Center for Excellence in Corporate Governance (CECG), Mexico | Kazakhstan Institute of Directors (KID) | Russian Institute of Directors (RID)


Center for Excellence in Corporate Governance (CECG), Mexico

Corporate Sustainability Index

The problem:
Mexican companies do not refuse to adopt corporate governance, social responsibility or environmental practices; instead, they either: (1) do not conceive the importance and benefits that the adoption of these principles would bring to their companies or, (2) they actually meet with all, or some, of the principles but do not necessarily make that information available.

The practice:
The Center for Excellence in Corporate Governance built a methodology that evaluates Corporate Governance, Social Responsibility and Environmental Practices in the country. This methodology translated into a computing tool that considers approximately 500 aspects to rate these topics.

Of the three mentioned above, Corporate Governance is the pillar that weighs the most since these practices have been enhanced for a longer period of time and family businesses and public companies are more familiar with its concepts. Social Responsibility, in our methodology, is NOT about philanthropic activities, but organizational behavior and activities from within the company. The environmental pillar was not built with biased nor ‘polemic’ sub-principles (e.g. is the company contributing to take care of endangered animals?). Instead, it is focused on practices that promote cost-reduction and recycling practices.

The CECG collects and analyzes publicly available information from reliable sources and based on the criteria in the table below, every listed company from the Mexican Stock Exchange receives an overall rate of compliance with corporate sustainability practices. The inclusion of this Index to the Mexican Stock Exchange is an incentive that facilitates the dissemination of relevant information regarding the above-mentioned topics and shall work positively in the corporate sector, since investor relations departments from Mexican companies will highlight the importance of the disclosure of publicly-available, transparent and relevant information on a regular basis.


CECG_Table_for_Leading_Practices_Wiki.jpg


Why and how the Center for Excellence in Corporate Governance developed this practice:
The most effective way of promoting good environmental, social, and governance (ESG) practices in the private sector is through an official, regulating body: the Stock Exchange. For the listed companies in the Stock Exchange the Index works both as an incentive and as a motor to attract investment, to compete in a positive way and strengthen the market economy through transparent practices.

Since the local practices and regulatory framework are poor compared to international investors’ exigencies, we built a solid platform that brings companies to worldwide accepted practices. Therefore, the methodology is based primarily on international practices, as well as local practices/regulatory framework.

Steps and tips for implementing the practice:
First, we focused on studying the country's regulatory framework and analyzing ESG practices in listed companies. When we understood what was being taken care of within a company and what was being left out, we created an electronic system with internationally accepted principles and formulas for automated scores. Subsequently, we revised our system and awarded different weights to each sub-principle. Finally, we compiled public information relevant to the issues we were about to rate and we made assessments of each company in the three categories mentioned.

Both the results in our electronic system and the individual reports for each company were shared with the Stock Exchange. At this point, we signed an agreement with them to work together. So, while we conduct all the research and we write reports on each company’s performance, the Stock Exchange commits to build the index and sell it to investors.

The plan is to divide the Index-related program into two phases before it is launched:
  • First is an assessment that leads to reunions with Investor Relations Departments to let them know their company’s performance against the national average and help them find incentives to publish relevant information regarding corporate governance, social responsibility and environmental practices.
  • Second is an assessment using the recently-published information to sell the Index through the Stock Exchange.

Results of the practice and applications:
We are still in the first phase of the project; therefore we have no evidence for effectiveness yet. However, because we have already made the first evaluation and have shared with every company their corresponding performance rating, we can assure that listed companies have responded positively to the adoption of these practices and have shown a willingness to be part of the Index. Since the completion of the evaluation and reunions were held with each company, they have been uploading valid and relevant information that serves as evidence for practices they have been taking care of but have not yet reported on. We will start the second phase evaluation period in May and the Index will be launched in July of this year. So although the evidence of the effectiveness of this Corporate Sustainability Index will not be available until July 2012, we can assure that measurable data will sustain the relevance of this initiative in the country and in the region because its effects can, and will, be multiplied.

