MAY 2012 72834 ABOUT THE AUTHORS One IFC in Practice: CAROLINE BRIGHT is the Corporate Governance The Example of the Azerbaijan Corporate Product Leader for the IFC Corporate Governance Forum. Governance Project Caroline managed the Azerbai- jan CG Project from 2008 to 2011. The Azerbaijan Corporate Governance Project (ACGP) worked to improve RALITZA GERMANOVA corporate governance practices in Azerbaijani companies and commercial is the Project Coordinator, Global Corporate Governance Forum. banks, and to strengthen the relevant regulatory framework for corporate Ralitza coordinated all interventions of the Forum in the governance. The project achieved strong development impact and is an Azerbaijan CG Project from 2009 example of how the work that the advisory services business lines do can lead to 2011. to an investment opportunity for IFC. It is also an excellent example of the strength in leveraging global-local partnerships, and of a collaborative use of APPROVING MANAGERS Philip Anthony Armstrong, Head, different advisory services products. Covering the full spectrum of corporate Corporate Governance Forum, Sustainable Business Advisory governance services offered by IFC, in many ways the model of joint work Darrin Hartzler, Manager, Corporate under this project has been used in designing and implementing future Governance: Environmental, Social and Governance Department corporate governance projects. Every success comes through overcoming certain challenges, and this project was no exception. We were working in a situation where one donor funded two separate corporate governance projects in one country. In this SmartLesson we share the lessons that we learned in finding solutions in order to work together efficiently, including several parts of IFC working with one particular client company. Background From 2005 and 2011 the Azerbaijan Corporate practices, including better protection for Governance Project worked to improve corporate shareholders and improved board practices and governance (CG) practices in Azerbaijani supervision. These improvements helped facilitate companies and commercial banks in order to help investments of $138 million (with IFC investing them enhance their operations and increase their $27.7 million) in client companies. ability to attract financing and investment. The project, which was funded by the Swiss State The project was a strong example of teamwork Secretariat for Economic Affairs (SECO), involved and partnership. The core project team on the over 600 companies and banks receiving advisory ground was the Sustainable Business Advisory services or training on corporate governance. The (SBA) business line CG staff, who worked closely project team organized 230 training events with the Global Corporate Governance Forum attended by over 2,500 individuals. Seven laws and the Corporate Governance Unit on delivering and codes were adopted to improve the legislative CG training and expertise on such things as environment for corporate governance in partner capacity building and CG Code Azerbaijan. As a result of these interventions, the development. The project also worked closely country’s position on the “Doing Business� with other Business Lines: Investment Climate on ranking for investor protection improved from legislative reform, and Access to Finance (A2F) on 110 in 2008 to 18 in 2009. work with client banks in the area of risk and control. The project cooperated closely with the After working with the project team, many World Bank CG team on the preparation and companies improved their corporate governance follow-up to the Report on the Observance of SMARTLESSONS — MAY 2012 1 Building on its successful collaboration with ACGP, Turan Bank joined IFC’s Risk Management Project being implemented by the Access to Finance business line, and also funded by SECO. This project was designed to help banks in the Eastern Europe and Central Asia region recover from the financial crisis by building their internal capacity and advising them on how to better manage risk. The team from A2F worked with Turan Bank to help better manage non- performing loans and credit risk, and then built on this to improve the bank’s services to SMEs. All the advisory services work was complementary: The A2F advice strengthened the operational activities of the bank, while the corporate governance team looked at the supervisory level. The two teams collaborated in sharing their understanding of the bank’s operations, increasing efficiency in implementation, “It will be amazing to use Forum’s training resources for our and ensuring that both sides of the equation – governance and newly established Georgian Institute of Directors. We are operations – were improved consistently. certainly going to use the materials in our future training programs.