Cairo & Alexandria Stock Exchanges Working Paper Series

Dr. Shahira Abdel Shahid

September 2001

Corporate Governance is becoming a global pursuit: what could be done in Egypt?

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Corporate Governance is becoming a global pursuit: what could be done in Egypt?

Abstract: The paper defines corporate governance and explains the reasons for its becoming an important issue pursued by many countries in the last decade. Following, the various codes of corporate governance, used as a guidance for countries, which are set by international organizations such as World Bank, IMF and OECD are summarized. Next, the paper reviews corporate governance experiences in nine diverse, countries including both developed and emerging markets. Finally, the paper assesses corporate governance practices in Egypt, identifying existing problems and proposing recommendations in order to enhance corporate governance practices in Egypt. Acknowledgements: The Research & Markets Development Department at CASE is very pleased to present its first series of research papers that addresses an issue of both local and international importance, which is broadly examined by experts and researchers in both practice and academia. The author would like first to thank Dr. Sameh El Torgoman, Chairman of CASE, for his great support and encouragement. Dr. El Torgoman insisted that corporate governance becomes the first research working series paper to be written by Research & Markets Development, given the worldwide importance of the topic and its great relevance to the Egyptian context. Dr. El Torgoman is a great advocate of corporate governance and is determined to have CASE, one of the main driving entities, working with the Ministry of Economy & Foreign Trade and other organizations, in setting a Code for Corporate Governance in Egypt. Furthermore, the author thanks Mr. Nazre Dastgir, Senior Advisor to the Chairman, for his valuable comments and suggestions. Thanks are also due to Mrs. Heba El Serafie, Manager, Research & Markets Development, for her research assistance. Disclaimer: The findings, interpretation and conclusions expressed in this paper are entirely those of the author. They do not necessarily reflect the view of CASE. Corporate Governance is becoming a global pursuit: what could be done in Egypt?

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Chapter (1) Overview of Corporate Governance Summary This chapter: Defines corporate governance and the main components that it constitutes. Mentions the reasons behind the increased importance of corporate governance and how it has become a very hot issue for both developed and emerging countries. Discusses the entities that introduce codes of corporate governance in any given country dependent on its legal system. Summarizes the framework of corporate governance principles set by international organizations namely, World Bank, IMF and OECD.

Definition Corporate governance can be defined as the set of rules and incentives by which the management of a company is directed and controlled in order to maximize the profitability and long-term value of the firm for shareholders. Corporate governance regulates the contractual relations between stakeholder groups, in particular, the principal-agent relationship between shareholders and management. Ideally the separation of ownership and control allows shareholders and managers to focus on their respective competitive advantage: the provision of risk capital on the one hand and the management of real investment portfolios on the other hand. In reality, the contractual governance of management behavior is necessarily incomplete and direct monitoring will be under provided. Hence, management is in the position to seize residual control rights and may appropriate the shareholders’ investment return. If left unregulated, shareholders will under provide finance and companies will not be able to take advantage of all value enhancing investment opportunities. Thus the codification of corporate governance into national law or codes of best practice becomes a necessary and effective means of alleviating the under investment and limiting the implied agency costs.

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There are four major players affected by corporate governance: Shareholders: since they provide capital in exchange for the rights to profits and increase in corporate value. The board of directors: as they represent the basic interests of shareholders and sometimes other interested parties. The board selects management, provides general direction to managers and oversees management performance. Management: whose responsibility is the day-to-day operations of the company and reports to the board. Management is responsible for maximizing corporate profits and shareholder value. Stakeholders: mainly creditors since their interest focuses on maximizing the probability of debt repayment. Other important stakeholders include employees, suppliers and the public at large.

There are interrelated factors contributing to the proper functioning of the corporate governance system: Internal factors: board of directors, providers of capital, management and stakeholders. External factors: the environment that ensures effective governance including law, regulation, competitive markets, the media, transparency and high standards of reporting.

In summary, corporate governance is a broad term that encompasses rules and market practices which determine how companies, especially widely held companies, make decisions, the transparency of their decision-making processes, the accountability of their directors, managers and employees, the information they disclose to investors and the protection of minority shareholders. It involves issues of company law, securities laws, the listing rules of a country’s stock exchanges; the accounting standards applicable to listed companies, competition or antitrust laws and bankruptcy or insolvency laws. It includes the government regulations and regulatory agencies with which corporations and their shareholders deal and those regulators’ actions to ensure compliance with applicable laws and regulations. Furthermore, corporate governance involves the courts that are called upon by shareholders, directors and managers to resolve corporate governance disputes and enforce government regulations1. 1 Olin, J. (2001), “ Corporate Governance in Korea at the Millennium: Enhancing International Competitiveness”, Stanford Law School, Law and Economics Working Paper No. 196.

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Importance Corporate governance is now the subject of much discussion in boardrooms, classrooms and the media2. Corporate governance systems have evolved over centuries, often in response to corporate failure or systemic crises. Usually each crisis or major corporate failure often as a result of incompetence, fraud and abuse was met by a system of corporate governance3. Corporate governance received more attention than ordinarily would have, due to a series of corporate failures that affected not only those directly connected with the companies concerned i.e. directors, shareholders and auditors; but also those affected by its existence like employees, customers, suppliers and the environment. In particular the occurrences of major corporate failures such as the collapse of Barings Empire, Daiwa Bank debacle, Maxwell Affair, have pointed to the lack of a proper corporate governance system as one of the main reasons for their collapse. The present economic turmoil faced by so many countries, the recent Asian economic crisis, the continuing turmoil in Russia and the recent experience of the Czech economy have combined to push the issue of corporate governance to the center stage. Those financial crises showed that even strong economies lacking transparent control, responsible corporate boards and shareholder rights collapse quite quickly as investor’s confidence erodes. Globalization processes such as the liberalization and internationalization of economies, developments in telecommunications, the integration of capital markets, as well as transformations in the ownership structure of corporations with the growth of institutional investors, privatization and rising shareholder activism, have increased the need for efficient corporate governance. These factors are discussed below:

Globalization is forcing many companies to tap international financial markets

and thus face greater competition. This has led to restructuring and a greater role for mergers and acquisitions and to expanded markets for corporate control4. In an increasingly globalized economy, firms need to tap domestic and international capital markets for capital and investment and the quality of corporate governance is increasingly becoming the criterion for investment and lending5. Corporate governance is a significant factor considered by institutional investors when making investment decisions and ownership stakes. Many shareholders now compare ownership rights and governance as part of their due diligence reviews of companies. International investors are

2 Brian R. Cheffins, “Teaching Corporate Governance” (1999) 19 Legal Studies 515 at 515-16; Klaus J. Hopt and Eddy Wymeersch, “Preface” in K.J. Hopt and E. Wymeersch (eds.), Comparative Corporate Governance: Essays and Materials (Berlin: Walter de Gruyter, 1997), v at v. 3 Iskander, M and Chamlou, N. “Corporate Governance: A Framework for Implementation”, World Bank Group, 1999. 4 Ibid. 5 Corporate Governance, An issue of International Concern, Global Corporate Governance Forum

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also convinced that the appropriate governance structure reduces risk and promote performance and that shareholder participation can motivate boards to produce higher long-term returns. Companies that enjoy good corporate governance have a competitive advantage in attracting capital over those whose practices discourage shareholder participation.

For the economy as a whole, better corporate governance means a more efficient corporate sector and higher level of economic growth. Active, dynamic and imaginative management push companies into new markets, provide new or/and cheaper services to customers and reacts rapidly to outside pressure.

Privatization around the world forced governments and companies to accommodate the needs of private investors who require good governance practices.

Corporate governance encourages more transparent management practices, in order to attract more investment flows.

Cross-border analysis is a noteworthy feature of corporate governance’s rise to prominence6. Privatization around the world forced governments and companies to accommodate the needs of private investors who require good governance practices. Improving corporate governance procedures helps improve the management of the firm in areas such as setting company strategy, ensuring that mergers and acquisitions are undertaken for sound business reasons and that compensation systems reflect performance7.

Adopting standards for transparency in dealing with investors and creditors helps in preventing systemic crises.

Increasingly for developing economies, a healthy and competitive corporate sector is fundamental for sustained growth that withstands economic shocks and renders benefits to the society as a whole.

In short, corporate governance has become, and is likely, to remain a powerful tool for

attracting foreign direct investment. Capital will go where it knows it is protected. Companies in both developed and emerging markets have learned that corporate governance becomes a vital issue as they begin to go public, to merge with local and foreign companies, to tap international financial markets and to operate in a truly competitive domestic and international business environment.

Who sets corporate governance codes? Codes of good corporate governance present a comprehensive set of norms on the role and composition of the board of directors, relationships with shareholders and top management, auditing and information disclosure, as well as the selection, remuneration 6 Teemu, R. “Conceptualizing Corporations and Kinship: Comparative Law and Development Theory in a Chinese Perspective” (2000) 52 Stanford L. Rev. 1599 at 1602-3; Lawrence A. Cunningham, “Comparative Corporate Governance and Pedagogy”, (2000) 34 Georgia L. Rev. 721 at 722, n. 1; Douglas M. Branson, “The Very Uncertain Prospect of ‘Global’ Convergence in Corporate Governance” (2000), unpublished, at 11. 7 Corporate Governance Code for Mexico.

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and dismissal of directors and top managers. The codes serve to improve the overall corporate governance of corporations, especially when legal environments fail to ensure adequate protection of shareholders’ rights. Countries are usually classified into four legal families according to the origin of their legal systems: English, French, German and Scandinavian. Countries with an English origin or common-law legal system provide better protection to shareholders than countries with a civil law legal system i.e. French, German and Scandinavian origin.8 Hence, the code serves to compensate for the lack of protection in the legal system and would be more likely to be adopted in civil law countries. It was also found that in common-law countries, codes of good governance developed much earlier with the stock exchange and managers’ associations being the main actors in developing codes whereas civil-law countries, created codes later, with managers and directors’ associations taking the lead9. Thus the legal system can be considered as a conditioning factor in the development of the codes of good governance. Another important factor affecting the issuance of the codes is the issuer. Issuers can be stock exchanges, governments, director’s association, managers association, professional association or investors. It was noted that the stock exchange is more likely to set the first code in common law countries, while the government is more likely to issue the first code in civil-law countries. Differences in who issues the code denote differences in the enforcement of the codes. For instance, government and stock market issuers might exert coercive pressure for the adoption of the codes of good governance, whereas associations and investors might apply normative pressures for adoption10. In Egypt, as will be discussed later, the Government, through the Ministry of Economy and the Stock Exchange can play a crucial role in the development of a Corporate Governance Code. In most countries, corporate governance rules are the subject of binding law or regulations, while others involve market institutions or merely common practices, sometimes written down in corporate governance codes and enforced through listing or disclosure rules and sometimes simply embodying investor expectations. Corporate governance rules are neither entirely mandatory nor entirely voluntary in nature, but a mixture of both. Any reform proposal must include judgments on which issues should be addressed by a mandatory rule, which issues require mandatory disclosure but are not binding rules, and when adoption of a practice should be purely voluntary11.

8 Aguilera, Ruth and Cuervo-Cazurra, Alvaro (2000). “Codes of Good Governance Worldwide”, CIBER Working Paper No. 00-105, October 2000. 9 Ibid. 10 Sullivan, J. 2000, “Corporate Governance: Transparency between Government and Business”. 11 Olin, J. (2001), “ Corporate Governance in Korea at the Millennium: Enhancing International Competitiveness”, Stanford Law School, Law and Economics Working Paper No. 196.