Lessons from the experience:
  1. It was very difficult to deal with listed companies that have great influence in the market, so we had to find incentives to make them accept the Index. This, of course, was that they would improve the public’s perception of them, attract investment and increase their earnings based on good practices.
  2. Mexican companies were only interested in complying with the minimum legal requirements. Some of them tried to comply with certain aspects from the voluntary codes of corporate sustainability. Therefore, this Index will serve as a motor to achieve reforms in this regard.
  3. It took patience to transmit the benefits from adopting international practices on transparency to attract investment.



Kazakhstan Institute of Directors (KID)

Strengthening Awareness of Corporate Governance and Financial Markets

The problem:
Despite numerous efforts by international financial organizations and donors to improve the state of corporate governance in Kazakhstan, local buy-in to the process has been relatively low due to a lack of understanding of the importance of corporate governance and national economic development to the wider population. Information on corporate governance related issues is scarce and often presented without substantial local context. While stressing the value of international experience, the project relied on a "local knowledge" approach to reform in Kazakhstan.

The practice:
Textbook "Corporate Governance in Kazakhstan Context":
KID’s team of 8 highly-qualified CG experts contributed chapters to the textbook. The 370-page textbook, published in May 2009, includes a forward by CIPE, 15 chapters and 2 case studies of local business practices. KID distributed 1,985 print and 500 electronic copies to university libraries, public libraries, university economic departments, shareholder companies, state-owned enterprises, government officials, media outlets, embassies and international financial institutions. The soft version of the text-book was accepted by the National Academic library for free public access. Feedback from 48 owners and directors of large and medium-size private businesses and state-owned enterprises, lawyers, professors, university presidents and deans, confirms the book’s value and uniqueness.

Kazakhstan Informational Seminars for University Heads and Lecturers:
From February through December 2009, KID held fourteen 5-hour seminars for 434 professors and heads of university economic departments from 41 Almaty, Astana, Uralsk, Pavlodar, Karaganda, Rudny (Kostanay) universities, as well as two 2-hour seminars for 60 business managers. Participant surveys indicate that on a scale of 1 (weakest) to 5 (strongest), participants evaluated the seminars on average 4.7, indicating a high appreciation of seminar content.

Why and how the Institute of Directors developed this practice:
After the first project we realized that it is necessary to promote corporate governance widely because faculty in the regions often do not even understand the term “Corporate Governance”. During the second project we translated the textbook into Kazakh because the Ministry for Education promotes the Kazakh language. About 1/3 of university students are educated in Kazakh. We translated and distributed 1,105 copies of the textbook to the university and college libraries. In addition, we conducted sixteen 3-day “Corporate Governance basics” seminars for 305 educators from 57 universities of Kazakhstan. All the seminars received positive feedback from the participants.

Steps and tips for implementing the practice:
  1. Prepare the appropriate textbook in one language.
  2. Prepare teaching material related to the textbook.
  3. Publish these both in hard and soft format with permission to copy for the educational goals.
  4. Send the hard and soft copies of the textbook to universities and colleges, with a presentation to each chapter of the textbook and syllabus, and supplementary soft CIPE materials.
  5. Prepare trainers to teach university faculty.
  6. Conduct a pilot seminar for the faculty of one university.
  7. Change the seminar content if necessary.
  8. Conduct the seminars for educators in each main regional city of the country.
  9. Evaluate the results.
  10. Prepare the textbook in the other language of the country and repeat the above steps.

Results of the practice and applications:
The average attitude to the seminars conducted is 4.8 according to the 5 point scale. After the first project we received 7 written positive references on our textbook from the universities and 26 from businesses. During the current project we received 23 positive references on the Kazakh translation of the textbook from the educators.

