48813 MAY 2009 ABOUT THE AUTHORS Help Me To Help You: Strategies for Working KAKHABER KUTCHAVA joined the IFC Georgia Effectively with Governments Corporate Governance Project as a legal advisor in February In development work, we all have heard many words of advice for 2007. He works with banks and companies to improve effective work with governments. But succeeding at policy work is corporate governance practices and with the govern- easier said than done. This paper describes how IFC's Georgia ment in Georgia to address weaknesses in regulating Corporate Governance Project was able to support the process of corporate governance. reforms in a fast-paced, challenging political and administrative MAIA TEVZADZE environment and amid shifting government priorities. The purpose is the project manager of the Georgia Corporate Gover- of this SmartLesson is to share some of the challenges faced in our nance Project. She joined IFC in May 2008. The goal of the work with government and to provide useful tips for effective project is to improve the policy work. corporate governance practices of Georgian companies and banks, thereby helping them to operate more effectively and allowing them Background good working relationships with the easier access to capital. government and provide effective policy In 2004, the government in Georgia began advice, we learned four key lessons. APPROVING MANAGER undertaking a wave of reforms to help spur Motria Onyschuk-Morozov is the economy by reforming government Lessons Learned Principal Operations Officer in institutions and making significant changes charge of corporate governance, IFC Advisory and amendments to existing laws and 1) Prepare the background and build Services in Europe and Central regulations. Reforms were carried out at a fast government awareness before initiating Asia. pace, with varied levels of stakeholder policy work, because people only see what participation and with certain shortcomings. they are prepared to see. The government's reform agenda included many priorities, such as private-sector Sometimes policymakers are just not ready to development and privatization, market tackle the policy problems for various reasons. deregulation, trade facilitation, tax reform, They may not see the real problems; they may improvements in the investment climate, and not have a clear picture; or they may not be facilitationofEuropeanUnion(EU)integration. prepared to evaluate the situation. In such But with such a loaded agenda and a lack of cases, there is a need for more groundwork. professional and institutional capacity, corporate governance problems were often In our case, for quite some time the project overlooked. The importance of establishing had been suggesting that the Georgian corporate governance standards in the country government adopt regulatory norms for was not fully appreciated, although many protecting minority shareholders. This corporate governance problems were recommendation was not taken into intertwined with the government's reform consideration, however, because the efforts. For example, protection of shareholder government was not convinced that there was rights was closely related to efforts to improve a significant policy problem. There was a need the investment climate. for more awareness work, which the project tackled in several different ways. The Georgia Corporate Governance Project, similartomanyotherIFCcorporategovernance In 2004, IFC's Georgia Corporate Governance advisory services projects in the region, has Project conducted a baseline survey of been working to improve the legal framework corporate governance practices. More than regulating corporate governance in Georgia. 150Georgiancompaniescompletedthesurvey. In attempting to find the best way to establish Widespread dissemination of the results made IFC SMARTLESSONS -- MAY 2009 1 the survey a useful public awareness tool. In addition to Once awareness has been built and there is a will to address other areas for improvement, the survey identified the policy issue, it is crucial to choose the right group to shareholder rights as a major loophole in the legislation. steer the process. It is important to include key government The project team used the survey results as a tool during counterparts who have the political power to push the discussions with the government. The survey helped reform, so that there are no undue delays and the initiative demonstrate that protection of shareholder rights was an does not get shot down midway through the process. But it area that needed improvement and helped convince is equally crucial to encourage public-private dialogue and policymakers to adjust their regulatory efforts. ensure participation of key stakeholders who have the experience and can add value to the decision-making The project also used various global economic indicators, process. such as the World Bank's Doing Business indicators, the World Economic Forum's Global Competitiveness index, etc., to demonstrate how poor protection of shareholder rights was negatively affecting various rankings on these indices, and how better protection would not only improve some of the economic rankings but would actually help increase investor confidence. Following this groundwork, the project was able to raise the government's awareness and put the protection of shareholder rights on its agenda. 