International Financial Corporation (IFC), in cooperation with Corporate Governance Center Foundation (CGCF), an Armenian NGO, has launched a long-term project aimed at the development of corporate governance in Armenian enterprises, thus contributing to the competitiveness and investment attractiveness of these companies and thus the Armenian economy overall. The opening event of the initiative was the seminar «Risk management and the Board of Directors», held in Yerevan on June 8 and 9.

IFC Regional Project Manager for Corporate Governance in Europe & Central Asia, Oliver Orton, and CGCF Principal Counsel and Program Manager in Armenia, Vahagn Movsesyan, explained in an interview to Mediamax and Banks.am portal, what steps are intended to be undertaken in the framework of the project and what they expect to achieve.

- As we know, the project in Armenia is part of wider regional initiative of IFC. Could you please explain what actions are going to be taken in the framework and why it was decided to involve a local partner?

Oliver Orton: - As you probably know, IFC is a recognized global leader in the promotion of corporate governance practices and standards and has developed a globally-respected and well-tested methodology for evaluating corporate governance practices, risks and opportunities in companies and financial institutions. This methodology is now reflected in the Corporate Governance Development Framework, a common approach to corporate governance, adopted in 2011 by 29 Development Finance Institutions (DFIs).

IFC has worked for over 10 years on improving corporate governance in Europe & Central Asia, reaching over 11,000 companies and financial institutions and providing tailored advice and support to over 400 clients, assisting them to improve their performance, and supporting them to raise over $3 billion of financing as a result of improved governance.

Now IFC is working with local partners in various countries throughout Europe & Central Asia in the promotion of corporate governance. In Armenia, IFC and CGCF can together offer corporate governance services for companies and financial institutions, ranging from thematic training, tailored “diagnostic” reviews, consultations on specific corporate governance matters, to in-depth assessments with implementation plans.

A key goal of this project is to develop local capacity for the delivery of corporate governance services based on IFC’s methodology. The second goal, which overlaps with the first, is to work directly with companies on a consulting basis and assess their corporate governance practices, provide recommendations and assist them with implementing those recommendations. The methodology provides a framework for the examination of the current state of corporate governance in a company, followed by an identification of areas for improvement and support in implementation of key recommendations. This approach analyzes internal acts, board of directors’ policies and practices, audit and control processes, risk management, transparency and disclosure mechanisms, and shareholder rights.

Corporate governance is often perceived by companies as an obligation relating solely to matters of compliance with relevant laws and regulations, but this is only a small part of it. Good corporate governance practices help a company to meet its objectives: it helps in terms of setting strategy, enhancing performance, competitiveness, sustainable expansion, effective risk management, attracting capital investment, etc. So we\'ll be also promoting this perception of corporate governance as not simply being about regulation and additional obligations, but focusing on the assistance good corporate governance brings to companies in very real ways.
                       
Together with the CGCF, we’ll be organizing awareness-raising events on corporate governance, and we’ll also be seeking to visit key companies in Armenia that we believe might be interested to work with us and which, based on our experience, would benefit from our work. Their example will also have a demonstration effect within the market in terms of the benefits good corporate governance can bring.   

- There is widespread perception in Armenia that corporate governance refers to only large private businesses and not to small ones. So, is the project targeted at big companies or it can also involve state owned enterprises, family firms and small businesses?

Oliver Orton: - Definitely. We see corporate governance as relevant to all companies, even small ones, although we need to be clear what we mean by small: it’s generally not so relevant to firms run by 2 people with 10 employees, for example.

However the perception that it\'s only relevant to very large and sophisticated companies is really very wrong. We have worked throughout the world with many companies that might be seen as medium enterprises in Armenia and these companies benefit significantly from corporate governance.

With regard to family-owned businesses, in our view developed corporate governance practices are very important because of the complexities of working not only with the company-related issues, but also the involvement of the family and those associated issues.  Worldwide, many family businesses fail by the second generation due to the relevant considerations not being adequately taken into account.   A very significant proportion of companies worldwide comprise family businesses and they often avoid facing up to corporate governance issues because of the sensitivities and complexities of the family elements. For such cases, we have a very specific methodology focused on family businesses (whether they\'re large or not) and the specific challenges they face.

