Corporate FINANCIAL MARKETS SUSTAINABILITY SUSTAINABLE FINANCE OPPORTUNITIES Governance Finance Why corporate governance? 94818 Good corporate governance—well-defined shareholder “Better business rights, strong internal controls, high levels of transparency performance, better and disclosure, and an empowered board of directors—can improve a company’s performance and profitability, and make credit quality, and it more attractive to investors and lenders. For this reason, better ratings show corporate governance has become a hot topic in the business that good world, especially in emerging markets where governance improvements can improve a firm’s access to capital and governance access to international markets. Financial institutions can pays” offer corporate governance-targeted finance aimed at strengthening client business performance while enhancing Good corporate governance attracts premium valuations: credit quality and bottom line portfolio returns. This market A 2002 McKinsey survey² showed that institutional investors has great potential and IFC specialists are uniquely qualified would pay premiums to own well-governed companies, to help banks access it. averaging 30% in Eastern Europe and Africa, and 22% in Asia and Latin America. What are the opportunities for financial Companies with good governance perform better: A 2004 study of S&P 500 firms by Deutsche Bank3 showed that institutions in corporate governance finance? companies with strong or improving corporate governance Access to large market with high growth potential: outperformed those with poor or deteriorating practices by Financial institutions can extend corporate governance about 19% over a two-year period. finance to any client company—including family-owned Good governance improves client credit risk: businesses, listed, newly-privatized companies, and small A report by FitchRatings4 found a statistically significant enterprises (SMEs)—making this a large potential market. relationship between a firm’s corporate governance and its Lower credit risk: Good corporate governance improves the credit quality, with stronger and weaker governance management and credit-worthiness of companies, leading practices resulting in higher and lower credit ratings, to stronger operational performance and reducing the risk respectively. of non-performing loans. An ABN/AMRO study showed that Good governance improves a bank’s credit ratings: Brazilian firms with above-average corporate governance IFC spearheaded corporate governance improvements with had ROEs that were 45% higher and net margins that were Romania’s Banca Comerciala Romana (BCR) to bring the 76% higher than those with below-average governance bank into line with European Union standards. In 2005, practices¹. FitchRatings and S&P upgraded BCR’s ratings, citing Improved portfolio strength: By improving the performance improvements in corporate governance and risk of client companies, financial institutions can strengthen management as the major reasons. their own bottom line portfolio performance. Rating agencies see institutions with good governance in a better What are the key issues—questions to ask? light, which may lower the cost of capital for banks too. Portfolio profile: What is the bank’s existing portfolio profile? Market differentiation: Financial institutions well- What types of companies could be a focus for corporate acquainted with best practice corporate governance governance-targeted lending? What is the potential for market projects have value-added appeal to companies seeking to sizing? Are any client companies already adhering to best improve performance in competitive regional and interna- practice corporate governance standards? tional markets. Finance in this area may attract new Client capacity: Can client companies meet the necessary business while acting as a cross-selling tool to serve corporate governance requirements (e.g. audited financial existing clients with a more sophisticated product package. statements, business program, and succession planning)? Increased brand value: Financial institutions can enjoy the What is their level of awareness and current corporate reputational benefits associated with practising good governance practices, if any? What level of technical FMS-CG-0306E corporate governance and promoting the same high assistance may be necessary to help client companies meet standards with clients to increase their brand value with eligibility and performance requirements? shareholders, customers, and policy makers. INTERNATIONAL FINANCE CORPORATION | GLOBAL FINANCIAL MARKETS | 2121 PENNSYLVANIA AVE. | WASHINGTON, DC, 20433 | WWW.IFC.ORG/FMS Corporate FINANCIAL MARKETS SUSTAINABILITY SUSTAINABLE FINANCE OPPORTUNITIES Governance Finance FI products and processes: What internal resources exist to support corporate governance-targeted lending? What is the Deal Highlight: Corporate Governance current availability of medium-to long-term financing, and at Credit Line, Brazil what terms? How will loan size, pricing, segmenting and Purpose US$25 million credit line to structure vary for corporate governance lending? support a Brazilian bank in Monitoring and evaluation: What is the bank’s level of extending corporate govenance understanding of best practice corporate governance finance to clients practices? Is technical assistance needed for internal training Financial institution Leading commercial bank in and institutional capacity building to implement this type of Brazil lending? How will the bank process and monitor this Borrower Middle-market companies component of lending to clients, and over what timeframe? Eligibility Eligible firms meet predeter- What actions will the bank take in case of default or non- mined corporate governance improvement in corporate governance performance by a thresholds and agree to improve client? performance within an agreed timeframe (18 months) How can IFC help? Repayment 7 years IFC is developing corporate governance lending with leading IFC role Beyond financing, IFC worked banks in Brazil, Colombia, Mexico, Peru, and South Africa. with the bank to develop a IFC’s offering includes: flexible corporate governance methodology to evaluate client Global expertise in corporate governance: IFC is a leader company performance among multilateral financing institutions in integrating Project impact Corporate governance has been corporate governance into all phases of the investment such a popular business line that process. IFC works with partners across the financial the bank approached IFC for spectrum to implement international corporate governance additional financing in 2005. IFC’s standards. total sustainability credit line Flexible financing: IFC offers medium- to long-term credit lines with the bank (including environ- to support financial institutions to implement corporate mental projects) now stands at $100 million. governance-targeted lending to clients aimed at improving credit risk and business performance. Corporate governance methodology: IFC provides the methodological framework for financial institutions to Who to contact at IFC? implement corporate governance projects with clients. Financial Markets Sustainability: Adapted to banks’ needs, IFC’s framework measures client Miguel Martins mmartins1@ifc.org company management commitment, accountability and T: + 1 202 473 3684 transparency over an agreed period at escalating www.ifc.org/fms performance levels. Corporate Governance Unit: Technical Assistance: IFC can provide customized training Mike Lubrano mlubrano@ifc.org and assistance to financial institutions during project T: + 1 202 473 7891 implementation. In addition, IFC may be able to provide www.ifc.org/corporategovernance corporate governance technical assistance to banks’ client companies. References: 1. Corporate Governance in Brazil: Is There a Link Between Corporate Governance and Financial Performance in the Brazilian Market?, Bruno Erbiste, ABN AMRO Asset Management, July 2005. The mission of the IFC is to promote sustainable private sector 2. McKinsey’s Global Investor Opinion Survey, 2002. investment in developing and transition countries, helping to reduce 3. Beyond the Numbers—Corporate Governance: Implications for Investors, poverty and improve people’s lives. Since its founding in 1956 through Grandmont, Renato; Grant, Gavin; and Silva, Flavia, Deutsche Bank, April 1, 2004. FY05, IFC has committed more than $49 billion of its own funds and 4. Evaluating Corporate Governance: The Bondholder’s Perspective, Credit Policy, arranged $24 billion in syndications for 3,319 companies in 140 Special Report, FitchRatings, April 12, 2004 developing countries. For more information, visit www.ifc.org. INTERNATIONAL FINANCE CORPORATION | GLOBAL FINANCIAL MARKETS | 2121 PENNSYLVANIA AVE. | WASHINGTON, DC, 20433 | WWW.IFC.ORG/FMS