applicable CG codes and relevant CG best practices; the company aligns its activities and operations with these standards. CG IMPROVEMENT PLAN: the company has SOURCES OF INFORMATION: developed/ implemented plans for improvements to its CG - a senior member of the company is tasked with leading on the plan; these plans comprise analysis COMMENTS & REMARKS: 1.3. of the strengths and weaknesses of the company’s 0 20 0% corporate governance; include action points, proposed timings, and allocation of responsibilities; plans have SUMMARY been approved by the board, and implementation is RECOMMENDATIONS: monitored by management and the board. COMMUNICATION OF CG ISSUES WITH STAKE- SOURCES OF INFORMATION: HOLDERS - The company appropriately commu- nicates its CG-related activities to stakeholders – The company periodically discloses to shareholders COMMENTS & REMARKS: 1.4. (and other stakeholders) its CG code/other key bylaws/ 0 20 0% policies and reports alignment with national CG code/ relevant CG best practices along the lines of “comply SUMMARY or explain.” RECOMMENDATIONS:       100 0%   Corporate Governance Scorecards 69 TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes (3) (4) (1) (2) Score per Comments & Remarks; Grading Weight- category Source of Information; (1–10) ing % (in %) Recommendations 2. Family Governance 15 AWARENESS: the members of the family owning SOURCES OF INFORMATION: the family business have taken time to consider the strengths, weaknesses, and challenges of the family business and how family governance can be of COMMENTS & REMARKS: benefit – the family has considered the strengths of fami- ly-owned businesses generally (such as high commitment, knowledge continuity, reliability, pride associated with the SUMMARY 2.1. 0 25 0% RECOMMENDATIONS: business, higher levels of trust) and in relation to the com- pany; as well as corresponding weaknesses and challenges (complicated family issues, informality, lack of discipline, effects on the company of potential disputes, non-family members’ perception, transparency, succession issues); the company has agreed on principles of strengthening family governance and addressing corresponding challenges. FORMALIZATION: the family has formalized its SOURCES OF INFORMATION: family governance framework with proper board and management structures – family members have moved away from assuming multiple roles and responsi- COMMENTS & REMARKS: bilities in the family business; clear distinctions have been 2.2. 0 20 0% established between owners (shareholders), managers (senior management), directors (board of directors), fam- SUMMARY ily members (family and its institutions); CEO and senior RECOMMENDATIONS: management succession has been addressed through family documents, having family legitimacy. CONSTITUTION: the family has adopted a family SOURCES OF INFORMATION: constitution or protocol addressing: family meetings, family assembly, family council, and other institutions (such as education committee, share redemption commit- COMMENTS & REMARKS: tee, career planning/succession committee); established family structures to communicate family values, mission, and long-term vision to all family members; keep family SUMMARY 2.3. 0 25 0% RECOMMENDATIONS: members informed on major business accomplishments and issues; communicate rules/decisions that might affect family members’ employment and succession of key position, dividends, and other benefits; establish formal communication channels that allow family members to share ideas, aspirations, issues; allow family members to come together and make necessary decisions. POLICIES: the family has developed key family SOURCES OF INFORMATION: governance policies to regulate family-member and non-family-member employment (together with the corresponding HR issues - recruitment, COMMENTS & REMARKS: 2.4. promotion, employment termination); family direc- 0 20 0% torships, succession planning, family and non-family share ownership, capital allocation, dispute resolution, SUMMARY transfer of shares. RECOMMENDATIONS: PERSONAL AND PROFESSIONAL DEVELOPMENT: SOURCES OF INFORMATION: appropriate mechanisms have been created to help personal and professional development of family members – family has defined specific training COMMENTS & REMARKS: 2.5. and education needs for current future employed 0 10 0% family members. SUMMARY RECOMMENDATIONS: 70 Corporate Governance Scorecards TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes (3) (4) (1) (2) Score per Comments & Remarks; Grading Weight- category Source of Information; (1–10) ing % (in %) Recommendations Shareholders/Owners' Rights PLEASE NOTE: If the company realities do not require organization of GMS [general meetings of sharehold- ers] (for example: single-owner company, or if the 3. company has two owners, of which only one is the 15 beneficial owner, etc.), or if it does not have minority shareholders, the provisions of this section should be graded accordingly, including possibility of assigning maximum grades. GMS: GMS are convened and conducted in a SOURCES OF INFORMATION: manner to allow for meaningful participation of all (interested) shareholders – preparation of GMS enables participation of all shareholders; the notice, COMMENTS & REMARKS: agenda, and supporting materials are distributed 3.1. 0 35 0% sufficiently in advance; shareholders are encouraged to propose items to the agenda, to participate at the SUMMARY GMS, personally or by proxy, to ask questions; the RECOMMENDATIONS: dissemination of the results of the GMS are properly regulated and implemented. DECISION MAKING: decision making at GMS SOURCES OF INFORMATION: allows for equitable treatment of all sharehold- ers – voting rights of shareholders do not deviate from their ownership rights; effective representation COMMENTS & REMARKS: of minority shareholders is provided by cumulative 3.2. voting and/or other mechanisms protecting minority 0 35 0% shareholders against unfairly prejudicial actions when SUMMARY controlling shareholders have conflicts of interests RECOMMENDATIONS: (“majority of minority provisions”); minority share- holders have the possibility to nominate and elect a board member. RELATIONSHIP WITH SHAREHOLDERS: the compa- SOURCES OF INFORMATION: ny pays attention to disclosures to shareholders - the company has a policy and practice of full and timely disclosure to shareholders of all material trans- COMMENTS & REMARKS: actions, including those with affiliates of controlling shareholders, directors, or managers; and complete, 3.3. timely and accurate disclosure is made on all material 0 30 0% SUMMARY shareholder and similar agreements; the company’s RECOMMENDATIONS: annual report discloses principal risks (identity of controlling shareholders, degree of ownership con- centration, cross-holdings among company affiliates, imbalances between voting power and overall equity position in the company) to minority shareholders. 100 0% Corporate Governance Scorecards 71 TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes 7. Annexes (1) (3) (4) (2) Grad- Score per Comments & Remarks; Weight- ing category Source of Information; ing % (1–10) (in %) Recommendations 4. Board Practices 20 COMPOSITION: the composition of the board allows SOURCES OF INFORMATION: it to properly fulfill its duties and responsibilities – majority of board members are non-executive/independent directors; acceptable definition of independent director has COMMENTS & REMARKS: been adopted by the company; The chairman of the board is 4.1. 0 25 0% an independent non-executive director; CEO and chairman are separate functions; competences, skills mix, and diversity SUMMARY on the board are comprehensive and adequate for the board RECOMMENDATIONS: to perform its duties; at least one member of the board has substantive knowledge and experience in financial issues. OPERATION: the board meets regularly, making de- SOURCES OF INFORMATION: cisions on an informed basis – meeting agendas and adequate supporting materials are communicated to directors sufficiently in advance to enable them to make informed COMMENTS & REMARKS: decisions; an annual calendar of meetings is scheduled and provides for at least six regular meetings, with at least one 4.2. session devoted to strategy; the board as a whole deliberates 0 25 0% SUMMARY independently of management; non-executive directors meet RECOMMENDATIONS separately from executive directors at least once a year; inde- pendent members of the board or a committee comprising entirely independent directors approves all material transac- tions with affiliates of the controlling shareholders/directors/ management. FUNCTIONS: the board provides strategic direction SOURCES OF INFORMATION: and oversight of management – the board meaningfully discusses strategy before adoption, and regularly oversees its implementation; the board’s delegation of authority to man- COMMENTS & REMARKS: agement is such that the board does not become involved in day-to-day operations; the board has adopted a written 4.3. policy/plan dealing with succession of all key positions in the 0 25 0% SUMMARY company and has tested this plan; the board has adopted RECOMMENDATIONS and implemented a remuneration policy for executive and non-executive directors in line with best practices; the board takes an active role in risk governance; the board is supported by a professional corporate secretary, appointed by the board. COMMITTEES: the board has an adequate number of SOURCES OF INFORMATION: properly staffed committees - in particular, audit, remu- neration, and nomination committees; all committees have majority of non-executive directors, and at least the audit COMMENTS & REMARKS: committee is composed entirely or of a majority of indepen- 4.4. dent directors; the committees have their own budgets and 0 10 0% can obtain professional advice on issues within their scope SUMMARY of authority. (NOTE: when having committees is not legally RECOMMENDATIONS required, consider whether the size of the company and/or complexity of its business operations, etc., require appoint- ment of committees. Grading should be made accordingly.) EVALUATION AND TRAINING: the board undertakes SOURCES OF INFORMATION: meaningful evaluations – at least on an annual basis; these evaluations result in specific proposals for improvement of the operation of the board as well as a COMMENTS & REMARKS: 4.5. 