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It is worth mentioning that Hong Kong, Korea, Malaysia, Singapore and Thailand have all adopted codes of best practice of corporate governance and have linked them to the listing rules of their stock exchanges12. The guidelines of corporate governance employed by three international organizations i.e. the World Bank, IMF and OECD will be discussed at this juncture, since the majority of countries adopting corporate governance rules more or less follow the standards set by these organizations. Corporate governance codes as set by international organizations

1. The World Bank:

Though the World Bank has always encouraged developing countries to adopt international best practices and implement legal and regulatory reforms, it is not in the business of setting standards or creating codes, rather it gives necessary support on a national, regional and global levels. At the national level, the World Bank has supported a series of country self-assessments that identify strengths and weaknesses in corporate governance that helps countries establish priorities. The objective of the assessments is to strengthen regulatory reform while fostering private voluntary actions, which is consistent with the Bank’s comprehensive development framework that emphasizes good corporate governance as a key factor in development. The framework stresses the importance of the private sector (local and foreign), as a major player in the development process. It also calls for the participation of stakeholders in the design and implementation of a comprehensive reform strategy. At the regional level, the World Bank has co-sponsored with other multinational agencies, a series of roundtable discussions addressing government officials, legislators, regulators, local and foreign firms, investors and rating agencies, to help craft a consensus for reform. On the global level, the Bank has worked closely with the OECD to broaden the corporate governance beyond OECD countries. The World Bank and the OECD have signed a Memorandum of Understanding on June 21, 1999 to sponsor the Global Corporate Governance Forum. The main aim of the forum is to help middle and low-income countries improve their corporate standards of governance by fostering the spirit of enterprise and accountability, promoting fairness, transparency and responsibility13.

12 Aguilera, Ruth and Cuervo-Cazurra, Alvaro (2000). “Codes of Good Governance Worldwide”, CIBER

Working Paper No. 00-105, October 2000. 13 Iskander, M and Chamlou, N. “Corporate Governance: A Framework for Implementation”, World Bank Group, 1999.

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In consultation with other organizations, the World Bank has also developed a template for the assessment of corporate governance regimes in developing countries. This template is designed to allow an evaluation of strengths and weaknesses in different markets. This template assessment will contribute to the World Bank/IMF Report on Observance of Standards and Codes (ROSC), which summarizes the extent to which countries observe certain internationally recognized standards. As of end of June 2001, the ROSC for Egypt will be available on the World Bank’s web site. A mission team of the Bank prepared this assessment report after more than a six-month study in Egypt. The World Bank has emphasized the inclusion of insolvency and creditors rights besides transparency in codes/rules of corporate governance. Insolvency and creditors rights In an effort to improve the stability of the international financial system after the South East Asian Crisis, the World Bank led an initiative to identify principles and guidelines for meaningful insolvency systems and for the strengthening of related debtor-creditor rights in emerging markets. Insolvency systems provide a pre-determined set of rules and institutions concerned with the recognition of insolvency, the resultant liquidation or rehabilitation of the insolvent firm and the allocation of the financial consequences between the stakeholders. The insolvency systems also permit lenders to more accurately price risk and encourage cash flow lending rather than relationship or politically directed lending and discipline managers to allocate scarce resources efficiently. Transparency in accounting and auditing systems In order to have transparent, timely and reliable corporate financial reporting and as part of the Reports on the Observance of Standards and Codes (ROSC) initiative, the World Bank will undertake reviews of compliance with accounting and auditing standards in a number of countries. It is intended to provide a basis for comparing practice in the countries reviewed to both national and international accounting and auditing standards, which in turn, will facilitate cross-country comparison and the design of programs to strengthen corporate financial reporting. More specifically, the objectives of the review are to assess the comparability of national accounting and auditing standards with International Accounting Standards (IAS) and International Standards on Auditing (ISA), respectively; and the degree to which corporate entities comply with established accounting and auditing standards in the country. Furthermore, the International Finance Corporation (IFC), being a member of the World Bank Group, has also promoted better corporate governance by requiring that the firms in

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which it invests, practice sound corporate governance and by insisting on proper internal controls and reporting. This applies particularly on developing stock and bond markets14. 2. International Monetary Fund (IMF): In addition to the IMF’s contribution in the ROSC of the World Bank, the IMF has developed codes of good practices mainly for the transparency of governments’ fiscal and monetary policies15. Code for Fiscal Policies: The IMF is encouraging its member countries to implement a Code of Good Practices on Fiscal Transparency. The Code stresses: responsibilities of government should be clear; information on government activities should be provided to the public; budget preparation, execution and reporting should be undertaken in an open manner; fiscal information should attain widely accepted standards of quality and be subject to independent assurances of integrity. The code sets out what governments should do to meet these objectives in terms of principles and practices. The code for fiscal policies emphasizes four important areas: Clarity of Roles and Responsibilities The government government sector and/or its public sector agencies16 should be

distinguished from the rest of the economy. Policy and management roles within the public sector should be clear and publicly disclosed.

There should be a clear legal and administrative framework for fiscal management.

Public Availability of Information: The public should be provided with full information on the past, current and

projected fiscal activity of the government. A commitment should be made to the timely publication of fiscal information.

Open Budget Preparation, Execution and Reporting The budget documentation should specify fiscal policy objectives,

macroeconomic framework and policy basis for the budget as well as identifiable major fiscal risks.

Budget information should be presented in a way that facilitates policy analysis and promotes accountability.

14 Iskander, M and Chamlou, N. “Corporate Governance: A Framework for Implementation”, World Bank Group, 1999. 15 The web site of the IMF: www.imf.org. 16 The IMF actually makes a distinction between the government and public sector.

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Procedures for the execution and monitoring of approved expenditure and for collecting revenues should be clearly specified.

There should be regular fiscal reporting to the legislature and the public. Assurance of integrity Fiscal data should meet accepted data quality standards. Fiscal information should be subject to independent scrutiny.