Lessons from the experience:
  1. Understanding of Democratic principles: Our meetings, contacts with educators, businessmen, journalists, and the pilot seminars at MBA showed that there is not an understanding of democratic principles among the groups mentioned above.
  2. Interest to Democracy: We also concluded that there is not a clear interest in democracy. This may be because there is no trust in the political system people live in. It is possible that in Kazakhstan people rely on interpersonal relations more than on rule of law. From our opinion, the interest in the topic “Corporate Governance as a school of Democracy” from educators, journalists and CEOs of JSC was more academic than practical.
  3. Understanding of Corporate Governance: Our contacts with businessmen and educators showed that there are few people who understand corporate governance at some reasonable level. It is necessary to develop this understanding through education.
  4. Interest to Corporate Governance and its development: Interest in corporate governance looks to be increasing as it is the government decision to sell the shares of government-owned JSC. In this context, our efforts in promoting corporate governance and democracy through education look relevant.



Russian Institute of Directors (RID)

Improvement of Corporate Governance in State-Owned Enterprises (SOEs)

The problem:
State-owned enterprises account for a major part of the Russian economy. Starting from the mid-2000s, the Russian government has embarked on the policy of increasing the scale of SOEs in the national economy, both in absolute and relative terms. The share of SOEs in the national economy has been raised through direct government subsidies to SOEs (loans at low rate, major government contracts, etc.) and through acquisition of major private assets by SOEs with cheap money received from the government or foreign sources guaranteed by the government. By the end of 2010, the share of SOEs in the national economy had increased dramatically. According to some estimates, the share of SOEs in the GDP varied from 40 to 50%, but the corporate governance practices of SOEs have changed little as compared to the early 1990s. By 2007, boards of SOEs included only top executives and government officials without a single independent director. No SOE had a corporate governance rating. RID decided to focus on improving corporate governance practices as a part of its general mission of introducing best corporate governance practices to Russian companies.

The practice:
RID implemented the project within the lines of its main activities, specifying the goals and activities for improving corporate governance practices in the SOEs. The following objectives have been pursued:
  • To start introducing key elements of best corporate governance practices, specifically the election of independent directors to boards, setting up board committees (audit committee and remuneration and nomination committee), board evaluation, and to introduce corporate KPIs and to link management remuneration to them.
  • To encourage election of outside (independent) directors with adequate professional background and a real degree of independence to SOE boards.
  • To encourage SOEs to obtain corporate governance ratings as a clear and complex indicator of corporate governance practices.

As a part of its activities to build up expertise in corporate governance practices in SOEs, RID marked out a subgroup of SOEs from the general sampling of companies covered by its annual survey of Russian companies corporate governance practices, which has been made every year since 2003. Since the survey of 2007, the SOEs corporate governance practices indicators have been compared with indicators of the sampling at large and with those of listed companies. The survey results were used for tailoring the methodology of the corporate governance audit. In 2009 and 2010 two polls were made among the members of the National Registrar of Corporate Directors (the professional community organized and managed by RID since 2002) who sit on boards of SOEs.

To raise awareness of best CG practices at large and in SOEs in government institutions, business associations, professional communities and the general public, RID has done the following:
  • The results of annual surveys related to the SOEs and of the above two polls have been regularly summarized and forwarded to the Federal Agency for Federal Properties and the Ministry of Economy.
  • Improvement of corporate governance in the SOEs has been put on the agenda of annual congresses of the National Registrar of Corporate Directors, to which government officials have been invited to speak. The national congresses have been held in cooperation with the Russian Chamber of Commerce, Russian Managers Association, Investor Protection Association and Delovaya Rossiya Business Association.
  • Improvement of corporate governance in the SOEs has been put on the agenda of the meetings of the Russian Managers Association Corporate Governance and Investment Committee chaired by the RID director since 2006. Government officials have been invited to listen and speak at these meetings.
  • Articles on improving corporate governance in SOEs have been regularly published and mailed to government agencies and officials. RID has included improvement of corporate governance in SOEs into the modernization discourse which the government declared to be the basis for the development strategy of both SOEs and private businesses. Some articles have been co-authored with senior government experts and officials.
  • RID has promoted the idea to recruit SOE board members among the members of the Presidential pool. This idea was raised by the RID deputy director, a member of the Collegium of the National Registrar, at the meeting of prospective business leaders with Russian President Dmitry Medvedev in November 2009.
  • The RID director takes part in a governmental expert group to update the national developmental strategy until the year 2020. The message from RID is, Corporate governance practices of SOEs lag behind those of private companies. The government should stop expanding the state sector in the economy and radically and integrally improve corporate governance practices in SOEs. The improvement should be made as a complex process and not as just improvements in some components. The government should resume privatization and pay more attention to corporate governance practices of companies which receive its financial support.

