Expatriate Bangladeshi 2000
Linking Individuals, Regions, Ideas, and Actions
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Attracting Foreign InvestmentThe Importance of Good Corporate GovernanceSyed Akhtar Mahmood* Smahmood@worldbank.org* Syed Akhtar Mahmood is with the Private Sector Development Department of the World Bank. This article is written in his personal capacity and does not necessarily reflect the views of the World Bank Group.A few years ago, a group of Bangladeshi businessmen had come to the US in an endeavour to attract foreign investment into Bangladeshi companies. At the end of one of their seminars, I asked a wealthy Bangladeshi friend if he was willing to invest his money in such companies. His reply, which I will never forget, was "No way!, I do not trust these guys at all!". This particular friend of mine is usually critical of most things Bangladeshi - so I was not shocked at his remark. However, the fear that he was expressing is a common one. Investors everywhere in the world are always concerned about the safety of their investments. And this concern is not limited to fears about government actions, such as nationalization, expropriations, controls on profit remittances, or arbitrary policy changes that drastically change profitability of the invested activities. As governments around the globe have become relatively less arbitrary in their decisions, attention has focused increasingly on the threats to investment that arise from within the company, from managers, employees and co-investors. This brings us to the concept of corporate governance. Corporate governance refers to the rules and incentives by which the management of a company is directed and controlled so as to maximize the profitability and long-term value of the firm to the shareholders, while taking into account the interests of other legitimate stakeholders. An important challenge for the owners of a company is to ensure, through a combination of carrots and sticks, that managers and employees work in their best interests. Investors also have to worry about the actions of their co-investors. This is particularly true for minority shareholders who, in the absence of adequate protection, may find themselves ripped off by the majority owners. It is thus no surprise that investors the world over will want to carefully assess the quality of corporate governance in companies they are thinking of investing in. So how much premium do investors actually place on good corporate governance? A lot: suggests a recent study of investor opinions carried out by the world-renowned management consultancy firm, McKinsey and Company. In collaboration with the World Bank and the magazine Institutional Investor, McKinsey carried out a survey of over 200 institutional investors in March and April of this year. The survey gathered responses about investment intentions, in particular about the extent to which corporate governance figures in the investment decisions of these large investors. The findings are valuable because the investors surveyed are important. The 216 investors surveyed together manage about US $3.25 trillion in assets. Most of them have substantial investments in developing countries, particularly in Latin America and East Asia. If Bangladesh wants a fraction of this investment, it needs to know exactly what drives these investors. So what does the survey reveal? First, corporate governance is important. Three out of four investors said that, when they evaluate companies for potential investment, they emphasize corporate governance as much as they do the financial performance of the companies. One-third of the companies who had invested in Asia and almost half of those who had invested in Latin America went a step further: for them, corporate governance was actually more important than financial performance. Why is this so? A major reason is the limited, and often poor quality of, financial reporting. When you can't trust the figures in the first place, you are not likely to be driven much by reported profitability. You would want to assess if the companies are well-governed and whether shareholder rights are protected. Not surprisingly, investors in Europe and the US, where accounting standards are higher, put relatively less emphasis on corporate governance. The second major finding: Investors will pay a premium for a well-governed company. Four out of five investors said that they would pay more for the shares of a well-governed company than for those of a poorly governed company, even if the financial performance is similar. How much more will they pay? A lot. The proportion varies - from 18 per cent for a well-governed company in the UK to 27 per cent for a well-governed company in Venezuela or Indonesia - but it is always high. Corporate governance has many dimensions. These include the composition and rights of the boards of directors, the extent to which information is disclosed, and the degree to which shareholder rights, specially those of the minority shareholders, are protected. Are all of these equally important to the investors or are there some aspects of corporate governance which they consider more important than others? Investors in Latin America were asked to identify what their first and second priorities were. Slightly more than half (52%) said that their first priority was shareholder rights, with disclosure coming next. There was a difference, though, in the reactions of the local vis-à-vis the foreign investors. While one-third of the local investors thought shareholder rights were their top priority, the proportion was much higher - 71 per cent - for the foreign investors. For the foreign investors, having more information through better disclosure is not that useful if they cannot use the knowledge to influence board or management decisions. So, corporate governance is clearly important. If that is so, what can be done in Bangladesh to improve the manner in which companies are governed? This is a question that I hope to address in a separate article. However, one fundamental point may be mentioned here. Improvements in corporate governance would require both regulations as well as voluntary actions. Governments can do their bit through setting policies, enacting laws and establishing regulations, and implementing all of these effectively. But a lot will depend on the voluntary realization of companies and professional bodies, such as accountants and auditors, that, at the end of the day, good corporate governance is as good for them as for anyone else. Thus, as Bangladesh strives to meet the challenge of improving corporate governance, there will be a role for everyone: government, individual companies, private sector collective bodies, professional associations and the media. And if all actors play their role well, perhaps, one day, even my skeptical friend will change his mind. |
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