0 15 0% list of areas in which the board as whole needs further training; an introductory training session is provided to new directors, and ongoing training is available as needed. SUMMARY RECOMMENDATIONS 72 Corporate Governance Scorecards TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes (3) (4) (1) (2) Grading Weight- Score per Comments & Remarks; category Source of Information; (1–10) ing % (in %) Recommendations 5. Control Environment 15 BOARD OVERSIGHT: the board oversees the company's SOURCES OF INFORMATION: control system – the board (or its audit committee) is respon- sible for oversight and implementation of internal controls, risk management, and compliance policies and practices; a head COMMENTS & REMARKS: internal auditor is hired/fired with the consent of the board/audit committee, and has direct access to the board/audit committee 5.1. 0 20 0% and meets with the board or committee at least once a year SUMMARY without management present; the board/audit committee reviews RECOMMENDATIONS: the external auditor’s management letters and the management’s response to them; key business processes are regulated in policies and procedures; directors, managers, and staff clearly understand their responsibilities in relation to the internal control system. INTERNAL CONTROLS: the company has a comprehensive SOURCES OF INFORMATION: system of internal controls – i.e., the company has formal policies and procedures that provide reasonable assurance that management directives are carried out, that operations are ef- COMMENTS & REMARKS: ficient and effective, that financial reports and information are 5.2. 0 15 0% reliable, and that the company complies with applicable laws and regulations; the system of internal controls is designed on the basis SUMMARY of and in accordance with internationally recognized frameworks RECOMMENDATIONS: (such as COSO); the company has not had significant prob- lems with regard to internal controls in the last three years. RISK MANAGEMENT: the company has a formalized SOURCES OF INFORMATION: risk management process, based on established objectives that are based on an established risk register, and methodi- cally analyzes relevant risks to achieve objectives; the board COMMENTS & REMARKS: 5.3. regularly reviews the company’s risk register, the mainte- 0 15 0% nance of which is a responsibility of a designated officer; the company has had no significant problems in relation to risk SUMMARY management in the last three years. RECOMMENDATIONS: COMPLIANCE: the company has established a compli- SOURCES OF INFORMATION: ance function – the company has a formal, comprehen- sive compliance program covering compliance with laws, relevant regulations, and the code of conduct/ethics, with COMMENTS & REMARKS: 5.4. 0 15 0% appropriate sanctions; the company has not had significant problems in relation to compliance in the last three years. SUMMARY RECOMMENDATIONS: INTERNAL AUDIT: the company has established an internal SOURCES OF INFORMATION: audit function, which provides assurance through testing, opining, and making recommendations on improving the system of internal controls, undertakes risk assessments and opines on COMMENTS & REMARKS: 5.5. systems of risk management; the internal audit function has suf- 0 20 0% ficient resources (including available budget) and objective and competent staff. The internal audit function is able to investigate SUMMARY all areas of the company's business and operations and reports RECOMMENDATIONS: to the board (or audit committee). EXTERNAL AUDIT: the company has an independent exter- SOURCES OF INFORMATION: nal auditor with appropriate standing – the external auditor is a (internationally) recognized audit firm that conducts auditing in line with International Standards on Auditing; the external auditor COMMENTS & REMARKS: provides a management letter to the company; the external audi- 5.6. 0 15 0% tor is selected on the basis of a tender process and is approved by GMS, which determines its compensation, which is not depen- SUMMARY dent on the audit results; the company has a policy of rotating the RECOMMENDATIONS: external auditor (or at least lead audit partners); the company’s audits were unqualified for the last five years. 100 Corporate Governance Scorecards 73 TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes 7. Annexes (1) (3) (4) (2) Grad- Score per Comments & Remarks; Weight- ing category Source of Information; ing % (1–10) (in %) Recommendations 6. Transparency and Disclosure 10 KEY POLICIES AND PRACTICES: the company has pol- SOURCES OF INFORMATION: icies and mechanisms for timely and accurate disclo- sure – the company has a written information disclosure policy that seeks to make material information available COMMENTS & REMARKS: to applicable regulators, shareholders, and the general public; the company discloses information on a CG or in- vestor relations link on its website (including the company SUMMARY charter, code of conduct/ethics and CG code; list of mem- RECOMMENDATIONS: 6.1. bers of management and directors, with corresponding 0 35 0% biographies; annual report, overview of past GMSs with decisions adopted; contact information of the investor re- lations officer, etc.); the company, in particular, has policies on disclosure of related-party transactions and material off-balance-sheet activities; the company makes disclo- sures to the shareholders and general public on ultimate beneficial ownership of shares in the company (including by controlling shareholders/management). MATERIAL INFORMATION: the company has adopted SOURCES OF INFORMATION: a definition of material information – the company has a clear definition of what constitutes material infor- mation and procedures for handling of such information; COMMENTS & REMARKS: 6.2. internal rules have been established and communicated to 0 15 0% relevant staff; this definition at minimum refers to financial and operating results, shareholders and ownership struc- SUMMARY ture, foreseeable material risk factors, and governance RECOMMENDATIONS structures and policies. FINANCIAL DISCLOSURE: the company regularly SOURCES OF INFORMATION: prepares and discloses financial information – the company’s financial statements are prepared in accordance with internationally recognized accounting standards; the COMMENTS & REMARKS: company has no history of material restatements of its financial statements or of sanctions by regulators/stock 6.3. 0 30 0% SUMMARY exchanges (if applicable); the company discloses the fol- lowing financial information regularly: results of financial RECOMMENDATIONS and business activity; financial and economic ratios of the company; market capitalization; liquidity and obligations; capital structure, including working capital; and composi- tion, structure, and value of fixed assets. ANNUAL REPORT: the company publishes a compre- SOURCES OF INFORMATION: hensive annual report – through its annual report, the company discloses information on its strategy, financial results and notes on financial statements, risk manage- COMMENTS & REMARKS: 6.4. ment, related-party transactions, corporate governance, 0 20 0% and corporate social responsibility, as well as remuneration to members of the board, management, and the external SUMMARY auditor; management’s discussion and analysis is part of RECOMMENDATIONS the company’s annual report. 100 0% 74 Corporate Governance Scorecards TABLE 7.2: CORPORATE GOVERNANCE ANALYSIS: FAMILY-OWNED BUSINESS continued 7. Annexes Methodology: Grading suggestions for column (1): Ranking on level of fulfillment of standards referred 0: If the company has absolutely no practices or policies to in each category is to be made with points on a referred to in the groups of questions in any given line (1.1, scale of 1–10 in the box in column (1) (1 indicating 1.2, etc.), a 0 (zero) score would be appropriate. lowest fulfillment of the standards, and 10 highest). 