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A Primer on Corporate Governance

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WHAT !S CORPORATE GOVERNANCE?/

Corporate governance refers to_ thr structures and processes for the direction and'contro! of companies. Corporate governance concerns the relationships among the management. Board oteDirectors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capita!.

The OECD Principles of Corporate Governance provide the framework for the work of the World Bank Group in this area, identifying the key practical issues: the rights and equitable treatment of shareholders and other financial stakeholders, the rote of non-financial stakeholders, disclosure and transparency, and the responsibilities of the Board of Directors.

WHY IS CORPORATE GOVERNANCE IMPORTANT?

For emerging market countries, improving corporate governance can serve a number of important public policy objectives. Good corporate governance reduces emerging market vulnerability to financial ■crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. Also, as pension funds continue to invest more in equity markets, good corporate governance is crucial for preserving retirement savings? Over the past several years, the impor-tance of corporate governance has been highlighted by an increasing body of academic research. . y

. /Studies.have shown that good corporate governance practices have led to significant increases in economic value added,(EVA) of firms, Higher productivity, and lower risk of systemic financial failures for countries, y ■■ v -I

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Corporate governance has been adopted as one of,twelve core best-practice standards by the international,financial community. The World Bank is the assessor for the application of the OECD Principles of Corporate Governance. Its assessments are part of the World Bank and International Monetary Fund (IMF) program on Reports on the Observance of Standards and Codes (ROSC).

The 'goal of the ROSC initiative is to identify weaknesses that may contribute to a country's economic and financial vulnerability. Each Corporate Governance ROSC assessment reviews the legal and regulatory framework, as well as practices and compliance of listed firms, and assesses the framework relative to an internationally accepted benchmark.