ENCOURAGING INVESTMENT THROUGHSOUND CORPORATE GOVERNANCE

NYASHA P. S. ZHOUCZI Committee on Business Ethics

Corporate Governance Summit – ZIMLEF Harare 28/09/2009

PRESENTATION STRUCTURE Session Fit Driving Questions Back To Basics Scope Of Corporate Governance +Plus Investment Thru’ Sound Corporate Governance

A Global View At National Level (Macro) At Firm Level (Micro) At Investor Level Global Competitiveness (wef)

Implication For Zimbabwe Investor Concerns Conclusion

SESSION FIT- IN CORPORATE GOVERNANCE

Philosophy Importance In National Economic Development Legislative Aspect – Companies Act Stock Market Development Rebuilding Structures & Systems (in Zim) Implementation Of National Code (Zim) State – Owned Enterprises Investment Attraction

Focus Investment Motivation

DRIVING QUESTION? Why is Investment critical to National Economic development? Who is the Investor? Why would one consider investing? What are the investor’s expectations? What consideration would an investor put at the centre of his decisions? Who are the key players on the investment chessboard? What is sound/unsound governance? What is the BEST-FIT for investor and investee destination? What are the safety nets? How does Sound Corporate Governance Assist?

BACK TO BASICS (B2B)BUSINESS ENTITY CONCEPT

Ownership Business

GovernmentPublicsCommunitySuppliersCustomers

EnterpriseIdeaRiskTrade Off

TaxesSocial CostServicesWealth Creation

RiskCapital

Profits

Management

&Staff

A & B LTD

IN THE MIND OF THE INVESTOR I Have an Idea! I Have to Give Up Consumption! I Have Capital! I am Ready to Handover Control Of My Funds!

QUESTIONS

What Is My Risk / Return Trade Off? Where Do I Place My Funds What Safety Net Do I Need? How Can I Minimize Risk / For Returns?

BACK TO BASICS (B2B)

THINKING OF INVESTING Forego Consumption ! Risk Taking For A Return! Not Charity ! Wealth Creation ! Economic Growth !

Key Considerations Attractiveness Of Destination ! Competition For Capital ! About Choices – Of Business !

-Of Domicile !

BACK TO BASICS (B2B)

SCOPE OF CORPORATE GOVERNANCE

“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society.

The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust”

“Shareholders role in governance is to appoint the directors and auditors. Poor corporate governance has ruined companies, sent directors to jail, and destroyed a global accounting firm and threatened economies and governments.”

(Sir Adrian Cadbury)

+Plus Investment Thru’ Sound Corporate Government

A Global View Perspective Economies wishing to attract their “Fair Share” of global FDI must address those factors that either encourage or inhibit investment Corporate Governance practices which protect the rights of minority shareholders have major influence in:

o Attracting FDIo Making positive contribution to economic development goal

75% of institutional investors said Board Practices were as important to them As Financial Performance when evaluating potential investment (Mckinsey & Co.). 80% of those would Pay a Premium for shares in corporations that exhibit Good Governance Practices.

Macro Level (National)

According to the IMF- Capital Markets Consultative Group: The investment regime and the environment for business ranked second in order of importance among factors determining foreign investment location.(1)

Stability of investment environment (climate) : Consisting of transparent and predictable investments’ regulations and rules-is very important to attract FDI. Can be provided through good governance practices on macro level.

To attract foreign investment, there are four main elements that should be taken into consideration: Predictability, Accountability, Transparency and Participation

In addition to increased importance of stable investment climate, governments should work on achieving governance principles to provide a predictable, transparent and stable investment environment.

+Plus Investment Thru’ Sound Corporate Government

1) International Monetary Fund, (2003), Foreign Direct Investment In Emerging Market Countries., Working Group of the Capital markets Consultative Group(Washington DC.: IMF).

THE FIRM LEVEL (company) Well governed firms invest more than badly governed ones(1) Better governance quality improves the efficiency of capital allocation within firms, whereas lax governance produces under- investment rather than over-investment. Well-governed companies receive higher market valuations, which increase the inflow of capital from both domestic and foreign sources in the form of debt and equity. The higher the marginal product of capital, the higher the quality of corporate governance.(1)

+Plus Investment Thru’ Sound Corporate Government

Well-governed firms have considerably better access to outside financing than firms with weaker governance.