1–4: If the company has minimum policies and practic- Weighting of each of the six areas is set as a percent- es, a 1 to 4 score would be appropriate. age next to the title of the area. 5–8: If the company not only has formally established func- tions or adopted documents, but the realities also indicate Weighting per category is set out in column (2). a deeper understanding of the concepts behind them, a 5 to 8 score would be appropriate. Score overview in relation to each category is demon- 9–10: Scores 9 and 10 should be reserved for outstand- strated as a data-bar in column (3). ing performance—that which could be considered as Source of Information, Comments & Remarks, and best practice to be recommended to peer entities. Summary Recommendations for each question are noted in column (4). Complete corporate governance An overview of results and final score is presented on analysis product comprises: the next sheet, titled “Overview of Results.” a) This filled scorecard (based on an interview with relevant company representative(s) and review of key company documents, as appropriate). b) A report of no more than three pages, containing analysis of the company policies and practices, and corre- sponding recommendations. Source: Corporate Governance Scorecard for a Family-owned Business used by IFC in some of its advisory programs. Scorecards can help companies improve their strategy, decision making, risk manage- ment, control, and organization Corporate Governance Scorecards 75 7.4 Sample Web-based scorecard Question 2: Is the strategic plan approved by the 7. Annexes 7. Annexes general assembly of shareholders, the board of directors, Below are the questions posed in Colombia’s Confecámaras35 or equivalent body? Web-based scorecard, translated from the original Spanish. The scorecard is designed to follow the structure of Colombia’s Question 3: Does the company have a written policy that national governance code for small and family-owned busi- requires the strategic plan to be approved by the general nesses.36 There are 17 “blocks” of themes, each containing a assembly of shareholders, the board of directors, or equiva- number of questions that permit a simple yes-or-no response. lent body? Question 4: Does the company regularly monitor the Each question seeks to establish whether the company has implementation of strategic plans that cover a period of achieved a progressively higher level of governance. These two (2) or more years? levels can be summarized as follows: 1) no implementation; Question 5: Does the company adopt corrective mea- 2) some implementation; 3) documentation to support sures if, during the follow-up of the implementation of the implementation; 4) formal checking of implementation; and strategic plan, gaps are identified between actual execution 5) iterative action based on the results of checking. These and plan? qualitative hurdles are described in Example 4.15 (on page 26) in Section 4.3.3, “Develop the scorecard structure.” BLOCK 3: The total number of questions is over 150, which may Question 1: Has the company defined strategic objectives appear excessive, but the Web scorecard stops posing whose fulfillment must be within a minimum period of five additional questions when it receives a negative response. (5) years? In practice, the time required to complete the questionnaire Question 2: Have the strategic objectives been approved is relatively short, due both to the simplicity of the ques- by the general assembly of shareholders, the board of tions and to the fact that most companies will fall short of directors, or equivalent body? perfect practice and will not need to answer all questions. Question 3: Does the company have a written policy that BLOCK 1: requires strategic objectives to be approved by the general assembly of shareholders, the board of members, or equiva- Question 1: Does the company have an annual budget? lent body? Question 2: Is the annual budget approved by the highest Question 4: Does the company regularly monitor the governance body of the organization? fulfillment of the strategic objectives for a period equal to Question 3: Does the company have a written policy that or greater than five (5) years? requires the annual budget to be approved by the highest Question 5: Does the company adopt corrective measures governance body? if, during the follow-up of the implementation of the Question 4: Does the company regularly monitor the im- strategic objectives, gaps are identified between the plan plementation of the budget? and actual execution? Question 5: Does the company adopt corrective measures to identify gaps between the actual expenditures and the BLOCK 4: budget? Question 1: Has the company documented the officials of the company and what their responsibilities are in relation BLOCK 2: to the fulfillment of objectives? Question 1: Does the company have a strategic plan that Question 2: Does the company document who, how, and covers a period equal to or greater than two (2) years? when it will evaluate those responsible for fulfillment of plans and the strategic objectives? 35 See the Confecámaras website: http://www.confecamaras.org.co/gobierno-corporativo, in Spanish. 36 Superintendencia de Sociedades, Cámara de Comercio de Bogotá, Colombian Corporate Governance Guide for Closely Held and Family Enter- prises (Guía Colombiana de Gobierno Corporativo para Sociedades Cerradas y de Familia). (Confecámaras, 2009). http://www.supersociedades. gov.co/web/documentos/guia%20colombiana%20de%20gobierno%20corporativo.pdf. 76 Corporate Governance Scorecards Question 3: Does the company have defined performance Question 3: Does the company verify that partners or share- 7. Annexes indicators to assess fulfillment by managers of the strategic holders were informed of the last meeting of the general objectives? assembly of shareholders, the partners, or equivalent body, Question 4: Does the company take action in accordance especially those who were not present or represented? with the results of the performance evaluation of managers Question 4: Does the company have information about in achieving the strategic objectives? its partners or shareholders in addition to the information contained in the company shareholder register? BLOCK 5: Question 5: Are partners or shareholders surveyed annually to determine how they learned of the last meeting and the Question 1: Has the company identified key commercial means considered most effective to call future meetings? legal requirements and internal regulations with which it must comply? Question 6: Does the company employ means to promote increased attendance at the meetings of the general assem- Question 2: Does the company identify areas in which it bly of shareholders, the partners, or equivalent body? risks being in breach of the law? Question 3: Does the company verify its systems of compli- ance for measuring and managing the risks of noncompliance BLOCK 8: with commercial legal minimums and internal regulation? Question 1: Is meeting notice for the general assembly Question 4: Does the company adopt measures for man- of shareholders, the partners meeting, or equivalent body aging the risks of noncompliance and document the risks of provided with a minimum advance as established by law? noncompliance and measures taken? Question 2: Does the notice for the general assembly of Question 5: Does the company improve the identified risk shareholders, the partners meeting, or equivalent body con- management processes and identify potential new risks of tain at least the venue, date, and time of the meeting? noncompliance with the law and other applicable regulations? Question 3: Does the call for the general assembly of shareholders, the partners meeting, or equivalent body contain at least the venue and a description of the right of BLOCK 6: inspection, including the person with whom this right may Question 1: Has the company identified the accounting be exercised, when this required by law? minimums with which it must comply? Question 4: Does the call for the general assembly of Question 2: Does the financial reporting of the company con- shareholders, the partners meeting, or equivalent body con- form to the minimum accounting standards required by law? tain at least the necessary mechanisms to ensure that part- Question 3: Does the company ensure through a docu- ners are adequately informed of the issues to be treated? mented procedure the preparation of financial reporting Question 5: Does the company’s corporate governance code that complies with required accounting standards? or equivalent document indicate that the notice for the general Question 4: Does the company verify compliance with the assembly of shareholders, the partners meeting, or equivalent documented procedure so that the preparation of financial body contains at