The Role of Stakeholders In

Corporate Governance
Dr. Demir Yener
Center for International Private Enterprise
Washington, D.C.
Fourth Meeting of the Eurasian Corporate Governance Roundtable
The Responsibilities of Boards of Directors
October 29-30, 2003, Bishkek, Kyrgyzstan

Purpose of the Presentation

To discuss:

Objectives of the firm: Wealth

Maximization

Responsibilities of the board

The role of stakeholders in corporate

governance

Stakeholders and Shareholders

Primary Stakeholders

Shareholders

Boards of Directors/Managing Boards

Executive Management

Other Stakeholders

Managers

Employees

Customers

Community at Large

Suppliers

Financial Institutions: Creditors

Environment in general

Internal
InternalElements
Elements
of
ofCorporate
CorporateGovernance
Governance

Factors
Factorsof
ofSound
Sound
Corporate
Governance
Corporate Governance
Shareholders
Shareholdersrights
rightsprotection
protection
Rights
and
responsibilities
Rights and responsibilitiesof
ofBoard
Board
of
Directors
and
Shareholders
of Directors and Shareholders
Quality
Qualityof
ofDisclosure
Disclosure
Monitoring
Monitoring
Effectiveness
Effectivenessof
ofthe
thecore
core
management
functions
management functions

External
ExternalElements
Elements
of
ofCorporate
CorporateGovernance
Governance

Principal
PrincipalFactors
Factors
Stakeholders
Stakeholders
Takeovers/acquisitions
Takeovers/acquisitions
Bankruptcy
Bankruptcyframeworks
frameworks
Collateral
Collateraland
andForeclosure
Foreclosurerules
rules
Enterprise
EnterpriseRestructuring
Restructuring
Investor
Investorand
andCreditors
Creditors
Agents:
Agents:Management
Management

Enabling
EnablingEnvironment
Environment

International
InternationalAuditing
Auditing&&Accounting
AccountingStandards
Standards(IAS&ISA)
(IAS&ISA)
Securities
Markets
Legal
and
Regulatory
Frameworks
Securities Markets Legal and Regulatory Frameworks(IOSCO)
(IOSCO)
Financial
Sector
Participants
:
investors,
issuers,
intermediaries
between particip
partici
Financial Sector Participants : investors, issuers, intermediaries(interaction
(interaction between partic
Fi
Financial
nancialMarket
MarketInfrastructure
Infrastructureand
andArchitecture
Architecture
Product
and
Factor
Competitiveness
Product and Factor Competitiveness
Foreign
ForeignDirect
DirectInvestments
Investments
Corporate
Control
Corporate Control(Corporate
(CorporateGovernance:
Governance:OECD
OECDPrinciples)
Principles)
Enabling,
prudentially
regulated
business
environment,
Enabling, prudentially regulated business environment,with
withcreative
creativeincentive
incentivestruc
struc

Benefits of Corporate Governance

Good corporate governance has a

positive effect on:

Share valuation
Risk assessment
Reduction of market volatility

Good Corporate governance can:

Reduce the cost of capital

Increase the pool of investors
Improve management accountability and
performance

Efficient Ownership
Sufficient concentration of
control in a firm by owners to
be able to monitor and
influence management
effectively.

The Goal of the Firm

To maximize the wealth of

its shareholders.

How To Determine Whether Corporate

Governance Is Effective?
Two tests
Is the corporation maximizing
shareholder value?

Is the net present value of the corporations

cash flows positive and is it being used or
directed for the benefit of shareholders
based upon their pro rata ownership
interests?

If the corporations chief executive

officer is not performing well, does the
board of directors have the power to
remove him?

Responsibility of the Board

In pursuit of the wealth maximization

objective, boards must recognize the
interests of all stakeholders.
No company ever survived that
ignored the interests of its:

Customers
Employees
Suppliers

Four Values of
Good Corporate Governance

Transparency

Accountability

Responsibility

Fairness

Linkages

The four pillars of corporate

governance and the wealth
maximization concept serve as the
aspirational benchmarks

Investor Behavior

Investor behavior is characterized by the

fear and greed factors
Corporate governance is not an end in
itself.
CG is about improving firm performance
and assuring access to capital at a
reasonable cost.
The end game of CG is achieving the most
efficient allocation of the scarce resources
the firm has available within its economic
environment, and gaining access to the
capital needed for growth and development

CG and Firm Performance

The linkages between good CG and

firm performance is clear
Good CG will inspire investor
confidence
Good CG will assure investors of a
reasonable rate of return on their
investment
Good CG will generate operational
efficiency and increase the
competitiveness of the firm

Price Discovery

Good CG will contribute to the further

efficiency of the price discovery
mechanism in determining the value
of the firm.
This serves the purpose of wealth
maximization concept
Improved CG will help resolve the
problem of risk and help lower the
cost of capital. Thus leading to an
increase in the value of the firm.

Stick and Carrot

Effective CG will serve as the carrot if

private sector is convinced that it will
gain from good governance. IN this
case, reform will happen.
IF private sector is not convinced,
reform will be resisted.
This is the dilemma.
The main player in the maximization
of wealth through good governance
is the board.

Responsibilities of the Board

and Performance

Independent oversight
Contestability
Labor relations
Corporate strategy
Corporate social responsibilities
Respecting stakeholders
Excellent performing managers
Attracting low cost capital
Increasing market capitalization

Conclusion

The Board has an important role to play

in development and progress of the firm
on behalf of its investors.

Maximizing the shareholder value is the

long term objective of the firm.

Stakeholders play an important role in

CG

A board, respectful of the legitimate

expectations of all the stakeholders
should benefit all parties in the long run.