CORPORATE INTEGRITY AND GOVERNANCE (CIG)

SME Integrity and Governance Performance ProgramMaxine Garvey

Corporate Governance UnitJuly 2012

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Table of Contents

CORPORATE INTEGRITY AND GOVERNANCE1. SME Integrity Workshops Feb – May 20122. What did we find out from the workshops?

• Internal and External Issues in Poor SME Integrity Performance3. How can IFC help?4. IFC & SME Integrity Performance: An Opportunity to Lead5. Essential Elements for Success of an SME Integrity Program6. Outline of Activities in an SME Integrity Performance Program

• Outline of Structure & Budget• Outline of Deliverables

7. Issues/Questions

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SME Integrity Workshops: Feb-May 2012

•Purpose: To test prototype approach and market interest•Defined integrity in firms as driven by leadership, strategy, policies and culture

•Target SMEs: Up to 300 employees (as used in WB Enterprise Surveys)•Summary Actions in Prototype presented in Workshops

LEVEL 1: Foundation• Crafting firm strategy with integrity objectives as an element• Creating an integrity policy and taking actions to resist corruption• Maintaining good internal systems and controls• Improving corporate governance of an SME

LEVEL 2: Demonstration• Benchmarking against other firms • Communicating firm’s integrity approach through media, annual reports, CSR reporting• Auditing and external certification of integrity program

LEVEL 3: Collective Action• Creating alliances for integrity pacts, certifying business coalitions and principle-based

initiatives• Executing change by way of private-public dialogue

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SMEs as participant/suppliers of integrity failures (Internal Issues):

•Lack of transparency to their bankers

•Poor tax compliance

•Multiple financial records

•Strategic objectives that encourage graft

•Poor ethical tone set by leadership

•Participation in bribery

•Poor segregation of duties

•Weak collective action capability• Governance challenges

• Lack of compliance audits

Findings: Internal and External

Issues in Poor SME Integrity PerformanceSMEs as victims of integrity

failures (External Issues)

•Public procurement corruption

•Extortion in customs and licensing

•Police pressure

•Other public governance failures

• “touch-point opportunities”

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How can IFC help?

• An SME Integrity Performance Program to help SMEs achieve improved economic outcomes and access to finance by enhancing their integrity and governance performance

• Activities at Three Levels & Supporting Work Level 1

• Work with owners, boards and senior managers to build ethical leadership and practices• Work on internal controls and financial reporting• Work on credit rating enhancement by integrity improvements (using software as

needed)• Co-ordination with SME toolkit programs

Level 2• Aid reputation risk management • Guide on media relationships, case studies to communicate integrity improvements

Level 3• Build collective approaches with strong governance structures• Aid with auditing and monitoring compliance mechanism with agreements• Guide on using social pressure and media for compliance and collective action

• Supported by investment climate and other reforms to reduce the government “touch-points” that cause pressure on SME integrity 5

SME Integrity & Governance: Should the IFC engage?

• Weak integrity has significant financial impact for SMEs Higher operating costs for SMEs

• SMEs spend up to 33% to 49% of revenue on bribes to public officials according to WB/EBRD Enterprise Survey

• Often low value obtained even after paying bribe• SME pay more for good talent due to poor reputation and corrupt practices

•Engagement is consistent with IFC’s role in private sector development Corruption is a difficult perennial issue

• IDG # 3: Access to financing for SMEs Bankers in the workshops complained about lack of transparency and

accountability

•SMEs and Job Creation SMEs role in job creation is more important due to rising unemployment among

youth and aging population working longer

•G20/B20 Responsiveness to supply chain requirements for SMEs from B20 firms

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IFC & SME Performance: An Opportunity to Lead

•Among DFIs, one of the largest (and growing) portfolio of SME banking (debt & equity) relationships

We have access to portfolio of SME clients as base population We have a “carrot” because of our funding ability

