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World bank group governance is here to stay


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Corporate governance, securities regulation

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World bank group governance is here to stay

  1. 1. 1 ResearchconductedbyArthurMboue WorldBank Group Governance is Here toStay: Corporategovernanceis the foundation of the World Bank group governance. Founders of the World Bank group governancestructuredid study the corporate governanceand adapt it to the reality of the ‘social’ corporation or ‘social’ bank in order to come up with the World Bank group Governance.(seetable 1) This structureguides policy decision affecting the World Bank group leadership and operation of the IBRD, IDA, IFC, MIGA, ICSIDand trustfunds. (seetable 2) The board of governors is like the board of directors, the highest decision making authority holding fiduciary duty to people who appointed them. The board of governor roleis ceremonial during which finance ministers and treasury secretaries of the member countries meet twice a year to drink, talk and get pictures taken. In
  2. 2. 2 ResearchconductedbyArthurMboue addition, they will receive audit of accounts, administrativebudget and annual report on the bank operations without any obligation to read them. Itis why the board of governors, appointed for 5 years renewal, delegate authority to the board of executive directors to exercise any of its power except for certain powers enumerated in the Article of Agreements. That said, they delegate responsibility for supervising day to day operation to a board of executive directors, known as the board but a shadow board rank. As you may realize, founders was rightwhen they empowered all operational responsibilities to a Full Time board of directors to facilitate the work of approvalof requests fromthe management of the world bank about the complex issues related to loans, grants, loan modification and more fromthe wholeworld. It could have been too costly in term of time, money and knowledgefor these full time department chiefs to meet more than twice a year but they are still accountable to their people through their 188 parliaments. That said, they must be informed about all the decisions made here on their behalf. How? For some it is not that easy. The board of executive directors is comprised of 25 executive directors to represent 188 member countries. According to the article of agreements, executive directors are appointed or elected every 2 years. Executive directors are neither officers nor staff of the bank. Eight non-borrower shareholders including US, UK, Japan, China, Russia, Germany, Franceand Saudi Arabia are represented by 8 executive directors that mean one executive director each non borrower member. 17 executive directors represent180 member countries that mean there is sharing representation where one executive director represents a lot of countries grouped into 17 constituencies from3 to 23 member countries. (see table 3)
  3. 3. 3 ResearchconductedbyArthurMboue The disparity of voting power between US (now 340,000votes) and the lowestvoting member country, Palau (with 630 votes) did create the systemof constituencies. This big difference is reduced with the constituencies systemwhere US executive director with 340,000 voting power willdeal with (Nigeria, South Africa and Angola ) executive director, EDS 25, with 33,500 voting power to come to an agreement, it is why this Bylaw is called article of agreements. But, will this multi-countries executive director position havepower, control and faith to create incentives for its executive director to representthe interests of all the countries he representinstead of the interests of his own country and people and be accountable to all these governors when thebanks is distributing a lot of grants and free help? I do not have the answer to that question but Ann Florini did say ‘governments, answerableonly to domestic electorates, face few incentives to act for the benefit of someone else’s constituency”. There is not better provision thatshift control fromnon-borrower member countries to borrowing member countries than the consensus doctrineinstead of votes. When decisions are made by the search of consensus between the borrower and non-borrower member countries, the voting rights is not exercised while minority and ‘preferred’ shareholders’ interests will be prioritized. The World Bank President, the only US citizen to chair a board meeting does so sometimes and mostof the times delegate this chair to somebody else. After discussion if there is not sufficient supportfor a project, its discussion is postponed while waiting for behind closed doors negotiations between executive directors’ offices. Rarely, does these decisions and discussions will be interrupted with divisivevote. Decisions aremade by the way you argue your case, your friendship with non-borrower shareholders representatives, your committee’s position and how sorry others willfeel for you. These decisions are againstcorporate governanceand do not maximize all shareholders value.
