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Transcript of Bahan KuliaBahan Kuliah Genap 13- 14h Genap 13- 14 Revisi
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L/O/G/O
Corporate Governance
An Introduction(Konsep dan Kerangka)*
Purwatiningsih Lisdiono
*diambil dari berbagai sumber
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Corporate Governance
When a business goes wrong, look only to
the people who are running it
-Michael Dell-CEO Dell Corporation
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Definition of CG (1)
Definisi menurut OECD (1999)
Definisi menurut KNKGcari dan bandingkan
Definisi menurut IICGcari dan bandingkan
Definisi menurut Kepmen BUMN tentang Tata Kelola
Perusahaancari dan bandingkan
Secara singkat, CG adalah Processes and structure by
which business and affairs of corporate sector is directedand controlled (Cadbury Committee , 1992)
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Definition of CG (2)
Corporate Governance is the system by which businessoperations are directed and controlled.
The corporate governance structure specifies thedistribution of rights and responsibilities among different
participants in the corporation, such as, board, managers,shareholders and other stakeholders, and spells out therules and procedures for making decisions on corporateaffairs.
By doing this, it also provides the structure through whichthe company objectives are set,and the means of attainingthose objectives and monitoring performance,
OECD April 1999.
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Definition of CG (3)
World Bank Define corporate governance ininternational context as that blend of law,
regulation and appropriate voluntary private sector
practices which enable a corporation to attract
financial and human capital, perform efficiently, andtherebyperpetuateitself by generating long-term
economic value for its shareholders and society as a
whole
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Definition of CG (4)
Shleifer and Vishny (1997) : Corporate governancedeals with the ways in which suppliers of finance to
corporations assure themselves of getting a return
on their investment
This definition can be expanded to define corporate
governance as being concerned with the resolution
of collective action problems among dispersed
investors and the reconciliation of conflicts of interest
between various corporate claimholders.
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For Tuanakotta (1999), corporate governance isessentially about best business practice, aiming toenhance organizational performance and wellbeingand to create shareholder and stakeholder value.
He stated that corporate governance is beyond
structure and compliance. It has to be directed towards process and
effectiveness. It is also beyond compliance anddisclosure.
It has to be directed toward positive performance. Inconclusion, good corporate governance is goodbusiness. Good governance is not separate project, orsimply an add on to running your business. Its runningand managing your business as usual.
Definition of CG (5)
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Corporate Governance
It is about check and balance between all organ oforganization.
The most important : it is about changing the way ofthinking to run the business, Changing the mindset.
Making the companies accountable to theirstakeholders.
The key issue :TRANPARENCY and ACCOUNTABILITY
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Corporate Governance Theories
Agency Theory (Jensen & Meckling, 1976)
Transaction-cost Economics (Williamson, 1996)
Stewardship Theory (Davis, Schoorman, Donaldson,
1997) Stakeholder Theory (Mitchell, Agle, Wood, 1997)
Others theories that are relevant
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Some Background Information
Adolf Berle and Gardiner Means The ModernCorporation and Private Property (1932)
After US Stock market crash
Concerned with performance of modern corporations andefficient use of resources
Issues associated with separation of ownership andcontrol. How do you hold managers accountable?
What are the potential problems?
How can you address those problems?
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Pemegang Saham
RUPS
Dewan Komisaris
Dewan Direksi
Stakeholders
Employees
Customers
SuppliersCreditors
Society
Standards(IAI- accounting
standards)
LawsRegulations
Internal External
Private Regulatory
Bank
Markets Product Markets
Labor Market
Capital Market
Corporate Governance Mechanism :
The Internal and External Architecture
Reputational agents
Accountants
Lawyers
Credit rating Investment bankers
Financial media
Investment advisors
Research
Corporate Governance
analyst
Internal Auditor
Accounting
Management
Source : Modification from Cadbury (1999) Corporate Governance: A Framework for Implementation, Kim and Nofsinger ( 2004)
Corporate Governance.
