Corporate governance to help Georgian companies attract foreign investors. კორპორატიული მმართველობა ქართულ კომპანიებს უცხოელი ინვესტორების მოზიდვაში დაეხმარება

Corporate governance to help Georgian companies attract foreign investors. კორპორატიული მმართველობა ქართულ კომპანიებს უცხოელი ინვესტორების მოზიდვაში დაეხმარება
22 December 2014

The FINANCIAL -- Implementing good corporate governance practices can help Georgian companies attract foreign investors and partners, gain competitive advantage, increase financial returns, and provide shareholders with greater security on their investments, believes Oliver Orton, Regional Manager of IFC’s Corporate Governance Program in Europe and Central Asia.

“The governance challenges we see faced by many companies in Georgia are, in general, similar to those faced by companies in other countries in the wider region, even if the underlying economies ultimately differ,” Orton told The FINANCIAL. “A key consideration, for example, is whether there’s a body within the company that is effectively steering the direction of business – this body usually being a board of directors…One particular challenge to attracting investment into Georgian companies is a reluctance by those companies to demonstrate higher levels of openness and transparency. There’s a perception that making publically available any information about the company leaves it vulnerable – to competitors for example; of course we’re not suggesting disclosure of sensitive or confidential information – but transparency as to certain financial as well as non-financial information will be a key factor that international investors and partners want to see when establishing relationships with local partners. Georgia’s companies should take this into account,” he added.

Corporate governance, which focuses on improving the structures and processes by which companies are directed and controlled, is an emerging, and highly relevant, business discipline in the markets of Eastern Europe and Central Asia. Studies have shown that more than 84 percent of global institutional investors are willing to pay a premium for the shares of a well-governed company over one considered poorly governed but with a comparable financial record.

In order to raise awareness of corporate governance and to assist its incorporation into the daily life of Georgian companies, International Financial Corporation (IFC), a member of the World Bank Group, is implementing a corporate governance program funded by Switzerland’s State Secretariat for Economic Affairs (SECO). The program provides in-depth advice to companies and financial institutions on implementing good corporate governance practices, while also strengthening the capacity of local partners to provide corporate governance advice and services in their markets.

IFC’s Corporate Governance Program in Europe and Central Asia, together with its local partner institutions in Georgia - the law firm Eristavi & Partners, the Georgian Institute of Directors, the Georgian Banking Training Centre, and PMO Business Consulting - hosted more than 25 representatives from partners from 10 countries in Tbilisi in December. The purpose of the four-day workshop was to share knowledge and, importantly, to continue to further build capacities in corporate governance.

“We meet many companies and banks during the course of our work around the world. The challenge for us is to communicate that corporate governance is not a compliance or box-ticking exercise, relevant only to large or regulated businesses - it’s relevant to all companies, and ultimately, is about bringing very real value and benefit to the business. When effectively implemented and integrated into the business, corporate governance helps enhance competitiveness, effectiveness, efficiency and profitability, and enables companies to expand sustainably, while also helping to attract much-needed investment. We work with companies and financial institutions on a consultancy basis to help them identify, and then implement, improved corporate governance practices. In addition, we consider it highly important for us to work with sustainable local partners who can also deliver top-quality advice on corporate governance to local companies. That is real success,” said Orton.

“We all see that Georgia ranks highly in the World Bank Group’s latest Doing Business Report. The country does well in terms of, for example, registering a business or property, or the speed and ease of setting up a business. But when it comes to the corporate governance-related indices, Georgia could be doing better by comparison with these other indicators,” he said.

Q. What is good corporate governance? What are the challenges in Georgia in this direction and what are your recommendations?

A. There are many academic definitions of good corporate governance. I prefer to explain it in a different way. If corporate governance is ‘working’ as it should, it means that the shareholders or owners, the board and management are working smoothly and efficiently in a manner so as to allow the company not only to survive, but to develop in a sustainable manner.

We look at the corporate culture and mindset that exists within a company – this is set principally by the board and senior management. We look to see that the board is setting strategy and business direction and, importantly, overseeing what the management of the company is doing, without being overly involved in day-to-day business – these are some key tenets of good corporate governance.

We also look at what goes on inside the company in terms of the so-called ‘control environment’. When properly established, internal controls help to protect the assets of the business against fraud and inefficient use, and ensure sound information flows, ultimately allowing the right people to make informed decisions. As mentioned above, we also look at the approach companies take towards demonstrating transparency, both internally and externally. This is something that can be improved in Georgia and the region, especially in companies looking for foreign investment. We also consider the role of shareholders and how, especially minority shareholders, are treated. If all these components are functioning well, then I think one might say a company has good corporate governance.

Q. After signing an Association Agreement and bringing DCFTA into force competition between Georgian companies has been increasing. How can good corporate governance be used by Georgian companies as their competitiveness advantage?

A. Let's imagine you are a foreign investor looking for a partner in Georgia. Let’s say you don’t know Georgia particularly well. What would concern you? What would you like to know when considering investment opportunities here? Can you trust the stated financial situation of the company? Is the information you want about the company accessible to you? Is the company being properly run? Are there adequate protections in place to protect your planned investment?

Let me give a simple example. If we go to the websites of many Georgian companies – assuming one exists – you may readily find a list of products and services provided - but likely nothing about the board, the management structures, the company’s financial performance, issues and risks facing the company and so on. A company that shows itself to be more open can gain a competitive advantage over less transparent, comparable companies not only with regard to the public in general but also potential investors.

Investors entering a market would like to know certain information about a company before they invest or enter into a partnership. One area that investors will always consider, especially in transition economies, is the quality of governance – that is a large part of the assurance for their investment. Poor corporate governance would weaken a company’s ability to attract external, and especially international, finance. On the other hand, a company which demonstrates good corporate governance practice will be much more attractive to investors.

Q. What are the benefits that good corporate governance brings to companies?

A. Corporate governance is a discipline integrated into a business; it is not something separate from the business. Numerous studies show multiple benefits of corporate governance – whether or not we are talking of large, regulated companies or whether we are talking of smaller, unregulated companies – corporate governance applies to all. The benefits we regularly see relate to enhanced performance in the company – in terms of operational performance, its decision-making processes, its ability to manage the risks it faces, improvement in reputation and trust, as well as the very integrity of the business itself, its ability to access finance at better rates or with higher valuations. Perhaps most importantly, corporate governance actively contributes to the sustainability, success and growth of the business.

Q. You mentioned that transparency is one of the main challenges for Georgian companies. What is the reason in your opinion and how are you going to overcome this challenge?

A. We need to differentiate between types of companies, as well as between mandatory disclosure and voluntary transparency practices. A locally-owned private company operating in the real sector will have minimal disclosure requirements, while listed companies, or regulated institutions such as banks, face higher requirements in terms of the information they are required to make available. However what we encourage businesses to consider is their approach to making certain information available even if it is not required to be disclosed – voluntary transparency. We need to encourage companies to consider a gradual approach to this – to see the benefits. This not only improves accountabilities within a company, but also raises levels of trust outside the company, including crucial investor confidence.