least the necessary mechanisms to ensure that reports conforms to the applicable reporting standards? partners are adequately informed of the issues to be treated? Question 5: Does the company improve the documented Question 6: Does the company verify that the informa- procedure so that financial information conforms to appli- tion provided in the notice is sufficient to allow partners or cable accounting standards? shareholders to be informed for the meeting? Question 7: Does the notice for the general assembly of shareholders, the partners meeting, or equivalent body con- BLOCK 7: tain at least the order of the day, avoiding generic items? Question 1: Is the information from the company share- Question 8: Does the company’s code of good corporate holder register updated? governance or an equivalent document indicate that the Question 2: Does the company have formal means to pro- call for the general assembly of shareholders, the part- mote attendance at the meetings of the general assembly ners, board, or equivalent body contains at least the place, of shareholders, the partners, or equivalent body? Corporate Governance Scorecards 77 opportunity, and person who may exercise the right of with the quorum and majorities required by law 7. Annexes 7. Annexes inspection, where required by law? and the statutes? Question 9: Does the governance code of the company • Set the maximum time that will elapse between the or an equivalent document indicate that the notice for the time of notice and the conduct of the meeting? general assembly of shareholders, the partners meeting, • Create conditions that ensure active participation or equivalent body contains at least the order of the day, of the attendees and a dynamic decision-making avoiding generic items? process? Question 10: Does the governance code of the company or an equivalent document indicate that the notice for the BLOCK 10: general assembly of shareholders, the partners meeting, or equivalent body contains at least the venue, date, and time Question 1: Does the company have a remuneration policy of the meeting? for managers? Question 11: Does the company take action to improve Question 2: Transactions with related parties. Does the information provided in meetings, based on the results the company assign responsibility and take remedial action of a check? where transactions have not been carried out in accordance with approved policy? Question 3: Global disposition of assets. Does the com- BLOCK 9: pany submit the policy for the execution of operations that Question 1: Does the company take corrective action upon represent a global disposition of assets for the consideration discovery of noncompliance with rules and procedures? of the general assembly of shareholders, the partners meet- Question 2: Does the company have rules and procedures ing, or equivalent body? for the general assembly of shareholders, partner meetings, Question 4: Transactions with related parties. Does the or equivalent body? company have a policy for related-party transactions? Question 3: Do the rules and procedures: Question 5: Global disposition of assets. Does the com- • Regulate the participation and/or attendance of pany have a policy for the implementation of transactions third parties at the meeting? that represent a global disposition of assets? • Establish the mechanism by which members can be Question 6: Remuneration of managers. Does the com- represented? pany submit for the consideration of the general assembly • Establish a procedure to determine who exercises of shareholders, the partners meeting, or equivalent body the presidency and the secretariat of the meeting? the adoption of the remuneration policy for managers? • Establish the duties and responsibilities of the members Question 7: Remuneration of managers. Is the require- of the approving commission of the proceedings in the ment to submit the remuneration policy to the general case in which this function has been delegated? assembly of shareholders, the partners meeting, or equiva- lent body documented? • Require that the topics proposed in the agenda and those that arise as an addition to it are dis- Question 8: Segregations. Does the company have writ- cussed separately? ten requirements that specify the need to submit a segre- gations policy for consideration of the general assembly of • Establish the procedure to be followed in the event shareholders, the partners meeting, or equivalent body? of suspension of the meeting? Question 9: Transactions with related parties. Does the Question 4: Does the general assembly of shareholders, company submit its related-party transactions policy to the the partners meeting, or equivalent body comply with the general assembly of shareholders, the partners meeting, or rules and procedures? equivalent body for their consideration? Question 5: Do the rules and procedures: Question 10: Segregations. Does the company have written • Require prior approval of the agenda? requirements that specify the need to submit its policy for the re- • Establish mechanisms to be taken by management alization of segregations to the general assembly of shareholders, to ensure that decisions are taken in accordance the partners meeting, or equivalent body for their consideration? 78 Corporate Governance Scorecards Question 11: Transactions with related parties. Does Question 5: Is the procedure for the selection of the tax 7. Annexes the company have written requirements that specify the auditor formalized in the internal policies and procedures of need to submit its related-party transaction policy for the company? consideration by the general assembly of shareholders, the partners meeting, or equivalent body? BLOCK 12: Question 12: Transactions with related parties. Does Question 1: Has the company established corporate gover- the company check that no related-party transactions take nance bodies? place without consulting the approved policy? Question 2: Do these bodies fulfill different functions? Question 13: Global disposition of assets. Does the company have written requirements that specify the need Question 3: Are the different functions of the governance to submit its policy for the global disposition of assets to bodies set down in the company statutes? the general assembly of shareholders, the partners meeting, Question 4: Does the company check to see that each gov- or equivalent body for their consideration? ernance body fulfills the functions set down in the statutes? Question 14: Global disposition of assets. Does the Question 5: Does the company adopt corrective measures company establish responsibility and take remedial action when the functions are not fulfilled as established in the where operations have not been carried out in accordance statutes? with the approved policy? Question 15: Remuneration of management. Does the BLOCK 13: company check that no operations are carried out without Question 1: Does the company have established pro- consulting the approved policy? cedures to verify that the nomination of candidates for Question 16: Segregations. Does the company have a membership on the board of directors or equivalent body policy for the realization of segregations? complies with the criteria established by law, company stat- Question 17: Global disposition of assets. Does the utes, and other applicable internal regulations? company check that none of these operations is carried out Question 2: Does the company improve the procedure without consulting the approved policy? for the nomination of candidates, taking into account past Question 18: Segregations. Does the company establish experience and the experience gained in the operation of responsibility and take remedial action when the operations the board of directors or equivalent body? are not carried out in accordance with the approved policy? Question 3: Has the company documented this procedure? Question 19: Remuneration of management. Does the Question 4: Is compliance with the procedure checked? company establish responsibility and take remedial action where operations have not been carried out in accordance with the approved policy? BLOCK 14: Question 20: Segregations. Does the company check Question 1: Does the company have a board of directors that no operations are carried out without consulting the or equivalent body? approved policy? Question 2: Does the board of directors or equivalent body have an odd number of members and at least one (1) member who complies with the requirement not to be an BLOCK 11: employee or manager of the natural or legal person who Question 1: Does the company have a tax auditor? provides audit services to the company or any of its affili- Question 2: Is it true that neither management, partners, nor ates or subsidiaries? shareholders influence the independence of the tax auditor? Question 3: Does the company have formal internal rules Question 3: Does the company comply with the proce- and procedures that specify that the board will have an odd dures established for the selection of the tax auditor? number