•We have expertise in internal strengthening in related areas such as corporate governance

•We have expertise in external reforms through investment climate work•We can co-ordinate with the GAC efforts•We should aspire to leadership rather than allow IFC to be the laggard

IDB Integrity Program• Pilot ongoing but lacks investment climate work

EBRD• Joined us in two workshops

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Essential Elements for Success of an IFC SME Integrity Performance Program

•Integrity performance must be framed as a financial “bottom line” issue

• Financial benefits to SMEs must be clear and credible When SMEs do not participate in corruption and bribery they

face immediate costs• May be sufficient to undermine their viability• SMEs do not have much negotiating power when pressured

– Collective action will help mitigate cost to individual firms

• Can we encourage integrity performance by helping in some way?

– SME Integrity Fund? (Donor funded?)– Interest rate adjustments/rebates for integrity performers

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Essential Elements for Success of an IFC SME Integrity Performance Program

• Integrity performance must be framed as a financial “bottom line” issue• Working with our bank clients & their SME units/officers

Economic benefit to participating banks Agree with Investment Department on basis of contact

• Must engage at time of investing (with investment teams) As an additionality: providing development impact

• Emphasis on effective internal work by and with SMEs Medium-sized firms: higher impact from visibility and sustainability Micro-firms – often temporary life

• Benefit from complementary public governance and regulatory reforms Investment climate/GAC reforms Impact beyond SMEs

• Cross-SME work within SME communities Collective action training

• Core program personnel as IFC staff

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Outline of Activities in a SME Integrity Program Engage with investment officers & client banks

Work with banks on SME credit rating models

Work internally with SMEs’ boards and managers

Work internally with SMEs on risk ratings & financial reporting

Work with SME Toolkit trainers for groups of smaller firms

Work with SMEs on public-private dialogue & collective actions

Work on external public governance and regulatory issues

Work with SMEs on collaborative relationships with B20 on integrity performance

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Outline of Structure & Budget• Pilot Region: Europe, Central Asia, Middle East and North Africa (52 countries)

Need to identify country focus based on SME banking relationships Some political stability and adequate number of SMEs of viable size 1 from ECA & 1 from MENA?

• Funding Source: IFC FMTASS Core of full IFC staff, Mix of international and local staff

• Budget FY13-FY16: Separate Budget for internal vs. external work Comparables for CG Advisory Programs (Internal focus)

• ECA program: US$6.5M• East Asia: US$14.6M• MENA: US$7.25M

• Donors: B20, Korean and Japanese Governments•Collaborators: WBI, OECD, UNIDO, CIPE, EBRD, IIC• Hosting Department: CES, IC, GFM , SBA, Joint Program?• Successful Model to Learn From: Women in Business Program?

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Outline of Deliverables• Year 1

SME Toolkit Integrity Module (Dec 2012) Agreement on engagement basis among IFC departments (GFM, IC, CES etc) Secure funding and formalize collaborations Confirm pilot country (s), secure buy-in from managers and bank clients Identify and onboard staff Develop tools, training for select group of SMEs in pilot program Establish IFC presence in this space with G20/B20 and DFI community

• Year 2 Expand beyond initial SME pilots Start SME graduations to financial incentive programs Communicate successes for SMEs and for IFC (case studies, publications) Roll-out software for integrity based risk rating module for banks and SMEs Train-the -trainers programs for smaller SMEs Establish collaborative relationships with B20

• Year 3 New countries/regions and new banking relationships

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Issues & Questions•Is this a true opportunity? Is it important for IFC?

Are we under-represented in the SME Integrity space? What are the implications if we do not get into the SME Integrity space?

•Is tackling corruption too ambitious an activity?•Can IFC lead in the SME Integrity arena?•Do we focus on internal or external work? Can we effectively do one without the other?

•Implications for staffing and resources What is the appetite? What is the funding level available? Are donors interested?

•Where do we start? Pilot in EMENA

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