Corporate governance refers to the systems that are used to provide direction and control to corporate organizations. The World Bank and the International Monetary Fund have worked in collaboration for a long time to control and guide the financial management in vital macroeconomic sectors of the member countries. Corporate governance is essential for every country at all stages of development. It promotes accountability, transparency and good governance in the management in the management of public resources. The World Bank and the International monetary fund have provided technical assistance advice to member countries on the need for corporate governance to foster accountability and transparency in the public sector. The World Bank has played a leading role in providing policy advice to member countries on corporate governance on particular sectors including capital markets and financial sectors. On the other hand, the IMF has promoted corporate governance through technical assistance, policy advice and program conditionality to enable member countries to correct macroeconomic imbalances, address inflation and support long-term economic growth. The World Bank within its Financial Markets Integrity Group (FMI) has a Corporate Governance Team which is responsible for developing policies that promote corporate governance in the emerging markets of its member countries. This paper addresses the issues of corporate governance that fall within the mandate of IMF and World Bank.
The role of World Bank and International Monetary Fund in Developing International Corporate Governance
The demand for effective corporate governance is on the rise in the emerging market countries. The IMF and the World Bank have responded through Partnership for Sustainable Growth and Financial Market Integrity Groups respectively. Partnership for Sustainable Growth is an IMF’s Interim Committee that promotes corporate governance in the member countries in the public sector to promote accountability, transparency in the management of public resources to promote the development of the economies of the member countries. On the other hand, Financial Markets Integrity Groups focuses on improving corporate governance in the member countries by providing technical assistance and thought leadership in the management of public resources. Good corporate governance is necessary for advancing the financial stability of the member countries. It gives them the opportunity to access external financing that is necessary for promoting economic growth.
Both state-owned and private organizations require good governance. The growth of the insurance companies and the development of the banking sector rely on corporate governance. The microfinance institutions also depend on governance to allow them to access affordable external financing. The microfinance institutions are critical institutions in the emerging economies. Governance is also necessary for medium and large companies since they require finance to facilitate their expansion and investment.
The World Bank and the International Monetary Fund are working with other bodies that are responsible for setting corporate governance standards such as Basel Committee on Banking Supervision, Financial Stability Board, and the Organization for Economic Cooperation and Development to improve corporate governance in the emerging market economies. The World Bank through its Corporate Governance Group has identified specific areas of interest where they work with partner countries to improve and reform regulatory frameworks that govern the operations of both private and state-owned institutions.
Firstly, the World Bank through its Corporate Governance Group has set out procedures that intend to strengthen regulatory frameworks for corporate governance in all the companies in emerging market countries. Secondly, the World Bank is set to improve governance in the banking institutions. The bank primarily focuses on state-owned commercial and development banks. Thirdly, the bank is improving governance in financial cooperatives and micro-finance institutions. Lastly, the World Bank is developing international corporate governance by strengthening the supervisors in the financial institutions, micro-finance, listed companies and unlisted companies to enforce the reforms that promote good governance.
Corporate Governance in the Financial Sector
Corporate governance in the financial sector is of great significance since it contributes significantly to the growth of emerging countries. The Corporate Governance Team and Partnership for Sustainable Growth believes that developing corporate governance in the financial sector is of significance for the following reasons:
i) The financial sector is expected to hold the trust of the public since they are the custodian of the funds kept in the banks. The financial statements that are issued on a yearly basis can be opaque and may deny depositors some important information concerning the state of their deposits. The financial statements including the balance sheet do not guarantee the necessary transparency for effective organization. In this case, good governance would require senior management and the board of directors to discharge their fiduciary roles through effective communication of the strategic direction of the business, capital support, and organizational risk assessment and mitigation (World Bank, 2007).
ii) The traditional function of the financial institutions is to protect the depositor’s funds and raise the confidence of the public in the financial institutions. Good governance contributes to credibility and integrity of senior management in managing the depositor’s funds.
