The International Financial Corporation develops a collaborative relationship with its client companies and works with them to improve their governance practices. This is done through mainstreaming CG analysis in investment process for every IFC transaction by applying the IFC Corporate Governance Methodology.
IFC's Corporate Governance Methodology is the process of analyzing the client companies' corporate governance structures, policies and processes applying the relevant set of tools. Each analysis is company-specific to ensure practical approach to corporate governance. This methodology served as the foundation for the CG Development Framework's methodology.
In all IFC investment transactions, it is impossible for IFC project teams to conduct a proper appraisal without examining and making critical judgments in the areas of financial stakeholder rights; accountability and the board of directors; the internal control environment; and auditing, transparency and disclosure practices. All project teams must do this to a greater or lesser extent, so understanding the central issues of corporate governance in investor protection needs to be a core competency of investment staff. Mainstreaming allows IFC to better manage CG-related risk and improves our ability to deliver useful advice to clients, building stronger partnerships with clients as a result. Therefore, mainstreaming CG analysis in IFC transactions is an integral part of the investment decision-making process.
All projects do not require the same degree of application of the Methodology or the same amount of staff commitment from the Corporate Governance Unit. Depending on the particular client and project characteristics a Corporate Governance Assessment (CGA) in accordance with the comprehensive IFC CG Methodology will ordinarily be conducted during appraisal. For other projects, the simpler Corporate Governance Review (CGR) is more appropriate.
The application of the CG Methodology (the process of analysis with the application of specialized tool) envisages:
Deciding on the level of corporate governance analysis depending on the risks involved, size of the investment transaction and complexity of the client company's corporate governance framework,
Collecting the relevant information and analyzing corporate governance risks and opportunities,
Defining the relevant risk mitigating measures or improvement recommendations and
Helping the client with their implementation.
IFC's approach to CG begins with an evaluation of whether it poses a special risk to an investment or the company's operations or whether it involves an opportunity to add value. Using the IFC CG Methodology helps us evaluate the:
possibility of a client's poor CG contributing to a corporate failure, or mistreatment of IFC and other investors.
adequacy of the role and functioning of the client's board of directors.
the ability of a family business to formulize structures and survive generational change.
commitment of the part of the client to make improvements in their governance.
More specifically, IFC seeks to analyze if any of the five key CG risks exist in the client company and recommend relevant mitigating factors. The key CG risks are:
Risk 1: The Company and its shareholders have not demonstrated a commitment to implementing high quality CG policies and practices.
Risk 2: The Board of Directors is not up to the task of overseeing the strategy, management and performance of the company.
Risk 3: The Company's risk management and controls are insufficient to ensure sound stewardship of the company's assets and compliance with relevant regulations.
Risk 4: The Company's financial disclosures are not relevant, faithful, and timely representation of its economic transactions and resources.
Risk 5: The Company's minority shareholders' rights are inadequate or abused.
IFC can help client companies improve their CG practices to:
provide access to and/or lower the cost of capital.
enhance company's reputation.
increase operational efficiency.
sensitize the client to stakeholder issues including environmental and social issues.
The Methodology tools are presented in the next page.