� Kakhaber Kuchava (second from the left), CEO, Combining forces of two different IFC products enabled IFC to Georgian Institute of Directors have a much greater impact on the performance of the bank than if only one part of the advisory work had been conducted. Standards and Codes. The project translated the CG materials of Lesson 2: Advisory services can provide an entry point OECD, and also cooperated with them and other donor providers in for an IFC investment. the country to deliver seminars and workshops on CG. Toward the end of the project, the team collaborated with exit partners who will It is in IFC’s interest to reduce the risk of investments by ensure sustainability in provision of CG services and continued improving the governance and management of investee improvement in the legislative environment in the country. companies. Improving the corporate governance of these companies allows IFC to work in higher risk environments, A project of this size, which involved various teams working on reduce the investment risk, as well as add value and different aspects of the project, serves as a learning experience potentially improve the performance of the client. for the teams involved, and outlined below are a few of the lessons learned. When the corporate governance project began working with Turan Bank in 2009, there was no expectation that the Lessons Learned bank would become an IFC client. It turned out to be a strong example of the fact that well-designed and well- Lesson 1: Complementary and collaborative advisory timed advisory services can provide an entry point for services for clients could have a great impact on the investment by both finding potential new clients and project outcome. building the capacity of those prospects to a level where they are able to meet IFC standards and access investment. In 2009, Turan Bank was chosen as a pilot client by the Azerbaijan Corporate Governance Project. In order to align its corporate The advisory teams participated in the loan decision meeting, governance system with international best practices, IFC where the determination of the bank to implement the Corporate Governance staff assisted the bank in introducing a advisory recommendations, and the resulting improvements, number of reforms. These included: the development and were noted as key reasons the bank was being considered for adoption of new internal documents to govern and guide a loan. In June 2011, IFC extended a $7 million loan to help practices; the clarification of management and supervisory Turan Bank increase lending to micro and small entrepreneurs responsibilities; the establishment of a Corporate Governance across Azerbaijan, enabling the bank to diversify services and Officer position; and the adoption of a succession plan and a expand operations, especially in underserved rural areas. dividend policy. “With IFC’s support, we achieved significant results. IFC’s “Turan Bank’s partnership with IFC to date and the bank’s CG methodology engaged not only top management, but commitment to strengthening its corporate governance all Turan Bank’s employees. IFC does a great job in increas- and risk management practices are key factors that led IFC ing awareness and improving understanding through its to provide this loan. This financing will help Turan Bank to tailored workshops and meetings. Personally, I see that increase outreach to micro and small businesses, which is employees are much more informed and willing to part of IFC’s financial markets strategy in Azerbaijan.� implement better practices.� Ed Strawderman, Nazim Sadigov, IFC Senior Manager Chairman of Turan Bank’s Management Board 2 SMARTLESSONS — MAY 2012 The Forum supported the development of Azerbaijan’s corporate governance code through: • International peer review of the code; • Workshops on CG code development and implementation; • A launch event for the code; • Preparation of a corporate governance scorecard. In practical terms, the Forum provided international expertise through its global knowledge tools, by designing the structure of the training events and workshops and recommending trainers and speakers. The Forum was able to leverage its network of international, regional, and local institutions, as well as the Private Sector Advisory Group (PSAG), composed of global private-sector leaders. ACGP coordinated the work on the ground, as the project had better knowledge and understanding of the local environment and stakeholders. “It was very useful for me to share other countries’ experience of monitoring and implementing corporate The toolkit on “Developing CG Codes of Best Practices� was governance codes.� Bolormaa Jalbaa, Financial Regulatory used to organize a regional workshop on “Developing and Commission, Mongolia Implementing Corporate Governance Codes of Best Practices for Companies and Financial Institutions� in Azerbaijan on February 8-9, 2011. Participants at this workshop were able The support from the different advisory services products to learn from the Forum’s materials, PSAG members, experts, strengthened Turan Bank’s corporate governance and risk and twenty-two participants from eight countries in the management structures and turned it into a prospective ECA region. client for IFC investment. A new tool to help assess companies’ and banks’ Lesson 3: Leverage global knowledge to build local governance practices was introduced at the workshop – capacity. the CG Scorecard. In order to advance the implementation of the CG Code in Azerbaijan, a CG Scorecard, based on Leveraging global knowledge resources and integrating the national Code, was prepared by the Ministry of them into a country or regional project expands the Economic Development and peer-reviewed by IFC and depth of the project activities, better responding to PSAG members. clients’ needs and maximizing project’s impact and cost- benefit. In 2009, IFC’s Washington-based Global The toolkit on “Building Director Training Organizations� Corporate Governance Forum (the Forum) was funded was instrumental in supporting the project’s efforts in by SECO to help build institutional capacity and support building capacity of local