of members and that at least one board member Question 4: Does the company establish a selection proce- meets the requirement not to be an employee or legal rep- dure for the tax auditor that ensures that at least three propos- resentative of the company (i.e., a non-executive director)? als are received from suitable and independent candidates? Corporate Governance Scorecards 79 Question 4: Does the company have formal internal rules Question 3: Does the board of directors or equivalent body 7. Annexes 7. Annexes and procedures that specify that the board will have an odd identify related parties without delegating this authority? number of members and at least one member who meets Question 4: Does the board of directors or equivalent body the requirement not to be an employee or manager of the verify the proper function of the internal control system natural or legal person who provides audit services to the without delegating this authority? company or any of its affiliates or subsidiaries? Question 5: Are the most relevant results of the checks Question 5: Does the company have formal internal rules conducted by the board included in the annual corporate and procedures that specify that the board will have an odd governance report? number of members and that at least one member who Question 6: Does the board of directors or equivalent body meets the requirement not to have family ties with any of establish the policy for dismissal of senior management the above to the third degree of consanguinity, second of without delegating this authority? affinity, or first civil (i.e., an independent director)? Question 7: Does the board of directors or equivalent body Question 6: Does the board of directors or equivalent body verify compliance with accounting policies without delegat- have an odd number of members and at least one (1) member ing this authority? who complies with the requirement not be associated with or directly or indirectly steer, orient, or control the majority of the Question 8: Does the board of directors or equivalent body voting rights of the company or determine the majority com- ensure compliance with corporate governance standards position of the management, direction, or control bodies? without delegating this authority? Question 7: Does the company have formal internal rules Question 9: Does the board of directors or equivalent body and procedures that specify that the board will have an determine the information and communications policy for odd number of members and that at least one (1) member the company? meets the requirement not to be associated with or directly Question 10: Does the company have these responsibilities or indirectly steer, orient, or control the majority of the vot- formalized in its statutes? ing rights of the company or determine the majority com- Question 11: Does the board of directors or equivalent position of the management, direction, or control bodies? body have a succession plan to mitigate risks in the event Question 8: Does the board have more than one external of a change in the chief executive of the company without member and periodically check the need to increase the delegating this authority? number of external members? Question 12: Does the board of directors or equivalent Question 9: Does the company check that the board of direc- body establish the remuneration policy for senior executives tors has an odd number of members and that the status of the without delegating this authority? external members continues during the exercise of their office? Question 13: Does the board of directors or equivalent Question 10: Does the board of directors or equivalent body check the risk management function of the company body have an odd number of members, and at least one without delegating this authority? (1) member complies with the requirement not to be an Question 14: Does the board of directors or equivalent employee or legal representative of the company? body manage the conflicts of interest of company officials Question 11: Does the board of directors or equivalent without delegating this authority? body have an odd number of members, and at least one (1) Question 15: Does the company provide ongoing training member complies with the requirement to not have family for the professionalization of its board of directors? ties with any of the above, to the third degree of consan- Question 16: Does the board of directors or equivalent body guinity, second of affinity, or first civil? approve strategic objectives without delegating this authority? Question 17: Does the board of directors or equivalent BLOCK 15: body periodically check on performance compared to the Question 1: Does the board of directors or equivalent body strategic plan? approve the annual budget without delegating this authority? Question 18: Does the board of directors or equivalent Question 2: Does the board of directors or equivalent body body establish policies for evaluating senior managers with- approve the strategic plan without delegating this authority? out delegating this authority? 80 Corporate Governance Scorecards Question 19: Does the above-noted procedure establish BLOCK 17: 7. Annexes the form, frequency, and responsibility for the evaluation? Question 1: Does the company publish annual financial Question 20: Does the company have established proce- reports? dures for the evaluation of the management of its board of Question 2: Does management report on the results of directors or equivalent body? operations and the overall disposal of assets in addition to Question 21: Does the board of directors or equivalent what is required under Article 47 of the Law 222 of 1995? body establish policies for the appointment of senior execu- Question 3: Does the company have a formal requirement tives without delegating this authority? to report on the results of operations and the overall dis- posal of assets in the annual report? BLOCK 16: Question 4: Does management report on transactions with Question 1: Does the board of directors or equivalent body owners or partners in addition to what is required under have its own internal policies and procedures? Article 47 of the Law 222 of 1995? Question 2: Does the company assign a person to produce Question 5: Does management report on compliance board meeting minutes that faithfully reflect and attest to with corporate governance practices in addition to what is the decisions taken? required under Article 47 of the Law 222 of 1995? Question 3: Does the board of directors or equivalent body Question 6: Does management report on transactions with have formal rules and procedures for termination or resig- management in addition to what is required under Article nation of its members? 47 of the Law 222 of 1995? Question 4: Does the board of directors or equivalent body Question 7: Does the company have a formal requirement have formal rules and procedures for incompatibilities and to report on transactions with parties related to manage- incapacities of its members? ment in the annual report? Question 5: Does the board of directors or equivalent body have Question 8: Does the company have a formal requirement formal rules and procedures for the frequency of meetings? to report on related-party transactions with individuals linked to the partners or shareholders in the annual report? Question 6: Does the board of directors or equivalent body have formal rules and procedures for form, timing, and Question 9: Does management report on related-party responsibility for board meeting notice? transactions concluded with individuals linked to manage- ment in addition to what is required under Article 47 of the Question 7: Does the board of directors or equivalent body Law 222 of 1995? have formal rules and procedures for conduct, develop- ment, and completion of board meetings? Question 10: Does the company have a formal require- ment to report on transactions with management in the Question 8: Does the board of directors or equivalent body annual report? have formal rules and procedures describing the duties and rights of members? Question 11: Does the company check to ensure that re- lated-party transactions with any and all related parties are Question 9: Does the board of directors or equivalent body included in the annual report? have formal rules and procedures that describe the infor- mation rights of board members, including documents that Question 12: Does management report on related-party trans- must be attached to the meeting notice? actions concluded with partners or shareholders in addition to what is required under Article 47 of the Law 222 of 1995? Question 10: Does the board of directors or equivalent body have formal rules and procedures that describe their informa- Question 13: Does the company report profits or losses gen- tion rights, recognizing that any request for information from erated from transactions with any and all related parties? an individual board member must be approved by the board? Question 14: Does the company have a formal