iii) The liquidity shock affects financial institutions in a great deal. If the situation is not managed effectively, then the financial sector may experience financial instability. Therefore, good governance promotes prudential management and supervision of the depositor’s funds. Besides, the financial institution managers and supervisors are made to understand their role in preventing the institutions from liquidity shock.
iv) The emerging marketing economies in the world have embarked on various reforms that are meant to improve transparency and efficiency in the state-owned financial institutions. The development banks are critical to the growth of the economies of the emerging markets. They banks promote infrastructural development, small-medium enterprise development, housing, and agriculture. Therefore, sound corporate governance allows the development banks to discharge their duties prudently.
How the World Bank and IMF develop International Corporate Governance in the Financial Institutions.
The corporate governance team from the World Bank and the Partnership for Sustainable Growth from IMF has developed several tools that can be used to strengthen corporate governance policies and practices in the financial sector; for both private and state-owned banks. The World Bank and IMF provide advisory services to member countries that intend to change the existing system of governance in the financial sectors. Furthermore, they assist in formulating policies, laws, listing policies and codes that can change the state of governance in the financial sector. The World Bank and IMF also work with specific state-owned banks and help them develop policies and codes that conform to the standards set by International Finance Corporation. Remuneration of directors and top managers in the financial sectors is of great significance. The World and IMF evaluate the remuneration policies and creates performance evaluation frameworks for the directors. Furthermore, the World Bank and IMF create policies and frameworks that can be used by the financial institutions to nominate directors and develop dividend policies that support the mandates and objectives of the financial institutions.
The World Bank performs bank governance reviews to ascertain if they conform to the standards set by the banks’ Financial Sector Assessment Program (FSAP). The review process is about the evaluation of the legal frameworks and the regulatory processes that the banks employ in the management of the depositor’s funds. After evaluating the legal frameworks and regulatory policies, the World Bank a detailed recommendation that the banks can employ at different levels to promote corporate governance. The recommendations can comprise of legal policies, regulatory frameworks and the managerial competencies that the banks should employ to promote good governance. The World Bank and IMF have provided technical advice to the some of the emerging market countries including Tunisia, Algeria, Ukraine, Peru and Bangladesh among other countries. Furthermore, IMF and World Bank have performed bank governance reviews in various countries such as Central Republic of Africa, Sri Lanka, Bosnia, and Moldova among other states. The banking governance reviews in these countries have enabled them to implement regulatory, legal and supervisory frameworks that promote governance.
The World Bank and IMF also provides technical assistance to financial corporative and micro-finance institutions by developing operational principles that conform with the Financial Sector Assessment Program of the World Bank. The World Bank also perform reviews of the financial cooperatives and microfinance institutions by providing regulatory and legal frameworks that promote the development of good governance in the institutions (World Bank, 2007). The World Bank has assisted helped in the development of operational principles in the micro-finance institutions in the emerging market countries by examining the recurring issues in the micro-finance industry and considering the evolution of the corporate governance in these institutions. Besides, IMF and World Bank considers the responses of the government to corporate governance issues and provide necessary steps that the micro-finance industry can take to address corporate governance issues.
The World Bank and IMF also contribute to the development of the capital markets of the emerging market countries to promote transparency and reduce transaction costs in the financial markets. For instance, since the establishment of the National Securities Commission of Georgia (NSCG) in 1999, the World Bank and IMF, through their regulatory and legal frameworks have helped the country to reduce the trading activities that are not within the stock exchange. Furthermore, the World Bank and IMF have helped the NSCG to enhance transparency and accountability in its capital market after addressing the weaknesses in the corporate governance of the country. Besides, the combined effort of IMF and World Bank in collaboration with NSCG has contributed in strengthening the rights of the shareholders. The minority shareholders have been treated fairly, and the managing directors and board members of the major companies and major financial institutions have been encouraged to abide by their roles and responsibilities. In 2005, the World Bank assisted Georgia in developing the National Code of Best Practice in Corporate Governance that has strengthened transparency and accountability in the state-owned and private financial institutions in the country (World Bank, 2007).