  4. 4. 4 ResearchconductedbyArthurMboue At the World Bank group, the only time voting number matters it is when the governors of the borrowing member countries are voting for their executive directors and alternates to represent them because non-borrower member countries appoint their own executive directors and alternates. The case of US representation is very troubling to me because all accusations againstUS and its co-non-borrower member countries are getting cannot materially be proven in practice. U.S with 16 to 20 % voting rights has had 9 vacancies of either executive directors or alternates since2005. This absenteeismhas kept it fromrepresenting US interests in all committees of the board of executive directors (Audit, Budget, ethic, CODE, COGAMand HRC). (seetable 4) As you may know, alternate can assumeall power and responsibilities as an executive director and register as a full member of the committee with rights to participate in
  5. 5. 5 ResearchconductedbyArthurMboue negotiation toward the search for consensus. Itis why half of the US seats have been vacant since2005. Who to blame? Congress. (Seeillustration 1) US congress did providethis provision to shift control from US to developing countries by failing to confirmnominee for either the position of executive director or alternate on time.(see table 5) For an institution that rules through the search for consensus, I do not believe increasing developing countries voting power tied to increase in subscription and paid in contribution or not will add transparency to the World Bank group management’s information. Borrowing member countries have less incentive to improvetransparent information related to approvalof loan modification and grants than non-borrowing member countries. Borrowing member countries have less incentive to supportissues related to environment, gender equality, tax fund and anti- corruption becausethey require transfer of funds fromIBRD and IFCto IDA that means declining incomes from IFC and IBRD will reduce available funds for lending and grants to poor countries. (see table 6) Table 6-Characteristics of Shareholder Executive directors Voting power accountability Dividend Non Borrower shareholder 1 high directly reinvested Borrower shareholder Sharing director low indirectly Through available cheap liquid At the same token, these issues punish these developing member countries and keep them frominvesting their funds wheretheir governments may want with a change of heart because of the Bank monitoring systemand earmarks. Although capital structureand voting rights, if it matters, at the World Bank have shifted from1944 to 2016, thestrength of the U.S, from35 % when it was created to 18 % today voting rights and agreement with European countries to appoint the World Bank Presidentis still felt strongly in the presentgovernancestructure. Itdoes not matter that the US is not exercising its power through attendance to board committees and consensus, the World Bank Presidentwho is appointed and reappointed by the US Treasury Secretary
  6. 6. 6 ResearchconductedbyArthurMboue and Presidentis controlling whatissues will come for discussion to the Board and what kind of issues will continue behind closed doors. That said this is one of the two important powers left to the US after 72 years of reign in addition to power to veto any change of Article of Agreement. (85 % votes needed to approveany change of the Article but US has more than 15 % voting rights) In 1979, theWorld Bank did adopt Articles of Agreement, Article V, Section 3, stating that each member has 250 basic memberships plus one additional vote for shareof stock held. This provision to shiftcontrol fromnon-borrower member countries to borrowing member countries is justa concession toward equality in control without increase in ownership. In thelong run, it will affect the world bank credit rating from AAA becausewhen the bank is controlled by developing countries with no incentive to protect its lending and projects, the higher the risk the lower the credit rating, the higher the world bank will get its capital from Wall Street, the higher it will sell its loans. It will affect its ability to compete against other Multilateral Development Banks including China Development bank. (see table 7) Over the past years, when there is a new membership to the IMF, becauseyou must be an IMF member in order to apply for a World Bank membership, the Board of Governors willexamine the candidate member wealth and determine its value and its sizeof voting power to the World Bank group. Its entranceand acquisition of required shares of the World Bank group including subscription and paid in contribution (6% of
  7. 7. 7 ResearchconductedbyArthurMboue subscription) willrequire changes in ownership for all pre-existing shareholders including US by the reliance of the corporateformula about new shares number (see the formula below) The same scenario will take place when any existing member countries file for increase in ownership based on sometriggering events including annexation/recognition of new lands and other values added (GDP, GNP,…), it is why China did file for increase in shareownership after the accession of Hong Kong and huge economic boom. Although I believe that its case was easy at the IMF board, when it comes to the World Bank board, I havereasons to believe that it did get morethan it did bargain for when it did receive its own executive director as a bonus fromthe deal. Because of classified documents related to this vote, I cannotsay for surewhy one of the World Bank group top 1 borrowing countries ($21.76 Billion in 2015) cannothave incentive to argue against the World Bank group interest payments. In addition, China Development Bank and China export-import bank are now one of the strong competitors of the World Bank group with more than $100 Billion loan committed to developing countries since 2010. (seeillustration 2)