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L/O/G/O
Source: The World Bank Group
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Emphasis on Market Institutions
OECD Principles of Corporate Governance
1. Ensuring the Basis for an Effective Corporate
Governance Framework*
2. The Rights of Shareholders and Key OwnershipStructures*
3. The Equitable Treatment of Shareholders
4. The Role of Stakeholders in Corporate
Governance
5. Disclosure and Transparency
6. The Responsibilities of the Board
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Corporate governance intersect with manydisciplines include micro-economics,
organizational theory, information theory, law,
accounting, finance, management, psychology,
sociology and politics.
Each may view corporate governance in a
different way.
Corporate Governance is multi - discipline
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Corporate Governance
Why is it important? Proliferation of financial scandals and crisis
Loss of trust of investors
Globalization lead to increasing cross-border
investment opportunities but investors may nothave knowledge about the regulatoryframework of overseas investeesinvestorsneed security or safety guaranteethat are
common and can be applied everywhere withsome adaptationone of that guarantee isgood corporate governance practice
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Corporate Governance
Why is it important (continued) Search for investment (FDI trends) : Investors are
not willing to invest in countries / companies that are corrupt, prone tofraud, poorly managed and lacking sufficient protection for investorsrights one ofthe solution is GCG
Competition push companies to search forlower / cheaper Cost of capital
Privatization
SOE / BUMN reform
Competitiveness pressures
Sustainability
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Again, Why GCG? Main Reason
Corporation interacts with various parties inconducting its business:
Directors / Management
Stockholders
Majority Minority
Creditors
Government
Employees
Public
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Why CG?
Those relations could cause conflict of interest To control/manage that possible conflict of
interests among parties , one of the solution is
to apply CG CG is also needed to protect the interests of
principals from opportunistic behavior of
agent
Ultimate Objective:enhancing shareholder
value, whilst taking into account the interests
of other stakeholders.
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Drivers of Corporate Governance Dealing with
Failures and Scandals
Chile Financial Crisis 1970s
Asian Financial Crisis 1997
Russian Financial Crisis 1998
Impact of governance failures
on:
Companies
Societies
Economies Challenges today: Who is next
to fail? Who wants to fail?Questions remain in regards to Chinas
underlying financial health despite
impressive growth figures
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CorporateGovernance and Competitiveness
Stronger Shareholder Protection=Larger Stock Markets
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Corporate Governance and Competitiveness
Stronger Corporate Governance=Lower Cost of Capital
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Corporate Governance and Competitiveness
Higher Equity Rights=Higher Returns on Investment
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Corporate Governance Business Ethics
CORE VALUES of CG
Transparency
Fairness
Accountability
Responsibility
Guide for behaviorStructure of decision-making
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Ethical Behavior Matters
Why does it matter?
Ethical business practices = ability to retain
existing customers, gain new ones
Positive impact on employees - management Supply chains, global market opportunities
Corporate citizenship and the role of business in
societyif succeed could win the peoples
heartbecome competitive advantage
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Applying ethics
Bright lines vs. values Ethics as a set of evolving guidelines
Ethics and responsible decision-making by the
Board
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Board of Directors
Fundamentals:
Duty of care
Duty of loyalty
Business judgment rule
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Institutions Matter!
Functioning Markets
Better Environment for Doing Business
Rule of
Law
Good
Governance
Property
Rights
Access to
Information
Market
Entry
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Objective of Corporate Governance
Build up an environment of trust and confidence amongst thosethat having competing and conflicting interest
Enhance shareholders value and protect the interest of otherstakeholders by enhancing the corporate performance andaccountability
Promote the efficient use of scarce resources
Promote the trust of investors
Good corporate governance has a positive link to economicdevelopment and good corporate performance
Funds will flow to entities which are seen to have internationallyaccepted standards of corporate governance
Corporate Governance also plays an important role in maintainingcorporate integrity and managing the risk of corporate fraud,combating against management misconduct and corruption
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What can good corporate governance
bring to a corporation?