Code of good practices on transparency in monetary and financial policies The IMF has developed a code of good practices on transparency in monetary and financial policies. The design of good transparency practices in the Code rests on two principles. First, monetary and financial policies can be made more effective if the public knows the goals and instruments of policy and if the authorities make a commitment to meeting them. Also good governance calls for central banks and financial agencies to be accountable, particularly where the monetary and financial authorities are granted a high degree of autonomy17. The Code was developed in the context of the development of standards and codes for public disclosure and transparency practices designed to strengthen the international monetary and financial system. It calls for greater transparency of commercial banks, securities firms, insurance firms, central banks etc. 3. OECD: OECD principles are intended to assist member and non-member governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries. They also provide guidance and suggestions for stock exchanges, investors, corporations and other parties that are involved in the process of developing good corporate governance. OECD principles were developed based on different views from a number of various developed countries. Thus they represent a basic consensus on corporate governance requirements and describe existing rules rather than propose radical changes. Thus the OECD principles are an excellent starting point for the examination of a sound framework in emerging countries. The principles mainly focus on publicly traded companies. However, to the extent they are deemed applicable, they may be also useful for non-traded companies, such as privately held and state-owned enterprises.

17 The web site of the IMF: www.imf.org.

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The principles of OECD cover five major areas18: I) The Rights of Shareholders The rules emphasize that shareholders have secure ownership, the right to full disclosure of information, voting rights, participation in decisions concerning fundamental corporate changes such as the sale or modification of corporate assets including mergers and new share issues. Markets for corporate control should be efficient and transparent and shareholders should consider the costs and benefits of exercising their voting rights. II) The Equitable Treatment of Shareholders All shareholders of the same class should be treated equally, including minority and foreign shareholders and should have the opportunity to obtain effective redress for violation of their rights. It emphasizes the protection of minority and foreign shareholders rights with full disclosure of material information. It ensures the setting up of systems that keep insiders, including managers and directors, from taking advantage of their roles, insider trading is prohibited and members of the board and managers should be required to disclose any material interest in transactions. III) The Role of Stakeholders in Corporate Governance In addition to the shareholders, the OECD also recognizes the right of stakeholders. Employees are usually the important stakeholders that determine how companies perform and take decisions. Thus the corporate governance framework must ensure that the right of stakeholders are protected and respected by law. Stakeholders participating in the corporate governance process should have access to relevant information. The framework also encourages active cooperation between corporations and stakeholders in creating wealth, jobs and sustainable financial and sound enterprises. IV) Timely and Accurate Disclosure and Transparency The OECD principles ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company including board of directors and their remuneration. The guidelines also specify that annual audits should be performed by independent auditors in accordance with high quality standards of accounting, financial and non-financial disclosure. Channels for disseminating information should provide fair, timely and cost efficient access to relevant information by users. V) The Responsibilities of the Board The OECD guidelines lay in detail the functions of the board in protecting the company, its shareholders as well as its stakeholders. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by 18 The web site of the OECD: www.oecd.org.

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the board, and the board’s accountability to the company, shareholders and stakeholders. These include concerns about corporate strategy, risk, executive compensation and performance, as well as accounting and reporting systems. Board members should act on a fully informed basis, in good faith, with due diligence and in the best interest of the company and its shareholders. The board should also ensure compliance with applicable laws and take into account the interests of the stakeholders. Finally the board should be able to make objective judgement on corporate affairs, independent from management. In brief, the OECD principles emphasize that good corporate governance can be achieved through a combination of regulatory and voluntary private actions. On the regulatory side, the government interventions on corporate governance are most effective when consistently enforced and focused on ensuring fairness, transparency, accountability and responsibility. It stresses that regulatory measures are not in themselves sufficient to raise standards (what it takes to succeed is usually a mix of regulatory and private voluntary actions, such as improving the quality of disclosure as well as increasing managers commitment in running the company). Conclusion In order to remain competitive in a changing world, corporations must adapt their corporate governance practices to meet new demands and benefit from new opportunities. Likewise, governments have an important responsibility for shaping an effective regulatory framework that provides for sufficient flexibility to allow markets to function effectively and to respond to expectations of shareholders and other stakeholders.

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Chapter (2) Experiences of Some Developed & Emerging Markets in Corporate Governance Summary This chapter:

Emphasizes why corporate governance is now a global pursuit by many countries .

Reviews the ongoing practices of corporate governance in nine developed and emerging markets that represent a broad and diverse sample that varies in terms of historical, legal, business, economic and cultural systems .

Quotes the US example as the oldest and still considered the best up to date in terms of adhering to corporate governance principles .

Analyzes corporate governance practices of some European countries specifically UK, France, Germany .

Tackles corporate governance of some Asian countries namely Japan, Korea and Malaysia.

Discusses the corporate governance practices in Latin America covering Brazil and Mexico .

Highlights the differences between the Anglo-Saxon model represented by USA and UK compared to the remaining countries.

Points out the main lessons learnt from this sample that could be incorporated in the Egyptian context.

Introduction In late 1990’s, the issue of corporate governance has received more attention than it would ordinarily have in the light of a series of corporate failures. Furthermore the current economic turmoil faced by various countries, including SE Asia, Russia, some East European countries and some Latin American countries, to a certain extent, was ascribed to the lack of proper corporate governance in the corporate sector. Moreover globalization and the internationalization of capital meant that the flow of productive capital, from where it is most abundant to where it is most scarce, would be towards protection. Companies in both developed and emerging markets have learnt that corporate governance has become a vital issue as they begin to go public, to merge with local and foreign companies, to tap international financial markets and to operate in a truly competitive business environment. In short, corporate governance all over the world has become, and is likely to remain, a powerful tool for attracting foreign direct investment. A transparent and effectively monitored market environment for international equity flows enhances the stability of these flows and serves as an early warning system for corporate and financial distress.