  8. 8. 8 ResearchconductedbyArthurMboue As long as these borrowing countries will have substitute products to the World Bank group lending coupled with easy requirements and low global interest rate, it will be a decrease in demand for the World Bank group lending products and IBRD and IFC incomes and increase in global financial competitive environment. ( see table 8)
  9. 9. 9 ResearchconductedbyArthurMboue Itshould be noted that the World Bank has always faced pressureto lend at no cost coupled to higher default risk fromstructuralfactors, institutional factors and external factors including demand fromits own non-borrower shareholdersand this pressureis worsening with top borrower shareholder and competitor is enjoying the rights reserved to non-borrower shareholder and theentrance of very low global interest rate in the global market.(seeChart 1) Chart 1-Tentative Remediestothe WorldBank Group Problems  Increase loanprice (butitmust remaincompetitive toincrease demand)  Revisitandimplementnew softrequirementtomaintainloancommitment (lessdemandingmetricsfordemocracy,tax fraud,corruption,…)  Reduce transfersfromIBRDand IFC to IDA (you mustreplace the endof povertyby2030 sloganwithdevelopmentandindustrializationfocustoshare prosperity)  Slightlyincreaselendingvolume (watchdefaultriskbutcap Chinaborrowingor become itspartner‘if youcannot beatChina,joinChina’)  Remembertokeepyouradvisoryservice demand,youmustshow thatyoucan manage yourself. Thisreputationisnecessaryforotherstoseekyouradvises. In sum, the debate about how the World Bank Group is managed did take its worse turn weeks ago and it is that event that triggered my search for the truth. If I was not expert in this field I could justbelieve in everything I did read from others and Prof Stephany Griffith-Jones becauseshe did build a good case againstUS and all non- borrower member countries. When it comes to University President Jim Y Kim, I would say only a few university presidents are alike. A lot of university presidents would have turned down this kind of offer because they believe they will not have the respectand knowledgeneeded to run this kind of specialized institution. (seetable 9) The mechanism through which Dr Kim and others executive directors werechosen for their positions did not performvery well. I believe wecan downplay this kind of protests of the leader by choosing leader the sameway we are choosing our US DoJ leaders. I would say even the brother of the US President, Robert Kennedy, did have 2 years legal experience before being hand the powerfulposition of the Attorney
  10. 10. 10 ResearchconductedbyArthurMboue General of the US. That said, the international prestigious positions of executive directors and American citizen World Bank presidentmust be financial (financial related) experts through education and/or experiences. The Board of the Governors can adopt an amendment to the article of agreements and/or special rules of election. (see Chart2) Another proposalis a mandatory hiring of independent compensation consultant to guide the HRC when dealing with World Bank top executives compensation packages. In addition, no person related to the World Bank presidentand his lieutenants should be allowed to attend this portion of the board debate. Another proposalis that 5 out of 8 members of the audit committee mustbe financial experts. Also, this committee must work with other committees and make surethat the World Bank helps an averageexpert to understand its operation and management with a consolidated financial report of the World Bank Group. This annualreport guided by a disclosure expert must add clarity, transparency and understanding to the World Bank information it makes available to the public.(seeChart 3)
  11. 11. 11 ResearchconductedbyArthurMboue To close, I would say, for the last 72 years, the World Bank lending systemdid develop China, Singapore, Malaysia, Taiwan, Thailand, South Korea and provideclothes, shelter, health care and food in Haiti, Djibouti, Ethiopia, Papua and other poor countries, all of this with US, Japan, France and UK donation, we cannot afford to replace a winning system justto feed a small number of people with hunger to change things negatively for power. When human beings wereforced from their homes because of corrupted and/or addicted leaders or when human beings weredying from Aids or when the world was dealing with people who were justborn this way, poor, the World Bank was there with its help, can you truly comparethese institutions to the World Bank? Itis true, the World Bank group is experiencing problems now but we can fix them and adapt them to the new global competitive environmentdictated by rapid changes, speedy technology and respectfor talents. Thus, we should know that after trying this experience, US will end up doing the right thing to keep the world a better place.