Creation and enhancement of a corporationscompetitive advantage
Enabling a corporation to perform efficiently andpreventing fraud and malpractice
Providing protection to shareholders interest Increasing the valuation of an enterprise
Ensuring compliance with laws and regulations
Alleviating poverty by enhancing socialresponsibilitiese
Increase trust of shareholders and creditors lower cost of capital
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Corporate governance at the heart of investmentdecisions
75% ready to pay premium for high governance
standards
Premium range:
1214% North America, Western Europe
20-25% Asia, Latin America
30%+ Eastern Europe, Africa
Investor surveys: McKinsey 2002
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Today, the importance of good governanceis widely appreciated (even in Asia).
Good governance is a very easy phrase to
say, but much harder to understand and
to appreciate.
It is not only for companies, but also forpublic institutions (Public Sector
Governance)
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The Core Values of CG
Transparency
Accountability
Fairness
Responsibility
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Organs CG
General Meeting of Shareholders (RUPS) Board of Commissioners (Dewan Komisaris)
Independent commissioners
Remuneration Committee
Nomination Committee Audit Committee
CG Committee
Risk Management Committee
Board of Directors (Direksi) Internal Audit
Risk Management Team
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MANAGEMENT
VsCORPORATE GOVERNANCE
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Agency
Relationship
Risk Bearing Specialist
(Principal)
Managers(Agents)
Decision
Makers
which creates
Managerial Decision-
Making Special ist
(Agent)
Hire
An agency relationship exists when:
Shareholder
(Principals)
Firm
Owners
Agency Theory (Jensen and Meckling)
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Conflict of Interests
Insiders have an information advantage overother parties (i.e. outsiders).
Insiders: Management, Majority Stockholders
Outsiders: Creditors, Minority Stockholders,Government, Employees, Public
These parties pursue their own interests(i.e.,self-interest), which can be conflicting
As a result, the parties whose action isunobservable tend to shirk (i.e., insiders),which is detrimental to the other parties
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Shareholder Manager Conflict
The self-interested behavior of managers maybe at conflict with the interest ofshareholders.
Managers may favor growth and larger size of
the firm, for the reason of: Greater job security
Larger compensation
Greater prestige Larger discretionary expense accounts
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Principal Agent Relationship
An agent has decision making authority thataffects the well-being of the principal.
Examples of principal-agent relationship:
Shareholders - Manager Creditors - Firm
Majority StockholdersMinority Stockholders
GovernmentFirm EmployeesFirm
Public/society - Firm
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The Agency problem occurs when:
The desires or goals of the principal & agent conflict
and it is difficult or expensive for the principal to verify
that the agent has behaved appropriately.
Agency problem in Indonesia :
Majority interest / shareholders Vs.Minority interest
Agency Theory
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L/O/G/O
Corporate Governance- Agency Theory-
Beyza Oba
Spring 2004
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Corporate governance:
an old problem a new solution
Seperation of ownership and control in joint-stock company(Berle
and Means 1932) allows the firms behaviour to diverge from the
profit maximizing, cost minimizing ideal
The principal problem rests in the abuse of power by corporate
elites;status quo leaves excess power in the hands of seniormanagement, some of whom abuse this in the service of their own
interest (Hutton, 1995), the result is damaging for shareholders
Corporate governance includes the structures, process, culturesand systems that engender the successfull operation of
organisations (Keasey and Wright 1993) and mechanisms to cope
with these elements
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Agency Theory
In economics, the principal-agent problem treats the difficulties that arise
under conditions of incomplete and asymmetric information when aprincipal hires an agent.
Various mechanisms may be used to try to align the interests of the agent
with those of the principal, such as commissions, profit sharing, or fear of
firing. The principal-agent problem is found in most employer/employee
relationships, for example, when shareholders hire top executives ofcorporations.