require- Question 11: Does the company assign someone to check ment to report on related-party transactions with partners that the board of directors or equivalent body complies and shareholders in the annual report? with statutory requirements at meetings? Question 15: Does the company have a formal require- Question 12: Does the company take corrective actions ment to report on compliance with the code on corporate when there is evidence of breach of statutory requirements? governance practices in the annual report? Corporate Governance Scorecards 81 7.5 Sample pilot test and company feedback form 7. Annexes 7. Annexes The engagement of companies is of great importance to the success of a scorecard project. For this reason, it is important to solicit feedback from corporate users to ensure that the scorecard and the scorecard project are properly designed and that they are constantly improved. Table 7.3 is a sample feedback form that can be given to companies either after pilot testing or after having completed a scorecard.37 The form is designed to elicit feedback on the format and content of the scorecard as well as on the process and outcomes. Feedback forms can be administered annually after the completion of a set of scorings and inform a discussion in prepara- tion for subsequent years’ scorings. TABLE 7.3: SAMPLE FEEDBACK FORM Question Answer space 1. Format 1.1. Was the scorecard sufficiently user-friendly? 1.2. Would you prefer to work with paper, spreadsheet, or a Web-based scorecard? 1.3. What would you suggest to make the actual score- card easier to use? 2. Process 2.1. Did you fill in the scorecard alone? 2.2. If yes, would the assistance of a corporate gover- nance expert be useful when filling the scorecard in? 2.3. How much time did it take to fill the scorecard in? 2.4. Do you feel that the amount of time was about right, too little, or excessive? 2.5. Was it necessary to consult other people to gather the information needed to fill in the scorecard? 2.6. If so, what were the positions of the people who needed to be consulted? 2.7. Should filling in the scorecard be a group/team exercise? 2.8. How many other people were consulted when filling in the scorecard? 2.9. Was it necessary to consult company documenta- tion? 2.10. If so, what were the main items of documentation that were consulted? 2.11. What would you suggest to make the scorecard process better? 3. Clarity and completeness 3.1. Were there any questions that were unclear or diffi- cult to understand? 3.2. If so, which questions? 3.3. If there were any questions that you thought were particularly useful or revealing, what were they? 3.4. Were there any questions that should have been posed in the scorecard but were not? 37 Source: IFC. 82 Corporate Governance Scorecards TABLE 7.3: SAMPLE FEEDBACK FORM continued 7. Annexes Question Answer space 3.5. Were there any questions that should not have been posed? 3.6. Were there any questions you felt uncomfortable answering due to concerns regarding confidentiality? 4. Scoring 4.1. Did you feel that the weightings (importance given to) the different general indicator categories were correct? 4.2. Did you feel that the weightings (importance given to) the different governance indicators were correct? 4.3. Do you feel that the final aggregate score for the company was fair? 4.4. Why or why not? 4.5. What aspects of the scoring would you change? 5. Reporting and feedback 5.1. How important is it for you to have immediate feed- back from the scorecard and reports? 5.2. How important would it be to have results presented by a governance expert who is available for ques- tioning and feedback? 5.3. Do you feel that the results are best kept confidential, or that some results might be shared outside the company? 6. Outcomes 6.1. Did you find going through the scorecard process valuable? 6.2. Do you feel that company staff learned something useful about corporate governance? 6.3. Will there be any concrete results at your company as a result of the scoring? 6.4. Did top executives and/or the board read the report findings? 6.5. Did top executives and/or the board discuss the report findings? 6.6. Was corporate governance put on the board’s or management’s agenda for future consideration? 6.7. Did a governance reform plan result from the scor- ing, or will one result in future from the scoring? 6.8. Would you recommend undertaking a scorecard evaluation to a friend or colleague at another com- pany? 6.9. What do you think was the single most important outcome of the scorecard exercise? 7. Additional 7.1. From what source did you first learn about the score- card project? 7.2. What was your primary motivation for participating in the scorecard project? 7.3. Other comments: Corporate Governance Scorecards 83 7.6 Selected references Black, B., I. Loveb, and A. Rachinsky. 2006 corporate 7. Annexes 7. Annexes governance indices and firms’ market values: Time Aguilera, R., and K. Desender. 2012. Challenges in the series evidence from Russia. Emerging Markets Review measuring of comparative corporate governance: A (December) 7 (4): 361–79. review of the main indices; in Research Methodology in Strategy and Management, Vol. 7, C. L. Wang, D. J. Center for International Private Enterprise (CIPE). 2007. Ketchen, and D. D. Bergh, eds. (Emerald, Forthcoming). Philippines Stock Exchange commits to good corporate Available at SSRN: http://ssrn.com/abstract=1995615. governance. Overseas Report, Special Edition for Asia (September) 34. ASEAN Capital Markets Forum. 2012. ASEAN Corporate Governance Scorecard. Singapore: ACMF. http://www. Chen, K., Chen Z., and K. C.J. Wei. 2004. Disclosure, theacmf.org/ACMF/upload/asean_cg_scorecard.pdf. corporate governance, and the cost of equity capital in emerging markets. Working Paper No. 2004/05-13, Basel Committee on Banking Supervision. 2006. Enhancing Department of Accounting, Hong Kong University of corporate governance for banking organisations. Paper Science and Technology. first published in 1999. Basel, Switzerland: Bank for Inter- national Settlements. http://www.bis.org/press/p060213. CLSA Asia-Pacific Markets. 2007 CG Watch 2007: Corpo- htm and http://www.bis.org/publ/bcbs122.htm. rate Governance in Asia—On a Wing and a Prayer: The Greening of Governance. Survey Report. CLSA in Basel Committee on Banking Supervision. 2010. Principles collaboration with the Asian Corporate Governance for enhancing corporate governance. Paper. Basel, Forum. https://www.clsa.com/assets/files/reports/CLSA_ Switzerland: Bank for International Settlements. http:// ACGA_CGWatch2007_Extract-2.pdf. www.bis.org/publ/bcbs176.htm. CLSA Asia-Pacific Markets. 2012. CG Watch 2012: Corpo- Bhagat, S., and B. Black. 1999. The uncertain relationship rate Governance in Asia—Tremors and Cracks. Survey between board composition and firm performance. Report. CLSA in collaboration with the Asian Corporate Business Lawyer 54: 921–63. Governance Forum. http://www.acga-asia.org/loadfile. Bhagat, S., and B. Black. 2001. The non-correlation be- cfm?SITE_FILE_ID=658. tween board independence and long-term firm perfor- Daines, R., I. Gow, and D. Larcker. 2009. Rating the ratings: mance. Journal of Corporation Law 27: 231–74. How good are commercial governance ratings? Rock Bhagat, S., and B. Bolton. 2006. Board ownership and Center for Corporate Governance at Stanford Univer- corporate governance indices. Paper. University of sity Working Paper Series No. 1, Stanford University Colorado at Boulder. http://scholar.google.com/schol- School of Law, Law & Economics Research Paper Series, ar_url?hl=en&q=http://www.law.yale.edu/documents/ Paper No. 360. pdf/SanjaiBhagatPaper.pdf&sa=X&scisig=AAGBfm3I2p- Dionne, G., and T. Triki. 2005. Risk management and corpo- DZYX625YsFEfa1kFCB1SuzOA&oi=scholarr. rate governance: The importance of independence Bhagat, S., B. Bolton, and R. Romano. 2007. The prom- and financial knowledge for the board and the audit ise and peril of corporate governance indices. 