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Finally privatization and the growth of institutional investors meant that countries are increasingly relying on private institutions to create jobs, generate income and furnishing the markets with goods and services. Good corporate governance will be crucial for supporting this private sector basis for economic growth and to effectively channel savings to new investments. By the end of 1999 ,twenty four countries had issued codes of good governance: Australia, Belgium, Brazil, Canada, France, Germany, Greece, Hong-Kong, India, Ireland, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Portugal, Singapore, South Africa, Spain, Sweden, Thailand, United Kingdom and United States. This excludes other developed and emerging countries across that are in the process of issuing their Code of Good Practice for Corporate Governance or incorporated major changes in their regulatory and legal framework. A complete list of these countries can be found at the World Bank, OECD, and European Corporate Governance Networks19. 1. United States The United States experienced a ‘corporate revolution’ between 1880 and 1930 and the form of ‘outsider/arms-length’ system of ownership took shape as part of this process20. Throughout the 19th century, there were isolated examples of companies with widely dispersed shareholdings and well-developed management. Industrial enterprises almost invariably were privately held with family control being very much the norm21. Lamoreaux added that a merger wave that peaked at the turn of the 20th century heralded a distinct change in approach. The mergers were often financed in part by public offerings of shares, which served to disperse share ownership among a wide range of investors. The process of consolidation thereby created situations where those making managerial decisions did not control a substantial shareholding block22. Change was also evident in large companies that remained family-dominated. By the end of World War I, family members were typically working closely with salaried executives rather than attempting to manage on their own23. Despite the trends affecting US business enterprises, the family did not disappear completely from the corporate landscape. In mid 90’s in over one -fifth of America’s largest one thousand public companies, the founding family retained significant influence24.

19 Aguilera, Ruth and Cuervo-Cazurra, Alvaro (2000), “Codes of Good Governance Worldwide”, September 18,2000. 20 Means, G., (1962), “The Corporate Revolution: Economic Reality vs. Economic Theory (New York, 1962), pp.15-17. 21 Lamoreaux, (1955) ‘Entrepreneurship’, pp. 412-413. 22 Lamoreaux, (1955) ‘Entrepreneurship’, pp. 427-428. 23 Chandler, Alfred, 1990. Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, Boston). 24 Cheffins, Brian (2001), “History and the Global Corporate Governance Revolution: The UK Perspective”, Faculty of Law, University of Cambridge, March 2001.

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Nevertheless, in the book ,The Modern Corporation and Private Property ,it was mentioned that while the law treated shareholders as a company’s owners, delegation of managerial authority to professionally trained executives was common practice and there was true “separation of ownership and control” 25. The first code of good governance appeared in the United States in the late 1970’s. It denoted the transition from the conglomerate merger movement of the 1960s to empire-building behavior by management through hostile takeovers26. Early raiders in the United States such as International Nickel Company, backed by Morgan Stanley, justified their unfriendly tender offer against ESB in 1974 on the grounds that it was an acceptable market mechanism to correct ESB’s incompetent management27. In the context of charges and countercharges surrounding the takeover movement, the Business Roundtable issued a report in January 1978 entitled: “The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation”. This was an early response to corporate criminal behavior and an attempt to pass legislation curbing hostile takeovers28. The Business Roundtable Report chaired by Austin, CEO of Coca-Cola, turned out to be a claim for the legitimacy of private power and the enforcement of accountability. The Report stated that the director’s main duties are: overseeing the management and board selection and succession; reviewing the Codes of Good Governance Worldwide, the company’s financial performance and allocating its funds; overseeing corporate social responsibility and ensuring compliance with the law29. Since then there has been a notable rise in the number of codes of good governance in the US, including the TIAA-CREF “Policy Statement on Corporate Governance” Codes of Good Governance Worldwide (1993). As a shareholder that is diversified internationally in most major markets, TIAA-CREF believes that good governance practices are important to encourage investments in countries and companies in a global economy where gaining access to capital markets is increasingly been very competitive. The Codes according to TIAA-CREF are: Appropriate structures of accountability of the company to its owners.

25 Berle, Adolph and Means, G, (1932). The Modern Corporation and Private Property (Commerce Clearing House, Inc., New York). 26 Aguilera, Ruth and Cuervo-Cazurra, Alvaro (2000), “Codes of Good Governance Worldwide”, September 18,2000. 27 Blair, Margaret, 1995, Ownership and Control .Rethinking Corporate Governance for the Twenty First Century. (The Brookings Institution, Washington, D.C.) 28 Monks, Robert and Nell Minow, 1992, Power and Accountability: Restoring Balance of Power between Corporations, Owners and Societies (Harper Business, New York). 29 Charkham, Johnathan, 1995. Keeping Going Company. A Study of Corporate Governance in Five Countries (Oxford University Press, New York).

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Independent oversight of managers and accounts (including independent audits of financial statements based on high quality accounting principles). Fair and equitable treatment for all shareholders (an issue that can be particularly relevant when there is a controlling shareholder). Fair voting processes that in practice assure disclosure of all facts material to each vote being taken, and that enable shareholders to exercise their ownership rights in relation to their economic interest. Prohibition of insider trading and abusive insider trading. Open, efficient, and transparent markets for corporate control. Timely disclosure of financial and operating results of the company, material developments and foreseeable risk factors, and matters related to corporate governance. Disclosures related to corporate governance should include interested party transactions and any capital structures or arrangements that enable certain shareholders to obtain control disproportionate to their equity ownership; significant information about board members and key executives, including their compensation; and information describing governance structure and policies. Regulatory and legal recourse if principles of fair dealing are violated.

