Corporate Governance Investment Services
Corporate Governance Mainstreaming and Methodology
IFC develops a collaborative relationship with its client companies and works with them to improve their governance practices. This is done through mainstreaming corporate governance (CG) analysis in the 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 for applying the relevant set of tools. Each analysis is company-specific to ensure a practical approach to corporate governance.
In March 2010, IFC’s management team released a directive on mainstreaming IFC’s Corporate Governance Methodology (CG Mainstreaming Directive), effective as of September 30, 2010. In general, the CG Mainstreaming Directive provides that any Tier III transaction is subject to a Corporate Governance Assessment (CGA) conducted by a CG specialist assigned to the transaction team. Tier I and Tier II transactions are subject to a Corporate Governance Review (CGR), which should be conducted by the Investment Services staff on the transaction team. At the request of the transaction team, any deal may undergo a CGA by a CG specialist. The environmental and social (E&S) specialist on the investment team will conduct a separate review of the company’s E&S risks and issues in accordance with the IFC Performance Standards and provide a detailed E&S evaluation separately.
Corporate Governance Methodology Update
In 2018, IFC updated the Corporate Governance Methodology for key corporate governance developments since 2007, when the last update was completed. This included integrated governance of environmental and social issues as well as the addition of a new parameter: Governance of Stakeholder Engagement. This parameter reflects the company’s approach to stakeholder engagement, including expanding the definition of stakeholders to include Affected Communities and civil society, ensuring appropriate mechanisms to receive and respond to inquiries and complaints, and where communities are affected, ensuring effective stakeholder engagement, management, and grievance mechanisms. Below are the revised six CG risks:
Risk 1: The potential investee company and its shareholders have not demonstrated a commitment to implementing high-quality corporate governance, including the governance of key environmental and social policies and practices.
Risk 2: The board of directors is not qualified and adequately structured to oversee the strategy, management, and performance of the company.
Risk 3: The company’s internal control system, internal audit function, risk management system (including an environmental and social management system), and compliance function are insufficient to ensure sound stewardship of the company’s assets, effectiveness of operations, accuracy in reporting, and compliance with policies, procedures, laws, and regulations.
Risk 4: The company’s financial and nonfinancial disclosures are not a relevant, faithful, and timely representation of material events to shareholders and other stakeholders, including Affected Communities.
Risk 5: The company’s minority shareholders’ rights are inadequate or abused, and other stakeholders are treated equitably.
Risk 6: The company’s approach to external communication does not include an adequate mechanism to receive and respond to inquiries and complaints and, where communities are affected, ensure effective stakeholder-engagement management and grievance mechanisms.
Note that assigned Investment Services staff conducting the CGR should consult with the E&S specialist to review Risk 6 of this analysis, and this section shall not substitute for the requisite analysis of the company’s E&S risks in accordance with the IFC Performance Standards.
The Methodology tools are presented in the next page.