director training institutions in the development of corporate governance framework in Azerbaijan which can deliver corporate governance Azerbaijan. Activities were focused on improving the training programs and services on a sustainable basis. enabling environment in the country: working with the The new regional ECA CG project, which started in January government on the promotion of good CG standards, 2012, is continuing this work. and with institutions that train directors to ensure a supply of well-qualified external directors. The Forum IFC helped local training organizations build a cadre of worked to align areas of cooperation with ACGP, which professional trainers through a training-of-trainers was already operating in the country, to ensure that the program based on the Forum’s Board Leadership Training two initiatives fully complemented each other, thus Resources. The training allowed participants to improve expanding the depth of project activities and avoiding the training and knowledge skills needed to lead director duplication of effort. education programs for companies and banks. For this training, the Forum’s Governing Banks supplement and The Azerbaijan CG project was already working with a Training Skills Guide were adapted and translated into number of local partners as part of its exit strategy, and Russian so they could be a useful resource for their own had organized training workshops and joint CG future training programs. The training program was assessments of clients. Building on this, the cooperation attended by participants from Georgia, Kazakhstan, with the Forum and use of its global knowledge resources Mongolia, Tajikistan, Turkey, and Ukraine, thus creating allowed the local partners to hone their skills further and a network of trainers from different countries in the get access to good international corporate governance region from which they could derive specific skill sets, as practices. needed. SMARTLESSONS — MAY 2012 3 Two factors are essential components in remaining activities were incorporated into enhancing corporate governance practices: the regional ECA CG project, which was improvement in the markets in which designed in close coordination with the Forum companies and banks operate, and the to ensure all objectives, funds, and indicators strengthening of local capacity. were aligned. Lesson 4: If you have budgets from Conclusion different sources of funds, integrate them from the start and be clear who is Working as One IFC allows a flexible response responsible for covering which to client demand and brings additional depth activities. and expertise to project work. The key to success is to take the time in the beginning to Every success comes through overcoming discuss all aspects of the cooperation and find certain challenges. How could we make the the most suitable approach, and not to forget reporting of two projects to the same donor to keep the communication ongoing. efficient? While the donor may be content with providing two separate pots of money for project work in the same country, it makes both internal and donor reporting complicated. In the future, it would be better to agree with the donor in advance on one standard reporting template and consider unifying the donor funds for just one project. Both the Forum and ACGP received funding from SECO. The donor was very content with the fact that the two facilities worked together and complemented each other, but still they had to present separate donor reports to the same donor every six months for joint work. During this process it was important to ensure ongoing internal communication and exchange of notes between the Forum and ACGP, to guarantee clear and coordinated donor reporting. Donor representatives at the local and headquarters level were invited to participate in events and workshops and were engaged through ongoing and intensive communication. Donors are not just compliance officers; they would like to understand the value proposition of the program they fund. What is the best way to deal with different sources of funds? The Forum’s funding for Azerbaijan was received one and a half years DISCLAIMER before the end of ACGP, which presented SmartLessons is an awards challenges as to how to integrate the new program to share lessons learned funding and activities into the IFC systems. in development-oriented advisory services and investment operations. The findings, Three approaches were explored: 1) amending interpretations, and conclusions the current Azerbaijan Project implementation expressed in this paper are those plan by adding the Forum activities; 2) creating of the author(s) and do not necessarily reflect the views of an additional project focused only on the new IFC or its partner organizations, activities and funding; and 3) integrating the the Executive Directors of The activities into the new regional ECA CG project. World Bank or the governments they represent. IFC does not A combination of the first and third options assume any responsibility for the completeness or accuracy of the was used. Many of the activities were closely information contained in this aligned with the Azerbaijan Project’s objectives, document. Please see the terms so it was easy to integrate the new deliverables, and conditions at www.ifc.org/ which provided greater depth and additionality smartlessons or contact the program at smartlessons@ifc.org. to the existing project. At the same time, the 4 SMARTLESSONS — MAY 2012