CalPERS, America’s largest public pension fund, managing assets totaling more than $143 billion, defined corporate governance to be the "relationship among valuable participants in determining the direction and performance of corporations." The primary participants are shareowners, company management and the board of directors. The definition does not expressly mention other stakeholder groups (the community, company employees, suppliers, and customers). In CalPERS view, companies that are operated with long-term shareowner returns, as the primary goal will ultimately also reward other stakeholders. In late 1989, CalPERS began working closely with the US Securities and Exchange Commission. This relationship led to the 1992 reform of executive compensation disclosure and proxy solicitation reforms The main governance principles stated by CalPERS include: board independence and leadership, board processes and evaluation, individual director characteristics and shareowners rights. Since then several Committees were established in the US including the Report of the National Commission on Fraudulent Financial Reporting (Treadway Commission 1987), Strengthening the Professionalization of the Independent Auditor, Report to the Public Oversight Board of the SEC Practice Section, American Institute of Certified Public Accountants (AICPA) from the Advisory Panel on Auditor Independence (1994) and the Report of the Blue Ribbon Committee (1999) on improving the Effectiveness of Corporate Audit Committees. Up to date, the US market is the most notable example in terms of applying corporate governance rules. In the U.S., when an investor is unhappy with the manner in which

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management deals with the business of the company, he/she dumps his/her shares. This is called the "Wall Street Walk". Europe 2. United Kingdom In the United Kingdom, the separation of ownership and control occurred later than it did in the US30. It began in the final few years of the 19th century when the British industrial and commercial firms first made a strong move towards public ownership, as dozens carried out initial public offerings31. With many British public companies having public offerings via the stock market, the entrepreneurs who founded the firms and their heirs retained a sizeable percentage of the shares and played a prominent role in corporate decision- making. A commitment to personal ways of management was therefore perpetuated32. Empirical studies of ownership and control patterns in the UK illustrate that there was a relative decline in the importance of family control of business as the 20th century progressed. Statistical data compiled as of 1951 showed that there was a clear divorce between control and ownership for very large companies and that a ‘managerial evolution, if not revolution’ was taking place33. According to Florence’s figures, between 1936 and 1951, the number of “very large” industrial and commercial companies that had an investor who controlled 20 percent or more of the voting equity fell from one out of three to less than one out of five. By the early 1960s, a number of firms Florence categorized as “owner-controlled” had ceased to qualify for inclusion in the group and it may be that the progressive erosion of family influence meant that by 1970 it would make little sense to talk of British personal capitalism. As of 1970, forty-four of the UK’s 100 largest manufacturing companies were either “family companies” (thirty) or were controlled by a non-British parent company (fourteen)34. Subsequent work indicated that share ownership patterns were in fact moving closer towards the dispersed pattern evident in the US35 as noted in the ownership patterns of 200 largest industrial companies and 50 largest financial businesses in the UK as of 1988.

30 Berle, Adolph and Means, G, (1932). The Modern Corporation and Private Property (Commerce Clearing House, Inc., New York). 31 Prais, S.J., (1976 ( ,“ The Evolution of Giant Firms in Britain: A Study of the Growth of Concentration in Manufacturing Industry in Britain 1909- 1970” (Cambridge, 1976), p.90. 32 Okochi and Yasuoka, (eds.), “Family Business in the Era of Industrial Growth: Its Ownership and Management (Tokyo, 1984), pp.173-4, 183-4 33 Florence, P.S., (1961), “Ownership, Control and Success of Large Companies: An Analysis of English Industrial Structure and Policy 1936-1951, (London, 1961), pp.186-7. 34 Channon, D.F., (1973) “The Strategy and Structure of British Enterprise”, London, 1973), pp.64, 75. 35 Scott, J, (1990) ‘Corporate Control and Corporate Rule: Britain in an international perspective’, British Journal of Sociology, Vol. 41 (1990), pp.351-73.

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According to this data, of the 173 firms which were not state-owned or wholly-owned subsidiaries and were not building societies and insurance companies owned by depositors and policy holders, just over one in three had a shareholder owning more than 10 percent of the equity. In 1976, the equivalent ratio had been almost one out of two. Scott attributed this shift primarily to the decline of family control in UK companies. Clearly, then, by the time the 1980s drew to a close, ‘personal capitalism and family ownership (had been) swept away’ and Britain had moved to a US-style corporate governance system with ownership separated from control. In the United Kingdom, the Cadbury Report36 “The Financial Aspects of Corporate Governance”, containing the "Code of Best Practice" was published in 1992. The Committee that drafted the code was set up by the Financial Reporting Council, the Stock Exchange and the Accountancy Profession. The Code is applicable to all listed companies, and is enforced by a disclosure mechanism: listed companies have to report about their implementation of the Code's recommendation. The Stock Exchange and the public opinion exercise pressure to insure optimal follow-up of the Code rules. The issuance of the Cadbury Committee Report in the United Kingdom marked the importance of corporate governance in the UK. The Cadbury Report became very popular and widely accepted, which deliberately challenged the effectiveness of voluntary regulation and British corporate democracy37. The recession in 1990 as well as a series of high-profile corporate failures, in which the weakness of internal corporate control was clearly a contributing factor, raised the issue of corporate accountability both in the public mind and in the House of Commons38. The Cadbury Report was issued because of concern about “the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards, which the users of the company reports sought and expected”. It also emphasized the need for independent directors, larger shareholder involvement, and the establishment of audit, compensation and nomination committees39. Moreover, sanctions were introduced to ensure that companies floated in the London Stock Exchange would comply with the Code. The Cadbury Report’s recommendations are highly codified, allowing both Companies and stakeholders to benchmark best practices, as well as to be emulated by other agencies. 36 Cadbury Commission, 1992. Code of Best Practice: Report of the Committee on the Financial Aspects of Corporate Governance (Gee and Co, Ltd., London, UK). 37 Stiles, Philip and Bernard Taylor, (1993), Benchmarking Corporate Governance: The Impact of the Cadbury Code, Long Range Planning 26:61-71. 38 Monks, Robert and Nell Minow, 1992, Power and Accountability: Restoring Balance of Power between Corporations, Owners and Societies (Harper Business, New York). 39 Charkham, J and Simpson A, (1999). Fair Shares. The Future of Shareholder Power and Responsibility (Oxford University Press, New York).