I think corporate governance is relevant to companies at all levels of their development, especially for companies that are looking for growth. We\'ve seen many companies established by 2-3 people hiring, let’s say, 10 employees. Of course we don’t think that introducing intricate corporate governance structures at this stage makes realistic sense. However we see many companies grow organically and when you ask them a few years later how they manage their business, when they already have, say, 50 to 200 employees and more developed structures, they often admit that they still manage the business the same way as they did when they were much smaller. And that\'s really where corporate governance can assist: it helps to manage sustainable growth.               

Vahagn Movsesyan: - In our work with Armenian companies, CGCF and IFC will apply the IFC Corporate Governance Methodology and its tools customized to the needs of companies, including listed companies, family-owned businesses, financial institutions, privatized companies and state-owned enterprises.

And our role will be trying to localize the methodology for each type of Armenian company, and identify what the best solution for each enterprise is. We are also planning on training companies’ staff. This is something that hasn\'t been done in Armenia until now.      

- One of the main management problems of Armenian companies is the lack of long term strategic planning which is an important part of corporate governance. Many managers say that the absence of this long term strategic planning is due to political instability in the region. Will you tackle this issue?

Oliver Orton: - Yes.  Political instability – or indeed any other factor – is not a reason for not undertaking a systemic approach to corporate governance.  Good corporate governance assists companies to best address their current realities (whether these are challenges due to political instability or otherwise).  After all, boards are still responsible. By way of example, one of key areas that we look at is the role and functioning of the board. Very often we see that the board doesn\'t always understand what it is meant to be doing. The board should not be conducting day-to-day operational management. One of its main functions is the oversight of the management and an important component of this oversight is risk management (including, as I have said above, dealing with all risks and challenges a company faces – indeed this is one of the main benefits good corporate governance can bring), the structure of which depends obviously on the type of the company and realities (political realities as well) it faces.

But good risk management is also about seizing opportunities. Many companies we deal with often think they have clear strategy, but often they don’t and they’re often missing out on really good opportunities. So the board has to be prepared to do its job, whatever the environment (political or otherwise) is.

- Two years ago compulsory audit was implemented by the government in large companies in order to make them more transparent. In your opinion, can compulsory measures taken by the government contribute to improve the corporate governance?

Oliver Orton: - It’s a difficult question. Even academics look at this issue in different ways. My personal view is that elements of both are needed. I think there needs to be a certain level of mandatory regulation. Promotion and understanding of sound transparency practices is also a critical area in terms of maintaining integrity of the market and seeking foreign investment.

On the other hand corporate governance needs elements of flexibility as well and a number of corporate governance codes are based on a mechanism by which companies can explain why they don\'t comply with certain requirements of the corporate governance code. And the idea is that the market will react to the quality of those explanations. The difficulty in many markets is that they don\'t react, as they are not so developed to be able to do so.

I\'d say it depends on the sectors you\'re talking about. Banks and financial institutions have systemic roles and there\'s clearly greater argument for more stringent regulation of them in line with general banking and capital requirements; this also refers to listed companies in terms of protection of the investing public.

So I think it needs to be a combination of both mandatory and voluntary.    

- You probably know that the Armenian capital market is underdeveloped; there is nearly no free float of stocks. So, is it possible for corporate governance culture to be developed without an active capital market?

Oliver Orton: - Clearly stock exchanges worldwide can be very good supporters and promoters of corporate governance. Businesses in many countries prefer to go to banks in order to raise money and the idea of raising money on an exchange is seen as a little bit novel, as a degree of corporate governance is a requirement there. On the other hand I don\'t think it\'s necessary to have a very active stock market in order to make corporate governance part of business culture.

Vahagn Movsesyan: - A recent worldwide study was conducted showing that investors are willing to pay up to 40% more for companies that have better corporate governance. That\'s why today in many countries we can see voluntary compliance with corporate governance codes. Companies are trying to implement it without mandatory requirements because of the obvious advantages. During our project we are going to support the implementation of the code in all types of companies, whether listed at the stock exchange or not.

- What was the first feedback you got after introducing the project here?

Vahagn Movsesyan: - We discussed the program with the first deputy minister of economy Karine Minasyan, the NASDAQ OMX Armenia Stock Exchange CEO Konstantin Saroyan, the deputy- chairman of the Central Bank Nerses Yeritsyan and some private sector representatives. Everyone supports the idea. Moreover, the unexpected large number of top level decision making executives at the seminar proved that these issues are high on the agenda not only of our policy makers, but of our business representatives as well, and the registered high demand for such services is yet another prove for the urgent necessity for corporate governance services that we are going to bring in together with our partners from IFC.