As a part of improving professionalism of corporate directors in the field of corporate governance in SOEs, RID has done the following:
  • Training course for board members with a specific module for SOE board members.
  • Weekly mailings of relevant business news to members of the National Registrar of Corporate Directors.
  • Availability of advice for members of the National Registrar of Corporate Directors.

Why and how the Russian Institute of Directors developed this practice:
RID has developed the project as an integral part of its mission to improve corporate governance in Russian business. High importance to focus on improving corporate governance practices in SOEs stems from the fact that the Russian government has dramatically increased the weight of SOEs in the national economy, starting from the mid-2000s. The other important underlying factor is that poor corporate governance of SOEs inflicts serious damage on the interests of all Russian citizens who, at least by the constitution, own them through the state, on the national economy and on the business climate at large. The project fits perfectly into RID’s main activities and has been able to use the expertise built up by RID in the previous period of its existence. It is very important that the activities under the project are naturally integrated into RID’s main activities and make use of RID’s professional reputation and advantages.

Steps and tips for implementing the practice:
  • RID has been working to persuade major business associations to support the idea of recruiting independent directors for SOEs among their members as a new professional perspective for their members. RID has considered building an alliance with major business associations as a very important driving force of the project.
  • To win the support of government officials for the project, RID has been working to persuade them that improvement of corporate governance practices of SOEs and introduction of independent directors to their boards will open a new professional perspective for those who plan to retire from governmental service and use their expertise and experience in private business. If they prove their real efficiency and professionalism in this capacity, they may obtain board positions in private companies. The availability of best corporate governance practices in SOEs would help government officials, who sit on their boards, to learn and to use them in their professional career, both in SOEs and in private companies.
  • RID has used the nomination for best independent director of the national professional award ARISTOS (this nomination was initiated by RID in cooperation with the Russian Managers Association) for promoting the idea of improving corporate governance in SOEs. The award for best independent director of 2009 was awarded to Andrei Sharonov, former Deputy Economic Minister, who has been reputed as a supporter of liberal economic reform and as a good independent director of a number of major SOEs. The award for 2010 was awarded to Professor Sergei Guriev, rector of the Russian Economic School, who has been reputed as a prominent critic of the government economic strategy and who has sat on boards of 2 major SOEs and gained a very good reputation in this capacity.
  • In 2010, RID introduced the nomination for best executives in charge of corporate governance (by industries) as a part of the national professional award ARISTOS. The first winners were almost all from private companies. The idea behind the nomination is to attract attention to the lack of good corporate governance practices in SOEs and to encourage their executives to pay more attention to that. In 2010, 100 best executives in charge of corporate governance (of whom 10 are members of the National Registrar of Corporate Directors) in 8 industries were awarded by an independent expert group.
  • Members of the National Registrar of Corporate Directors have been proposed for nomination and election to SOEs boards. Each member has signed the Declaration of Professionalism and Business Ethics. Information on education and professional career of each member is publicly available through the RID website: http://www.rid.ru/kd/reestr/
  • Sharing of information on corporate governance practices with the OECD, which has collected it to formulate requirements for the Russian government with regard to these practices as a part of Russia’s admission to the OECD.