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The main principles of Cadbury Report comprise: Shareholders have a right and an obligation to exercise responsibilities. Owners

should back management striving for long-term growth and intervene when problems arise .

Existing UK Codes of Best Practice should be strengthened not weakened. Periodic review and updating of best practice guidelines should continue and

reviewing bodies should include investors based outside the United Kingdom. The structure of the Board should be built upon the twin concepts of

independence from Management and accountability to shareholders. The following qualities are necessary to ensure a fully accountable and independent board: a separate Chairman and Chief Executive Officer with the role of Chairman held by an independent director. A majority of independent directors. U.K. corporations should certainly comply with Cadbury's recommendation that there be at least three non-executive directors on a board and that a majority of those non-executives should be independent directors. Key committees such as the audit, compensation and nomination committees composed exclusively of independent directors. Appropriate training for independent directors who face increased responsibilities associated with monitoring key functions such as audits ,executive performance and compensation, and corporate strategy. A properly focused board with directors occupying no more than two seats on other boards if they are employed full-time (i.e. a CEO at another company) or three if they are not (i.e. a retired CEO).

Best practices in the UK should include several elements to strengthen management accountability to corporate owners through the Director-Shareholder relationship .

In May 1995, an implementation report was published, which indicated a considerable degree of compliance by larger corporations. Later reports complained about the administrative and others burdens resulting from the code, especially for the smaller companies.

The Greenbury Committee40 issued its report in 1995 covering best practice recommendations in the realm of executive and director compensation. The Greenbury Code includes the following key recommendations.

The compensation committee should be composed exclusively of independent

outsiders . Companies should annually outline their compliance with the Greenbury Code,

including explanations if they do not comply. The annual compensation committee report should disclose pay details for all

executive directors, including pension provisions, incentive pay, option plans, performance measurements, severance agreements and comparisons with similar companies.

Executive pay should not be "excessive ."

40 Greenbury Commission, 1995.

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Employment contracts should extend for no longer than one year so as to rule out multi-year golden handshake payouts in the event that an executive is dismissed or the company taken over .

New long-term incentive plans should replace, not supplement, existing stock option plans .

Performance-related pay should "align the interest of directors and shareholders," while performance criteria should be "relevant, stretching and designed to enhance the business. Upper limits should always be considered.

Executive stock option awards should be phased rather than given all at once, and options should never be awarded at a discount .

A distinctive feature of the British corporate governance system is that it strongly resembles its counterpart in the United States. Both countries have well-developed equity markets, with most major business enterprises being quoted on a stock exchange and share an “outsider/arms- length” system of ownership and control41.

In other words, share ownership is dispersed among a large number of institutional and individual investors, rather than being concentrated in the hands of family owners, banks or affiliated firms. In addition, investors in the US and the UK are rarely poised to intervene and take a hand in running a business, instead they tend to maintain their distance and give executives a free hand to manage.

3. France:

In France, several factors led market players to become more concerned about corporate governance. Principal among them were privatization, the increasing presence of foreign shareholders, American pension funds in particular, the emergence in France of the pension fund concept and the desire to modernize the Paris financial market.

The Viénot Report42 which was published in the summer of 1995 was mainly the product of discussions within the French Employers Associations .France's two main employer bodies (the Conseil National du Patronat Français and the Association Française des Enterprises Privées) established a Corporate Governance Committee that was chaired by Société Générale chairman, Viénot.

The Report has attracted wide attention and was commented on in the press at large .However, the report did not propose substantial changes in present practices and the implementation of its recommendations has lagged behind. There has been no official follow-up in terms of a compliance report.

41 Moerland, P.W., ‘Alternative Disciplinary Mechanisms in Different Corporate Systems’, Journal of Economic Behavior and Organization, Vol.26 (1995), p.19. 42 Vienot Committee, 1995.

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The main recommendations of Viénot Committee were: Boards should participate in decisions of strategic importance to a company. Each board should have a minimum of two independent directors. Cross-shareholding should be eliminated as quickly as possible. Companies should "avoid including an excessive number" of reciprocal directors

on boards, and reciprocal directors should not serve on each other's audit or compensation committees.

Each board should have a nomination committee that includes at least one independent director and the company chairman.

Firms should disclose annually how it is organized to make decisions. Each board should have audit, compensation and nomination committees, and

should indicate annually how many meetings the committees had. Each committee should be composed of at least three directors, one of whom should be independent.

Neither executives nor employee directors should serve on the audit and compensation committees.

Directors should "own a fairly significant" number of their company's shares. Executive directors should join no more than five boards other than their own. However the main problem regarding the Viénot Report is that compliance by

companies was entirely voluntary and there was no requirement by the Stock Exchange or any regulatory body to disclose whether or to what extent a company adopts Viénot principles.

Although the report warned for legislative interventions, the French Senate, especially under the impulsion of Senator Marini, has launched an investigation of French governance rules. This resulted in the Marini Report in July 199643. It included proposals for legislative change covered a broad range of topics, several of which are directly linked to governance matters .

Boards should be permitted in law to name committees with autonomous powers. Companies should have the legal right, but not obligation, to separate the offices

of chairman of the board and chief executive officer without having to adopt a two-tier board structure .

Corporations should release detailed lists of its owners to all investors. Notices of meetings should be issued one month, rather than 15 days, before

shareholder meetings. Shareholders who prefer not to vote themselves should be able to assign their

voting rights to an independent entity rather than to management . Directors would be permitted to serve on no more than five boards.

The main problem in the French experience of corporate governance is that both the Viénot and Marini Reports had no binding force. However with the force of globalization, advent of the Euro, internationalization of capital markets, it is expected in the future that more French companies will voluntarily conform to the findings of those reports. 43 Marini Committee, 1996.