The Role of IMF and World Bank in Monitoring of International Corporate Governance
The World Bank and IMF have been prompted by the concerns over the management of aids which are given to the emerging market countries. As such, they have endorsed good governance as an essential element of their development strategy. The IMF and World Bank have adopted restrictive approaches to monitoring economic governance of the member countries. The World Bank and the IMF put emphases on good governance to promote sustainable development. Sound corporate governance promotes investor protection and allows companies and financial institutions to get good returns on their investment.
According to the latest research released by the Global Financial Stability Report, the level of corporate governance in the developing countries has improved because of the monitoring policies implemented by the world bank and the IMF. The IMF has established firm-level governance index that it uses to monitor the performance of both listed and unlisted companies in the emerging market economies. The firm-level governance index indicates whether the companies, financial institutions, micro-finance industry and the capital market are operating in line with the legal, supervisory, and regulatory frameworks that are responsible for sustainable for sustainable growth. In the latest report released by IMF, Latin America and Asia have shown significant improvement in the last decade regarding corporate governance. According to the report, the capital market and the financial institutions had dispensed some of the policies that promote accountability and transparency in the management of the resources. Investor protection and shareholder rights have been implemented. In this way, the emerging markets have proved to be resilient to financial downturn which has been a significant threat to the capital markets and financial institutions.
The IMF policy paper concerning governance has also been adopted to monitor international corporate governance. The executive board of the IMF supports the evaluation of the performance of the systems of governance in the emerging market economies by providing technical assistance and advice on the management of public resources. The IMF evaluates the legal, regulatory and supervisory frameworks of the developing economies on a regular basis to ensure that they conform to the IMF policy papers. The key sectors of the public services that the IMF monitors on a regular basis include the central bank, the treasury, civil service and the public enterprises. IMF monitors the manner in which these public institutions collect revenue, manage their budget and expenditures. In case of discrepancies and anomalies in any of the key sectors of the public institutions, the IMF responds by providing technical assistance to help in correcting the anomalies. It encourages transparency and accountability in the management of the public resources to provide a favorable environment where the private enterprises can thrive.
The World Bank, on the other hand, is concerned with the effective management of the aids that are given to the emerging market economies. The primary role of monitoring international corporate governance is to promote accountability and transparency in the management of the economic institutions of the member countries (World Bank, 2007). The World Bank safeguards the use of public funds by employing internationally recognized standards and codes of sound practices in monetary and fiscal management. Furthermore, it trucks public expenditure in the emerging market economies to help in poverty reduction. The World Bank has enhanced the role of its anti-money laundering department in curbing corruption in the public sector in the emerging economies (World Bank, 2007). In this case, it is committed to reducing bribes which are a characteristic of the emerging market economies.
For instance, the efforts of World Bank in monitoring international corporate governance has helped to reduce corruption is some of the emerging market economies including Sri Lanka, Central Republic of Africa, Morocco, Tunisia, Latin America and some Asian countries. The World Bank has promoted financial accountability and transparency in the management of public resources through its corporate governance policies.
Conclusion
Corporate governance is essential in promoting accountability in the management of public resources. Besides, it enhances the confidence of the shareholders in both listed and unlisted companies. It encourages the firms, regulators, and managers of finical institutions, micro-finance industry, and capital markets to be more accountable, transparent, and efficient to allow them to build public trust and confidence. The World Bank through its Corporate Governance Group has worked in collaboration with the IMF to create legal, regulatory and supervisory frameworks that contribute to the development of good governance of the public resources in the emerging market economies. Through technical assistance, advisory services and thought leadership, IMF and World have helped the emerging economies to improve their corporate governance for sustainable development.