Results of the practice and applications:
  • In 2008, a presidential decree was published which introduced independent directors to SOEs’ boards. The number of independent directors on SOE boards increased gradually in 2009-2010.
  • RID representatives have been invited to the expert meetings held by the First Deputy Prime Minister.
  • The Federal Agency for Federal Property has classified RID among three organizations which are entitled to provide recommendations to candidates for nomination to SOE boards. The number of the National Registrar of Corporate Directors members elected as SOE board members on nomination by the Federal Agency for Federal Property has been increasing. In 2009, 44 members of the National Registrar of Corporate Directors were elected as board members of 66 SOEs and in 2010 this figure grew to 64 members in 105 SOEs on nominations made by the Federal Agency for Federal Property. In the Krasnodar region (a most advanced southern region of Russia where winter Olympics of 2014 will be held) seven members of the National Registrar of Corporate Directors were elected as board members of 10 SOEs.
  • In August 2009, the Federal Agency for Federal Property issued an act mandating all SOEs set up an audit committee and remuneration committee within their boards, and adopt both KPIs for top executives and the bylaws on remuneration of top executives linking it to KPIs.
  • In February 2011, the Ministry of Economy issued an instruction containing the matrix of the SOEs innovation policy evaluation. It lists among the evaluation criteria obtaining a corporate governance rating.
  • In 2010, the RID deputy director was appointed a member of the board nomination commissions of the Federal Agency for Federal Property and of the Corporate Director Registrar of the Russian Union of Industrialists and Entrepreneurs (RSPP), the largest Russian business association.
  • In February 2011, the RID director was appointed a member of the expert group for state property governance and privatization to prepare recommendation for the governmental strategy of national economic development until the year 2020, “Strategy 2020”. See the list of the group members at http://2020strategy.ru/g15/doc
  • In March 2011, the Russian President ordered that senior government officials must be replaced in the boards of SOEs with independent directors and outside appointees, with limited freedom of voting in boards on a number of issues.

Lessons from the experience:
Improving corporate governance in SOEs is very important due to the following spin-off effects:
  • It contributes to improving the general business climate in a country.
  • It encourages the civil society personified by professional and business associations to impose greater control over the government, making it function more effectively and limiting corruption.
  • It provides professional and business associations with a new point in their agenda, thus increasing the value for their members and for the general public.
  • It strengthens the positions of professional and business associations in their dialogue with the government in the countries with weak public control.
  • It develops a new field for professional activities (board members) and provides an additional field for self-realization of executives and business experts.

The financial crisis of 2008-2009 has resulted in a greater role of the state in economies of many countries, especially emerging markets, so the issue of improving corporate governance in SOEs could be of relevance not just for Russia but for other emerging markets as well. Therefore, the experience of the RID program can be used in these countries.

In addition to the lessons above, instrumental lessons can be drawn from the RID project which can be useful in implementing other projects:
  • The project should be a part of the core activities of the organization implementing it.
  • The project should be based on the organizations’ expertise built up by its previous activities. This expertise should be regularly updated and upgraded through research, consulting and similar activities.
  • The project will take stronger roots if activities under it are complex, i.e. to involve not a separate field (for instance, public advocacy campaign or social networking) but a number of interconnected ones.
  • The project shall stand better chances for success if it is based on an alliance with a number of other professional and business associations and NGOs. It is necessary to adapt the objectives of the project to the main agenda of these organizations and to make them attractive to the leaders and members of the ally organizations.
  • If the field of activity is rather new for the country it is very, if not critically, important to have the support of an international partner with relative experience in the field. For RID the project has been made possible due to multifaceted (expertise and finance) support from the CIPE. It has helped to built up an initial expertise, to formulate the agenda and to fund the activities at the initial stage.

Comment here or visit the Discussion tab at the top of the page.

Subject Author Replies Views Last Message
No Comments