Equally important and, irrespective of the need to access capital, improved governance structures and processes help insure quality decision making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance.(1)

(1) Oyvid,B., Cooper, I., and Priestly,R., (2007) :Corporate Governance and Real Investment Decision”, working paper series, Norwegian School Of Management.

(2) La Porta, R., Lopez-de-Silanes,f., and Vishny,R.,(2002), “Investor Protection and Corporate Valuation,” Journal of Finance.57(3),1147-70

THE FIRM LEVEL (company)

A study of S&P 500 firms by Deutsche Bank shows that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19% over a two-year period. (1)

An ABN/AMRO study demonstrates that Brazil-based firms with the best corporate governance ratings garnered 2004 P/E ratios that were 20% higher than firms with the worst governance ratings(2).

A study of Russian firms shows that a worst-to-best improvement in corporate governance predicted a huge 700-fold (70,000%) increase in firm value. The study’s sample size was small (21 firms), so it’s unlikely that such a huge increase would take place in a larger, more representative sample. However, the study still demonstrates a correlation between improved corporate governance and firm value(3).

(1) Grandmont , R., Grant, G., and Silva, F., (2004) Beyond the numbers-Corporate governance: Implications for investors. Deutsche Bank

(2) Erbiste , B., (2005), Corporate Governance in Brazil: Is there a llink Between Corporate Governance and Financial Perfomance in the Brazilian markets?” Abn Amro Asset Management.

(3) Black, B. ,( 2002), “The Corporate Governance Behavior and market value of Russian Firms”,, Emerging Markets Review, 2(2), 89-108

THE FIRM LEVEL (company)

Firm Level (continued)

A study by Korean and US researchers finds that a well-governed firm in Korea traded at a premium of 160 percent to poorly governed firms (1).

A Harvard/ Wharton Study shows that if an investor bought shares in US firms with the strongest shareholder rights, and sold shares in the ones with weakest shareholder rights, that investor would have earned abnormal returns of 8.5 percent per year(2).(1) Black,B., Jang,H., and Woochan,K., “predicting Firms’ Corporate Governance Choices: Evidence

fromKorea.”, Journal of Corporate Finance, 12, (3), 660-91(2) Gompers, P., Ishii, J., and Metrick, A., (2003), “Corporate Governance and Equity Prices.” Quarterly

Journal of Economics, 118(1), 107-155

+Plus Investment Thru’ Sound Corporate Government

Investor Surveys Investors state that they still put corporate governance on par with financial indicators when evaluating investment decisions

80% of the respondents would pay a premium for well-governed companies,

(premiums averaged 12-14% in North America and Western Europe; 20-25% in Asia and Latin America; and over 30% in Eastern Europe and Africa)(1).

The Mckinsey survey shows that investors do place importance on good corporate governance and are prepared to pay a premium for shares in well governed companies.

+Plus Investment Thru’ Sound Corporate Government

Global Competitiveness (wef)

Key for efficiency driven economies

Key for innovation driven economies

Basic Requirements•Political and Legal Institutions•Infrastructure•Macro Economy•Health & Primary Education

Efficiency Enhancers•Higher education & training•Market efficiency (goods, labour, financial)•Technological readiness

Innovation and Sophistication Matters•Business sophistication•Innovation

Key for factor driven economies

Zimbabwe’s position

How Competitive Is Mother Zimbabwe

How can Zimbabwe Regain its Global Competitiveness?

1st Pillar: Institutions

1. Property rights2. Ethics & Corruption3. Undue Influence4. Government red tape5. Security6. Accountability

3rd Pillar: Macro Economy

1. Government policy2. National Savings3. Inflation4. Interest rate5. Government debt6. Real Effective ROE

2ND Pillar: Infrastructure

How can Zimbabwe Regain its Global Competitiveness?How can Zimbabwe Regain its Global Competitiveness?

4th Pillar: Market Efficiency

1. Agric. Policy costs2. Legal framework3. Extent & effect of taxation4. Local Competition5. Antitrust laws6. Trade barriers7. Prevalence of foreign ownership8. GDP size9. Labour market: Flexibility & efficiency10.Brain drain11.Employment equity 12.Financial markets

5th Pillar: Health & Primary Education

6th Pillar: Higher education and Training

7th Pillar: Technological Readiness

8th Pillar: Business Sophistication

9th Pillar: Innovation

Implications of Sound Corporate Governance

What does this mean for our beloved country ? Do we need investment ? Is our climate attractive ?