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Cross-References 8.1 INDEX OF TAKEAWAY POINTS Takeaway points Page Takeaway points Page Goal Setting 12 Promoting Scorecard Broadly 39 Ownership 13 Conducting the Scoring 43 Stakeholder Engagement 16 Summarizing and Presenting the Results 49 Choosing the Benchmark 23 Scoring a Small Company 51 Developing the Scorecard 28 Scoring by a Chamber 53 The Platform 33 Scoring by an Institute of Directors 55 Stakeholder Feedback 34 Scoring by a Stock Exchange 57 Pilot Testing 35 Building on Scorecards 60 Engaging Companies 36 8.2 INDEX OF EXAMPLES No. Example Title Page 4.1 Initial Environmental Assessments Help Determine the Approach 9 4.2 Stock Exchange Objectives 9 4.3 Membership Organization Objectives 10 4.4 Scorecards to Promote Regional Integration 11 4.5 Who Initiates the Project? Who Owns It? 13 4.6 Ensuring Stakeholder Engagement through a Code-Drafting Group 14 4.7 Public-Private Stakeholder Partnerships 15 4.8 A Benchmark for Banks, Composed of Banking Regulation and Best Practice 19 4.9 Using an International Benchmark When There Is No Local Code 20 4.10 Dealing with Gaps in the Code and the Law 21 4.11 Measuring Legal Compliance versus Observance of Best Practice 22 4.12 Legal Compliance and Best Practice Combined in a Bank Scorecard 22 4.13 The Use and Adaptation of Indicators from the OECD Principles 24 4.14 Transparency and Disclosure Indicators in a Spreadsheet-based Scorecard 25 4.15 Assigning Scores to Indicators, Based on a Qualitative Difference in Performance 26 4.16 Neutral Indicator Weightings Mixed with Weighted Indicator Categories 28 4.17 Text Documents as a Platform 31 4.18 Spreadsheets as a Platform 31 4.19 The Web as a Platform 32 4.20 Gathering Stakeholder Feedback 34 4.21 Corporate Fears 35 4.22 Incentives for a Small Listed Company 36 4.23 Promotional Activities 37 4.24 Speaking Clearly to Companies on Issues of Relevance 38 4.25 External Assessment Brings Expertise 41 4.26 Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 4.27 Enhancing the Quality of Scorecards through Training and Proper Procedure 42 4.28 A Spreadsheet-based Performance Summary for an Individual Company 44 4.29 A Web-generated Report for an Individual Company 45 Corporate Governance Scorecards 87 8.2 INDEX OF EXAMPLES continued 8. Cross-References No. Example Title Page 4.30 Rankings of Company Compliance with Azerbaijan Corporate Governance Code 46 4.31 Reporting Performance by Indicator Category 46 4.32 Reporting on the Relationship between Foreign Ownership and Good Governance 47 4.33 International Comparisons Using Scorecards 47 4.34 Banking Sector Governance Practices 47 4.35 A Scorecard Analysis Using a Governance Disclosure Benchmark 48 6.1 Building on Scorecard Projects 58 6.2 Corporate Governance Indexes and Listing Tiers 59 8.3 INDEX OF EXAMPLES BY TYPE OF SCORECARD USER User Example Page Companies 4.14: Transparency and Disclosure Indicators in a Spreadsheet-based Scorecard 25 4.15: Assigning Scores to Indicators, Based on a Qualitative Difference in Performance 26 4.16: Neutral Indicator Weightings Mixed with Weighted Indicator Categories 28 4.21: Corporate Fears 35 4.22: Incentives for a Small Listed Company 36 4.24: Speaking Clearly to Companies on Issues of Relevance 38 4.25: External Assessment Brings Expertise 41 4.27: Enhancing the Quality of Scorecards through Training and Proper Procedure 42 4.28: A Spreadsheet-based Performance Summary for an Individual Company 44 4.29: A Web-generated Report for an Individual Company 45 4.30: Rankings of Company Compliance with Azerbaijan Corporate Governance Code 46 4.32: Reporting on the Relationship between Foreign Ownership and Good Governance 47 4.35: A Scorecard Analysis Using a Governance Disclosure Benchmark 48 6.1: Building on Scorecard Projects 58 Institutes of 4.3: Membership Organization Objectives 10 directors, 4.5: Who Initiates the Project? Who Owns It? 13 chambers of commerce 4.7: Public-Private Stakeholder Partnerships 15 4.13: The Use and Adaptation of Indicators from the OECD Principles 24 4.17: Text Documents as a Platform 31 4.19: The Web as a Platform 32 4:20: Gathering Stakeholder Feedback 34 4.23: Promotional Activities 37 4.26: Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 4.31: Reporting Performance by Indicator Category 46 4.32: Reporting on the Relationship between Foreign Ownership and Good Governance 47 4.33: International Comparisons Using Scorecards 47 6.1: Building on Scorecard Projects 58 Other organi- 4.4: Scorecards to Promote Regional Integration 11 zations 4.6: Ensuring Stakeholder Engagement through a Code-Drafting Group 14 4.18: Spreadsheets as a Platform 31 4.35: A Scorecard Analysis Using a Governance Disclosure Benchmark 48 88 Corporate Governance Scorecards 8.3 INDEX OF EXAMPLES BY TYPE OF SCORECARD USER continued 8. Cross-References User Example Page Stock 4.2: Stock Exchange Objectives 9 exchanges 4.6: Ensuring Stakeholder Engagement through a Code-Drafting Group 14 4.7: Public-Private Stakeholder Partnerships 15 4.20: Gathering Stakeholder Feedback 34 4.27: Enhancing the Quality of Scorecards through Training and Proper Procedure 42 6.1: Building on Scorecard Projects 58 6.2: Corporate Governance Indexes and Listing Tiers 59 Regulators, 4.1: Initial Environmental Assessments Help Determine the Approach 9 government 4.9: Using an International Benchmark When There Is No Local Code 20 institutions 4.10: Dealing with Gaps in the Code and the Law 21 4.11: Measuring Legal Compliance versus Observance of Best Practice 22 4.20: Gathering Stakeholder Feedback 34 4.27: Enhancing the Quality of Scorecards through Training and Proper Procedure 42 4.30: Rankings of Company Compliance with Azerbaijan Corporate Governance Code 46 DFIs 4.9: Using an International Benchmark When There Is No Local Code 20 6.1: Building on Scorecard Projects 58 Banks 4.6: Ensuring Stakeholder Engagement through a Code-Drafting Group 14 4.8: A Benchmark for Banks, Composed of Banking Regulation and Best Practice 19 4.12: Legal Compliance and Best Practice Combined in a Bank Scorecard 22 4.20: Gathering Stakeholder Feedback 34 4.34: Banking Sector Governance Practices 47 8.4 INDEX OF REFERENCES BY COUNTRY OR REGION Country/ Type of reference and issue Page region Afghanistan Scorecard to assess the banking sector (“Sector-specific and function-specific benchmarks”) 18 Example 4.8: A Benchmark for Banks, Composed of Banking Regulation and Best Practice 19 Example 4.12: Legal Compliance and Best Practice Combined in a Bank Scorecard 22 Pilot test 34 Albania Closely held business code of governance (“National benchmarks”—footnote) 18 ASEAN Example 4.4: Scorecards to Promote Regional Integration 11 Example 6.1: Building on Scorecard Projects 58 Azerbaijan Example 4.6: Ensuring Stakeholder Engagement through a Code-Drafting Group 14 Example 4.9: Using an International Benchmark When There Is No Local Code 20 Example 4.20: Gathering Stakeholder Feedback 34 Example 4.30: Rankings of Company Compliance with Azerbaijan Corporate Governance Code 46 Scorecards to check compliance with the law (“The use of law as a benchmark”) 21 Belgium Closely held business code of governance (“National benchmarks”—footnote) 18 Bosnia and Example 4.2: Stock Exchange Objectives 9 Herzegovina The case of the Banja Luka Stock Exchange 55 Quote: The cost of capital as an argument for good governance 55 Corporate Governance Scorecards 89 8.4 INDEX OF REFERENCES BY COUNTRY OR REGION continued 8. Cross-References 8. Cross-References Country/ Type of reference and issue Page region Bulgaria Quote: Scorecards help companies 4 Example 4.6: Ensuring Stakeholder Engagement through a Code-Drafting Group 14 Quote: Making use of code-drafting groups 26 Example 4.20: Gathering Stakeholder Feedback 34 Example 4.26: Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 Example 4.28: A Spreadsheet-based Performance Summary for an Individual Company 44 Quote: Scorecards have knock-on effects 58 Example 6.1: Building on Scorecard Projects 58 Example 6.2: Corporate Governance Indexes and Listing Tiers 59 Colombia Example 4.3: Membership Organization Objectives 10 Quote: Scorecards should be iterative and self-sustaining 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Quote: The importance of engaging stakeholders 14 Scorecards to check compliance with the law (“The use of the law as a benchmark”) 21 Example 4.15: Assigning Scores to Indicators, Based on a Qualitative Difference in Performance 26 Example 4.24: Speaking Clearly to Companies on Issues of Relevance 38 “Self-assessments” 40 Example 4.26: Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 “The case of Confecámaras” (Section 5.2, A chamber of commerce) 52 Quote: Speaking clearly to SMEs 52 Section 7.4, Sample Web-based scorecard 75 East Asia Example 4.5: Who Initiates the Project? Who Owns It? 13 “International comparisons” 47 Example 4.33: International Comparisons Using Scorecards 47 “The case of the Philippine Institute of Corporate Directors” (Section 5.3, An institute of directors) 54 Egypt Closely held business code of governance (“National benchmarks”—footnote) 18 State-owned enterprise code (“National benchmarks”—footnote) 18 Europe Closely held business code of governance (“National benchmarks”—footnote) 18 Quote: Benchmarking unlisted firms 19 Example 4.9: Using an International Benchmark When There Is No Local Code 20 Example 4.20: Gathering Stakeholder Feedback 34 Finland Closely held business code of governance (“National benchmarks”—footnote) 18 Georgia Bank scorecards (“Sector-specific and function-specific benchmarks”) 18 Germany DVFA scorecard (“What is a scorecard?”) 