Assumptions of agency Theory:
Bounded rationality
Opportunism
Information asymmetry AT focuses on the relationship and goal incongruance between managers and
shareholders
Agency relationships occur when one partner in a transaction (the principal)
delegates authority to another (the agent) and the welfare of the principal is
affected by the choices of the agent
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Agency Theory
The delegation of decision-making authority from principal toagent is problematic :
The interests of principal and agent ussualy will diverge
The principal cannot perfectly and costlessly monitor theactions of the agent
The principal cannot perfectly and costlessly monitor andacquire the information available to or possesed by the agent
These create the agency problemthat is the possibility of
opportunistic behaviour on the part of the agent that worksagainst the welfare of the principal
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Agency costs
Agency costs; incur to protect principals interests and to reduce thepossibility that agents will misbehave Monitoringexpenditures by principals
Bondingexpenditures by agents
Residual loss of the principal
Essential sources of agency problems:Moral hazard; more of the agents actions are hidden from the principalor are costly to observe
In economic theory, a moral hazardis a situation where a party willhave a tendency to take risks because the costs that could incur will not
be felt by the party taking the risk. In other words, it is a tendency to bemore willing to take a risk, knowing that the potential costs or burdensof taking such risk will be borne, in whole or in part, by others.A moralhazard may occur where the actions of one party may change to thedetriment of another after a financial transactionhas taken place.
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http://en.wikipedia.org/wiki/Economic_theoryhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Economic_theory -
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Economists explain moral hazard as a special case of information
asymmetry, a situation in which one party in a transaction has moreinformation than another.In particular, moral hazard may occur if a partythat is insulated from risk has more information about its actions andintentions than the party paying for the negative consequences of therisk. More broadly, moral hazard occurs when the party with moreinformation about its actions or intentions has a tendency or incentive
to behave inappropriately from the perspective of the party with lessinformation.
Moral hazard also arises in a principalagent problem, where one party,called an agent, acts on behalf of another party, called the principal. Theagent usually has more information about his or her actions or intentionsthan the principal does, because the principal usually cannot completely
monitor the agent. The agent may have an incentive to act inappropriately(from the viewpoint of the principal) if the interests of the agent and theprincipal are not aligned.
http://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetry -
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Agency costsEssential sources of agency problems:
Adverse selection; the agent posseses information that is, for the principalunobservable or costly to obtain
Adverse selection, anti-selection, or negative selection is a term used ineconomics, insurance, risk management, and statistics. It refers to a market
process in which undesired results occur when buyers and sellers haveasymmetric information (access to different information); the "bad" productsor services are more likely to be selected.For example, a bank that sets oneprice for all of its chequing account customers runs the risk of being adverselyselected against by its low-balance, high-activity (and hence least profitable)customers.
Risk aversion; as organisations grow managers become risk averse (theywould like to protect their position, managers would like to max. chance ofsuccess by projects that have already brought success, managers buildstructures to increase their chances of control)
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Resolving agency problems
Principals and agents resolve agency problems through; Monitoring; observing the behaviour and performance of
agents
Bonding; arrangements that penalise agents for acting inways that violate the interests of principals or reward them
for achieving principals goals
Contracts between agents and principals specify the monitoringand bonding arrangements
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Why do principals delegate authority to
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Why do principals delegate authority to
agents?
Size Simplicity of business operations (conceiving
opportunity, funding, making and implementing
decisions)
Decision making situation can overhelm the
cognitive capacity of a single individual, decison
quality can be improved by assigning different parts
of the decision to different individuals
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What monitoring mechanisms can principals put to
minimize agency costs?
Owners seek maximum effort from employees at minimal cost while employees seek
to minimise effort and maximise remuneration (i.e. pay and benefits)
Monitoring mechanisms;
A. Contracts
Principals can monitor agents by collecting information about their behaviour(decisions and actions)
behavioural contracts; specify the activities workers should engage in
e.g. institutional investors monitor the decisions of of senior managers, board ofdirectors monitor top management...
Principals can monitor consequences of (only partially obseved) agent behaviour
outcome based contracts; compensation, rewards, piece rate production,
commissions..
