Corporate governance

As an international financial institution with a mandate to promote private sector development, the EBRD has special reason to be concerned with the issue of corporate governance. As one of the largest lenders and investors in central and eastern Europe and the Commonwealth of Independent States, the EBRD must satisfy itself that enterprises and financial institutions in receipt of Bank financing are properly organised under domestic legislation and that their treatment of shareholders, customers, suppliers and other stakeholders is transparent and complies with that legislation. Under the Agreement Establishing the Bank, the EBRD’s equity investments are limited to a minority position. The Bank is, therefore, particularly concerned with how its investee companies treat their shareholders and whether minority shareholders are able to have their legal rights enforced effectively. These concerns led the EBRD to take an early, proactive approach to the development and enforcement of sound principles of corporate governance in all its countries of operations.

The EBRD takes a two-pronged approach to promoting corporate governance: through integrity checks and the terms and conditions of its investment operations, the Bank assesses and influences the internal structure and operation of those enterprises to which it intends to lend or invest. Sound corporate governance and the integrity of an enterprise will continue to be an integral component of the EBRD’s due diligence exercise before it makes any financial commitment. Further, through its Legal Transition Team, the EBRD fosters the appropriate external environment – an extensive and effective legal and regulatory framework – supporting sound corporate governance practices.

The EBRD's legal reform work on corporate governance

The major reform projects undertaken by the EBRD over the years in the area of corporate governance include:

• Leading, together with the OECD, the works of a Task Force mandated to analyse the situation in relation to the corporate governance of banks in Eurasia and to develop a set of recommendations on the most important issues in this area. The Task Force developed a Policy Brief identifying key corporate governance challenges affecting banks in that region and making recommendations to address them. Its purpose is to support policy makers, banking supervisors, capital market regulators, banks and banking associations in their work of strengthening corporate governance practices.
   Policy Brief (846KB - PDF)
  
• Assisting the Russian Federal Commission on the Securities Market (FCSM) in developing a Corporate Governance Code, accompanied by an explanatory commentary to be used as a central reference for issuers of securities. The Code is broadly based on the OECD Principles of Corporate Governance, and provides guidance for improved corporate by laws and operating procedures. Through Stock Exchanges, the FSCM requires Russian companies to disclose the degree of compliance with the Code’s provisions, and to justify any lack of compliance. The Code serves as an important tool for assessment by investors of Russian companies’ compliance with international best practices of governance. The Code was endorsed by the Russian government in March 2002.
  
• Assisting the Mongolian government to improve the country’s corporate governance legal framework and practice and develop an action plan endorsed by the Mongolian government to improve corporate governance practice in the country.
  
• Assisting the Ministry of Trade and Economic Development of the Republic of Armenia strategy in developing a Corporate Governance Code applicable to state-owned companies, listed companies, and banks.
  
• Assisting the CIS Inter-Parliamentary Assembly in developing a CIS Model Investor Protection Law. The model law was approved by CIS Inter-Parliamentary Assembly in April 2005. The model law serves as a reference for CIS countries for harmonising and fine-tuning their legislation with the best international standards.

In addition, the EBRD undertakes a Corporate Governance Sector Assessment project to gauge the quality of corporate governance-related laws and regulations in transition countries. It uses a checklist based on the OECD Principles of Corporate Governance. To complement its assessment, the EBRD launched the 2005 Legal Indicator Survey. The aim of the survey is to assess how the legislation, together with the local institutional framework, in each country works to create a functional corporate governance legal regime. The two initiatives assist the Bank to better understand legal developments in the region and serve as a reference for countries formulating reform. Similar sector assessments are undertaken with reference to securities markets, insolvency, concessions and secured transactions.

Future challenges

From the latest assessments on corporate governance three main conclusions can be drawn. First, countries that have developed a solid institutional environment can generally offer a better legal framework. Nevertheless, this alone is not enough to provide investors and minority shareholders with adequate protection against abusive behaviours. The sound environment needs to be coupled with a corporate governance framework in line with international standards and with an effective civil procedural framework. Second, consistent with previous studies on shareholder and creditor rights in transition countries, the survey shows that new EU member states and candidate countries, while displaying a better institutional environment, do not systematically outperform other transition countries with regard to the effectiveness of disclosure or redress mechanisms. Lastly, even excellent laws can suffer from poor implementation. This undermines the usefulness of legal provisions and diminishes the confidence of foreign investors in the legal system as a whole. Most transition countries need to upgrade their commercial laws to standards that are generally acceptable at an international level. Even more importantly, they must make those laws fully effective, particularly through strengthening their court systems, tackling corruption and adopting appropriate measures to strengthen the rule of law. Supervision and enforcement require qualified and sophisticated corporate governance professionals in the public sector, for example, market regulators and judges. This is an area where international financial institutions and bilateral donors should play a role in providing financial and technical assistance.