Crisis Of Confidence Liquidity Institutional Collapse Decapitalization Technological Reversal Outdated Methods / Processes High Cost Producer Weak Enablers Supply – Demand Side Constraints Decline In Investment Volumes

Our Mirror – Brutal Facts

Zim needs investment to speed up recovery but how attractive are we ?

The State Of Manufacturing A 70% Reduction Including 2008…

0

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

INDE

X: 1

990

= 10

0

Robertson Economic Information Services

(Indices)

BenefitsSize of marketGrowth rateEconomic system

PoliticalEconomic

CostsPolitical costsEconomic underdevelopmentLegal system

Overallattractiveness

Business ClimateSound Corporate

Governance

HOW ATTRACTIVE ARE WE ?

Risks

The Building Blocks

National Competitiveness (Porter’s Diamond Model)

Firm StrategyStructure

Rivalry

Supply SideFactor

Endowments

Market SideDemand

Conditions

Industry ClusterRelated

Supporting

SkillsCore systemsKey resourcesBasic infrastructure

Strong industrial baseVisible and active clusters

Real wages

Vibrant businessSound

Corporate Governance

The Safety Net

What Concerns Foreign Investors ?• What concerns foreign investors?• Two perspectives:

– Company specific concerns– Country Specific concerns

DOES ZIM WANT TO ATTRACT INVESTMENT ?

What Concerns Foreign Investors?

Country Specific

1. Property Rights2. Strong Legal & Political

Institutions3. Consistent Government

Macroeconomic and Fiscal Policy

4. Stable political system5. Profit/dividend

Repatriation

Company Specific

1. Strong Management team with a excellent track record

2. Good Strategy3. Market Dominance4. Strong Cash Generation5. Capital Appreciation

Corporate Governance as the safeguard

salary

Policies Fairness Social Responsibility

Transparency Systems

AccountabilityLosses Responsibility

Independence

Objectivity

Discipline

OutProfits

Structure

In

WITHER TO ZIM ?

So What Then – Our Reality ? Our Nation Needs Investment ! We Have Lots Of Idle Assets ! The Capital Markets Have Choices ! Investment Is Not Charity ! We Need To Get Our Act Together To Get Our Fair Share Of Investment Funds ! We Have The Right Work Ethic ! Need To Build Sound Governance !

Rebuilding A Sound National Governance Ethos

Individual level

National level

•Institutional•Political•Legal•Civic

7 CharacteristicsFairnessAccountabilityResponsibilityIndependenceSocial ResponsibilityDisciplineTransparency

Firm level

•School•Community•Home•Civic

•Shareholders•Boards•Executives•Supervisory•Work floor

Enterprise GovernanceCorporateGovernanceProcesses

BalanceBusinessGovernanceProcesses

Chairman/ CEONon- Executive DirectorsAudit CommitteesResources & Remuneration CommitteeRisk Management For CompliancyControls Assurance

AccountabilityAssurance

conformance

•Strategic Planning & Alignment•Strategic Decision Making•Scorecards•Strategic Enterprise Systems•Continuous Improvement•Strategic Risk Management

Value CreationResource Utilization

Performance

ConclusionImpact Of Sound Corporate Governance On Attracting Investment

a.Competitiveness. The more a company’s system is opening ethically and with integrity the more it becomes competitive because of its goodwill and formidable reputation.b.Sound governance shows investors a high level of potential for success in a company.c.Good governance makes a company visible in the domestic and international market. Such visibility exposes it to a variety of ideas and activities from other international business. International business bring in new markets, efficiency gains , diversification, spreading of risk, strategic assets, the list is long.d.A better allocation of capital overtime , and hence higher productivity and growth .e.Increased ability of companies to raise funds overseas and compete internationally.

f. Stronger foundations for further opening of the capital account.g. Linkages to international networks, contacts and possible

lucrative partnerships.h. Employment. Investors see the degree of resource employment

by the level of corporate government a company has.I Target firms need good corporate governance practices to

evaluate takeover offers - most takeovers are negotiated.j Good corporate governance practices prevents firms from being

seen as an easy target by other firms and governments.k. Good corporate governance is also necessary to attract venture

capital.

Conclusion (continued)

Lets’ Go For It………..

Accountability

Responsibility

Social Responsibility

Independence

fairness

Marks! Set ! Go ! Get Zimbabwe Moving Again

Transparency Discipline

Conclusion (continued)

I THANK YOU

Taking A Risk