When tasks are not highly programmable monitoring performance (output) ismore efficient
Performance monitoring is problematic in relation to teams, free rider problems
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What monitoring mechanisms can principals put to
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What monitoring mechanisms can principals put to
minimize agency costs?
B. Board of directors
board is charged with fiduciary responsibility (i.e. legal
trustee) of safeguarding the stockholders investmentInside
and outside board members
The outside board membersprovide objectivity as the board
ratifies and monitors the decisions of managers
responsibilities of the board of directors;
establish policies and objectives for the firm
elect, monitor, evaluate and compensate top managersmonitor, approve the financial condition of the firm
ensure that regulations are enforced
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The role of market discipline
Managerial labour marketviews the previous associations of managerswith success and failure as information about their talents . Managers of failing firms may not see a reduction in wages , but will be
disciplines as the managerial labour market attaches less value to theirservices
Managers in more sucessful markets may not receive any immediate gainin wages but the success of their firm may increase their value in
managerial labour market
Capital market and corporate control If managers (agents) of a firm take actions that are viewed by the market
as adversly affecting the value of the firms assets, then the price of theassets (i.e. stock price) will likely to drop. Managers in other firms,believing that they can profitably manage the assets of the failing firm,may be engaged in a takeover battle. The managers of the troubled firmwill loose control of their firm and old high agency cost managers will bereplaced by low (?) agency cost managers
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Assumptions of CG
The effective CG practice are often associated with:
1. A sound legal and regulatory framework and
rules of law in addition to incentive structures.
2. The ethical and transparent operations ofenterprises and their management.
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Ethical Conduct :
Ethic is the background color of CorporateGovernance.
Ethical conduct is putting into place the
mind-set do unto others you would havedone unto you.
Ethical approach is about reasonable
standard of behavior, both individually andcorporately. It is not theperfection.
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GCG and Its Impacts : CG as a Risk Factor
Country Level:
Market Infrastructure
Regulatory & Legal Environment
Informational Infrastructure
Common Problem : Form over Substance
Source: Standard and Poors
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GCG and Its Impacts : CG as a Risk Factor
Company Level:
1. Ownership Structure & Concentration
2. Financial Stakeholder Relations
3. Financial Transparency and InformationDisclosure.
4. Board and Management Structure and Process
Common Problem : Form over Substance
Source: Standard and Poors
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Corporate Governance Dilemma
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Business costs of too
much corporate
governance regulation
Benefits of having
corporate governance
mechanisms in place
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Strategy for Corporate Governance Reform
1. Initial Assessment2. Outreach and Education
3. Develop and Institute Corporate Governance
Mechanisms
4. Capacity-Building, Enforcement, and Follow-
up
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1. Initial Assessment
Assess corporate governance failures,challenges, opportunities, etc.
Rate country standards vs. international best
practices OECD principles/guidelines and local realities
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2. Outreach and Education
Identify stakeholders Build awareness: business leaders,
policymakers, society
Create broader public demand for reform
Public education campaigns
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3. Develop and Institute
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3. Develop and Institute
Corporate Governance Mechanisms
Develop corporate governance codes andinternal control mechanisms
Foster shareholder activism
Improve regulatory and enforcementframeworks
Create corporate governance networksincluding regulatory bodies, business
leaders and organizations, and other civilsociety groups
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4. Capacity-Building, Enforcement, and Follow-up
Training and certification programs formanagers and directors
Establishment of Institutes of Directors
Create corporate governance ratings systemsfor investors
Training for financial intermediaries
Broader legal and institutional enforcement:ex. Judicial systems
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Institutions and Corporate Governance
What does it mean for countries?
Initial conditions matter
Need to recognize that there is a cross-section ofcountries, approaches, and capacities
Set own reform goals and priorities
Strike the right balance between international bestpractices and local needs, priorities, and experiences
Share lessons learnedknowledge management
Focus on processes rather than outcomes How you develop CG mechanisms and how they function vs. what you are
trying to develop
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L/O/G/O
Terima kasih
Thank youMerci
Gracias