2) Provide a clear process and guidance on how to implement policy recommendations. Even if there is political will from the government to take certain policy advice, often there is no process or capacity in place to implement it properly. So therefore advisory projects need to point out the different options for The project's key government counterparts, the State Minister of implementingaparticularpolicy,describebestinternational Reforms Coordination and the then President of the National practices, and indicate the actions that need to be taken-- Bank, discussing reforms. and by whom--in each specific area. For example, after much discussion, Georgian policymakers After the government was convinced of the need to were willing to introduce shareholder protection introduce legal amendments to improve protection of mechanisms, but they did not have a clear plan for what shareholder rights, it was decided that a task force would exactly needed to be done. The project helped create a becreatedandthatarelatedpieceoflegislation,introducing roadmap that included the following elements: amendments protecting minority shareholders and regulating conflicts of interest, would be drafted and · Relevant examples from best international practice and presented to the parliament. The goal then was to ensure different regulatory mechanisms for protection of the creation of an effective task force that would include shareholder rights. key stakeholders who had first-hand knowledge and experience. The task force was led by the state Minister of · Assessment of how each mechanism would work under Reforms Coordination and included representatives from local conditions and help in reaching agreement on the several ministries, members of parliamentary committees, mechanism to be applied. theGeorgianStockExchange,anumberofnongovernmental organizations (NGOs), and several donor-funded advisory · Analysisofthelegalframeworkandidentificationofthe projects staff. piece of legislation that needed to be amended. Accomplishing this goal also involved building a meaningful · Identification of the group responsible for developing dialogue among the parliamentary groups and their the draft, along with help in drafting the private-sector counterparts early on in the process. The amendments. Georgian cabinet at that time, being backed by the majority of parliament members, almost never had a problem This approach proved to be very useful. The government adopting legislation. To ensure that all interested parties followed IFC's advice and, for the first time in Georgia's wereinformedandsatisfied,theprojectinitiateddiscussions history, decided to introduce a clause protecting minority with a number of parliamentary committees to prepare shareholders from misconduct by management and members of parliament and experts for the upcoming controlling shareholders. hearing on the draft law. The project also convinced the task force to send the initial drafts and receive feedback 3) Ensure participation of key government counterparts from private-sector representatives affected by the and encourage public-private dialogue. legislation. This turned out to be an excellent idea. Most suggestions from the interested parties were taken into 2 IFC SMARTLESSONS -- MAY 2009 with the Association of Banks of Georgia, the Georgian Stock Exchange, and bank representatives. Now that the draft has been developed, it is being discussed by the wider group of Georgian banks. Conclusion Through effective application of the lessons discussed in this document--building government awareness before initiating policy work; providing a clear process and guidance for implementation; ensuring participation of Encouraging public-private dialogue helps gener- key government counterparts; encouraging ate public buy-in. public-private dialogue; staying responsive to changes and modifying the strategy to fit the new conditions--the project achieved the consideration and contributed to the improved following results over a two-year period: quality of the draft legislation. This also helped to generate public buy-in. · Amendments to the Law on the Securities Markets regulating conflict of interest 4) Stay responsive to changes, remain were drafted by the project and adopted flexible, and be ready to modify your by parliament (enacted March 2007). strategy to fit new conditions. · The project's comments regarding the In policy work it is important to remain flexible composition of audit committees in banks and responsive to the changing government and remuneration for supervisory board agenda. Frequent shifts in priorities may occur, members were reflected in the draft Law and the government may adopt a strategy on Commercial Banks (enacted March that is in conflict with your policy suggestions. 2008). You must remain responsive to changes and be willing to modify your strategy to fit the new · A task force on development of a voluntary demands. corporate governance code for commercial banks has been created and the draft Code As an example, the project put much effort developed (February 2009). into supporting the National Bank of Georgia in developing a draft corporate governance regulation for banks. Before the regulation was adopted, the government initiated reforms of the financial sector. The supervisory function for commercial banks was transferred from the National Bank of Georgia to the newly established Financial Supervisory Agency, and the reform became oriented toward less government regulation. But the new agency was not interested in adopting DISCLAIMER the corporate governance regulation, and the IFC SmartLessons is an awards initiative came to a halt. After much discussion, program to share lessons learned the project team decided that finding in development-oriented advisory interested counterparts in the private sector services and investment operations. The findings, and helping them develop a voluntary interpretations, and conclusions corporate governance code would provide expressed in this paper are those best-practice guidelines for banks to follow of the author(s) and do not while, in the meantime, remaining in line with necessarily reflect the views of IFC the government's new agenda. After holding or its partner organizations, the Executive Directors of The World discussionswithprivate-sectorandgovernment Bank or the governments they counterparts, the initiative started moving represent. IFC does not assume again, now in modified form. The Association any responsibility for the of Banks of Georgia was interested in the completeness or accuracy of the information contained in this initiative and agreed to be the owner of the document. Please see the terms Corporate Governance Code for Georgian and conditions at www.ifc.org/ banks. The project helped create a task force smartlessons or contact the for developing the draft code of best practice program at smartlessons@ifc.org. IFC SMARTLESSONS -- MAY 2009 3