3 Example 4.8: A Benchmark for Banks, Composed of Banking Regulation and Best Practice 19 “Spreadsheet scorecards” 29 Example 4.18: Spreadsheets as a Platform 31 90 Corporate Governance Scorecards 8.4 INDEX OF REFERENCES BY COUNTRY OR REGION continued 8. Cross-References Country/ Type of reference and issue Page region Indonesia Example 4.4: Scorecards to Promote Regional Integration 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Quote: Targeted engagement of regulators can contribute to success 16 Bank scorecards (“Sector-specific and function-specific benchmarks”) 18 “Text document scorecards” 29 Quote: Stakeholder feedback helps ensure proper scorecard design 34 Example 4.21: Corporate Fears 35 Example 4.23: Promotional Activities 37 “Awards programs” 38 Example 4.26: Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 Example 4.33: International Comparisons Using Scorecards 47 Example 4.34: Banking Sector Governance Practices 47 Example 6.1: Building on Scorecard Projects 58 Italy Bank codes (“Sector-specific and function-specific benchmarks”) 18 Jordan Bank codes (“Sector-specific and function-specific benchmarks”) 18 Kazakhstan “International benchmarks” 18 Scorecards as a voluntary self-assessment tool (Section 4.4.1, Engage early adopters) 35 Lebanon Closely held business code of governance (“National benchmarks”—footnote) 18 MENA Example 6.1: Building on Scorecard Projects 58 Macedonia, Example 4.14: Transparency and Disclosure Indicators in a Spreadsheet-based Scorecard 25 FYR Example 4.20: Gathering Stakeholder Feedback 34 Example 4.23: Promotional Activities 37 Example 6.1: Building on Scorecard Projects 58 Moldova Example 4.10: Dealing with Gaps in the Code and the Law 21 Quote: The tortoise and the hare (understanding limitations within the local environment) 20 Netherlands Bank codes (“Sector-specific and function-specific benchmarks”) 18 Nigeria Bank codes (“Sector-specific and function-specific benchmarks”) 18 Example 4.10: Dealing with Gaps in the Code and the Law 21 Philippines Example 4.4: Scorecards to Promote Regional Integration 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Example 4.7: Public-Private Stakeholder Partnerships 15 “International benchmarks” 18 Bank scorecards (“Sector-specific and function-specific benchmarks”) 18 Example 4.12: Legal Compliance and Best Practice Combined in a bank Scorecard 22 Example 4.13: The Use and Adaptation of Indicators from the OECD Principles 24 Example 4.17: Text Documents as a Platform 31 Pilot testing (Section 4.3.6, Pilot testing) 34 Mandatory participation (Section 4.4, Conduct the scorings) 35 Example 4.23: Promotional Activities 37 “Awards programs” 37 Quote: The advantage of self-assessment 39 “Self-assessments” 40 “Assisted self-assessments” 41 Corporate Governance Scorecards 91 8.4 INDEX OF REFERENCES BY COUNTRY OR REGION continued 8. Cross-References Country/ Type of reference and issue Page region Philippines Example 4.26: Enhancing Objectivity and Reducing Bias through Assisted Self-Assessments 42 (continued) Example 4.33: International Comparisons Using Scorecards 47 “Public disclosure” 49 The case of the Philippine Institute of Corporate Directors (Section 5.3, And institute of directors) 53 Quote: Paying attention to incentives 53 Example 6.1: Building on Scorecard Projects 58 Qatar Bank codes (“Sector-specific and function-specific benchmarks”) 18 Serbia Measuring legal compliance versus observance of best practice (“The use of the law as a benchmark”) 21 Example 4.20: Gathering Stakeholder Feedback 34 Example 4.22: Incentives for a Small Listed Company 36 “Providing companies and other institutions with support” 43 The case of Galenika Fitofarmacija (Section 5.1, A company) 50 Singapore Example 4.4: Scorecards to Promote Regional Integration 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Bank codes (“Sector-specific and function-specific benchmarks”) 18 Spain Closely held business code of governance (“National benchmarks”—footnote) 18 Thailand Example 4.4: Scorecards to Promote Regional Integration 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Text documents as a platform (“Text document scorecards”) 29 Example 4.33: International Comparisons Using Scorecards 47 Trinidad and Example 4.5: Who Initiates the Project? Who Owns It? 13 Tobago Example 4.9: Using an International Benchmark When There Is No Local Code 20 Measuring legal compliance versus observance of best practice (“The use of the law as a benchmark”) 21 Example 4.19: The Web as a Platform 32 Self-assessments (“Web-based scorecards”) 33 United Example 4.9: Using an International Benchmark When There Is No Local Code 20 Kingdom Vietnam Quote: Scorecards benefit different users 6 Example 4.1: Initial Environmental Assessments Help Determine the Approach 9 Quote: Scorecards help regulators refine their governance framework 9 Example 4.4: Scorecards to Promote Regional Integration 11 Example 4.5: Who Initiates the Project? Who Owns It? 13 Example 4.9: Using an International Benchmark When There Is No Local Code 20 Example 4.13: The Use and Adaptation of Indicators from the OECD Principles 24 Example 4.16: Neutral Indicator Weightings Mixed with Weighted Indicator Categories 28 “External assessments” 40 Example 4.27: Enhancing the Quality of Scorecards through Training and Proper Procedure 42 “Country surveys” 45 Example 4.31: Reporting Performance by Indicator Category 46 Example 4.32: Reporting on the Relationship between Foreign Ownership and Good Governance 47 Example 6.1: Building on Scorecard Projects 58 Example 6.2: Corporate Governance Indexes and Listing Tiers 59 West Bank 4.11: Measuring Legal Compliance versus Observance of Best Practice 22 and Gaza 92 Corporate Governance Scorecards 8. Cross-References 8.5 INDEX OF FIGURES Figure Page 4.1: Steps in Conducting a Scorecard Project 8 8.6 INDEX OF TABLES Table Page 2.1: Sample of Measurable Outcomes 5 2.2: Different Users of Scorecards 6 4.1: Key Questions to be Answered in the Plan 17 4.2: Advantages and Disadvantages of Different Platforms 30 4.3: Advantages and Disadvantages of Assessment Approaches 40 7.1: Sample Indicators 61 7.2: Corporate Governance Analysis: Family-Owned Business 68 7.3: Sample Feedback Form 81 Acknowledgements Project team Nebojsa Vukovic, Head of Listing, Education and PR Department, Banja Luka Stock Exchange, Bosnia and Richard Frederick, Senior Consultant, IFC Herzegovina Ralitza Germanova, Associate Operations Officer, IFC Nick Nadal, Former Head, Hawkamah Institute for Corporate Corporate Governance Group Governance, Dubai, United Arab Emirates Kiril Nejkov, IFC Operations Officer Corporate Governance, Martin Steindl, Senior Corporate Governance Officer, Europe and Central Asia Sustainability Development, FMO Netherlands Development Finance Company International experts Anne Molyneux, Director, CS International Christian Strenger, Deputy Chairman, Private Sector Stephanie Charitonenko, Independent Consultant Advisory Group; Academic Director, Center for Corporate Governance, HHL Leipzig Graduate School of Management, Germany IFC/World Bank Peter Montagnon, Member, Private Sector Advisory Group, Henri Fortin, Head, Centre for Financial Reporting Reform, Associate Director, Institute of Business Ethics, United Europe and Central Asia Region, The World Bank, Austria Kingdom Philip Armstrong, Senior Advisor Corporate Governance, IFC Bistra Boeva, Member, Private Sector Advisory Group, Oliver Orton, Regional Project Manager, Corporate Governance Professor, University of National and World Economy; IFC Europe and Central Asia Member, Bulgarian Corporate Governance Commission, Yehia El Husseiny, IFC Operations Officer Corporate Bulgaria Governance, Middle East and North Africa Patrick Zurstrassen, Member, Private Sector Advisory Group, Isimkah Ibuakah, IFC Operations Officer, the Middle East and European Confederation of Directors Associations, North Africa Financial Infrastructure Program Belgium Roman Zyla, Corporate Governance Lead (Sub-Saharan Africa), Thierry Buchs, Head, Economic Cooperation Programme in Senior Corporate Governance Officer, IFC Corporate Colombia, State Secretariat for Economic Affairs (SECO), Governance Group Colombia Anar Aliyev, IFC Operations Officer Corporate Governance, Chris Hodge, Corporate Governance Unit, Financial Reporting East Asia and Pacific Council, United Kingdom Marie-Laurence Guy, Program Manager, Global Business Francisco Prada, Head, Corporate Governance Division, Leadership Program/Corporate Leadership Program; IFC Confecámaras, Colombia Human Resources Leadership and Development John Jarrett, Principal, BHJ Partners; Executive Director, Merima Zupcevic Buzadzic, IFC Operations Officer Corporate Chairmen’s Forum, United States Governance, Europe and Central Asia Gian Piero Cigna, Senior Counsel, European Bank for Stefanus Handoyo, IFC Operations Officer Corporate Reconstruction and Development Governance, East Asia and Pacific James Simanjuntak, General Secretary of Management Board, Nguyet Anh Nguyen, IFC Operations Officer Corporate Indonesia Institute for Corporate Directorship, Indonesia Governance, East Asia and Pacific Slavica Pekovic, General Affairs Manager, Galenika- Darrin Hartzler, Global Manager, Corporate Governance, IFC Fitofarmacija, Serbia Corporate Governance Group David Robinett, Senior Private Sector Development Specialist, Corporate Governance, World Bank Group 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Tel: +1 (202) 458 8097 Facsimile: +1 (202) 974 4800 www.ifc.org/corporategovernance