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4. Germany: In Germany, the debate about corporate governance gained momentum after the collapse of some major German firms and the difficulties experienced in other leading firms, such as Daimler. A wide discussion resulted, relating to the effects of the introduction of the Euro on shares with nominal value. Proposals have been submitted to Parliament. Recently, the German government had approved a proposal called “KonTraG”, which tackles the following governance issues:

Repurchase of a company’s own shares will be allowed under strict conditions (previously forbidden).

Shares with multiple voting rights would not be further allowed. There would not be a mandatory reduction in the number of members of the

supervisory board, while members may continue to sit on ten boards. Minority claims against directors would be made more accessible, by reducing

the threshold to 5 percent or DEM 2 million. (Previously 10 percent). The supervisory board, not the management board, will appoint auditors. The influence of the banks is somewhat curbed: banks may not vote as proxy

holders if voting in their own name for more than 5 percent of the shares. The Berlin Initiative Group, comprising academics and professionals, on 6th June 2000, issued the German Code of Corporate Governance (GCCG). It discussed governance standards for various parties including management board, supervisory board, stockholders and employees, transparency and auditing and private companies. However the standards of GCCG depend on the voluntary application by companies. GCCS suggests that each company take the recommendations of the report and should have a checklist in its annual report that states which guidelines were adopted and which were not and the reasons for that. Furthermore the Deutsche Schutzvereinigung Für Wertpapierbesitz (DSW), Germany’ largest shareholder organization, had the following proposals to be followed by German companies as a minimum benchmark for good corporate governance.

Prohibiting supervisory board members from simultaneously sitting on a competitor’s board. Prohibiting conflicts of interest among supervisory board members . Eliminating interlocking ownership. Ensuring the independence of the corporate auditor . Requiring greater accountability and transparency on banks that vote their beneficial share through greater proxy voting disclosure on the part of German banks including providing public notice when voting against management. Providing more advanced notice of Annual General Shareholders (AGM) meeting. Proxy voting to be simplified German companies should implement the one share one Vote capital structure.

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Traditionally, German corporate supervisory boards often included representatives from majority shareholders on the board in recognition of their influence. Moreover, the members of German management boards have often served on the supervisory boards of the very companies whose representatives sit on their own supervisory board, creating a system of interlocking directorships accompanied with special relationships44, Hommel (1998). Interlocking ownership creates the potential for conflicts of interest. Because interlocking parties often have dual relationships such as service contracts or financing arrangements, they may be disinclined to vote against management. Cross- shareholders may value their long-term business relationships over their interests as shareholders and therefore tend to vote in favor of management proposals. This situation harms outside shareholders by subverting shareholder interests to other economic interests. A study45 for a 1991 sample of 558 listed firms in Germany found out that 90.2 percent of the shares had a block owner holding more than 25 percent of the company’s equity. Another study46 found out that there was a five-shareholder concentration ratio of 41.5 percent for a 1990 sample of 310 German listed non-financial firms. This structure tends to shield management from accountability for its actions, diluting its focus on performance and diminishing shareholder value over the long term. In addition, takeover premiums that would normally be reflected in share prices are minimized by this structure. In order to develop an equity market that is competitive with global markets, it was suggested that German companies should unravel this structure and cross-shareholdings should be limited. In other words, while German law requires German boards to run corporations as independent entities that has their own interests apart from those of the companies’ stakeholders, the law also empowers German boards to determine such interests. The result has often led to German boards determining that the corporation’s interests are identical to those of majority shareholders or of the interlocking directorships. Boards afforded special treatment and advantages to privileged shareholders based on criteria unrelated to stock price performance and valuations. Such a system penalizes minority shareholders who entrust their funds to the corporation with the expectation that they will benefit proportionally and equitably. Also, a system in which shareholders can vote by mail or even electronically is more conducive to voting than the current German system in which shareholders must attend the meeting in person or be represented. Currently, shareholders must appoint a bank or a 44 Hommel, Ulrich (1998): “Regulating the Market for Corporate Control: Lessons from Germany”, International Journal of Business, 3(1). 45 Jenkinson, T. and Mayer C. (1994). Hostile Takeovers: Defense, Attack and Corporate Governance, London et. al.: McGraw-Hill. 46 Prowse, S. (1995 .( “ Corporate Governance in an International Perspective: A Survey of Corporate Control Mechanisms Among Large Firms in the US, UK, Japan and Germany”, Financial Markets, Institutions and Instruments, Vol. 4, No.1.

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shareholder organization to act as a proxy if they cannot attend themselves. These requirements are barriers to fuller shareholder participation47. Moreover the current practice in Germany is to elect members to the board in four-year terms restricts shareholders’ ability to hold directors accountable. Therefore, it was recommended that the election of board members be done on an annual basis. The establishment of international accounting standards enables investors to see a more accurate picture of a company’s financial status. German companies should continue the growing trend of using International Accounting Standards (IAS) or US GAAP accounting standards. Finally there is great support for the implementation of a Code of Best Practice for the German market. Nevertheless most advocates of change within Germany have suggested that standards of corporate governance must come through legislation rather than through non-regulatory codes. This will undoubtedly delay the implementation of corporate principles and reduce the competitive advantage of Germany compared to other European countries that already have the rules in place. Not waiting till corporate governance becomes voluntarily common practice by German companies, the Deutsche Bourse48 has recently embarked on an aggressive project that introduced two “trading segments” for companies that are interested in listing. If firms choose to list in those segments, they must comply with Deutsche Bourse rules, which require much more disclosure than is usual in Germany. The Neuer Market requires listed companies to produce accounts either according to US GAPP standards or a version of International Accounting Standards (IAS) and to report quarterly. The additional disclosure requirement for inclusion in SMAX is currently just quarterly reporting, although US GAAP or IAS will be required by the start of 2002. If listed firms violate these rules; Deutsche Bourse can punish them in various ways, including removing them from these trading segments. In addition there has also been change in the public laws that protect shareholders in Germany. The German Securities Trading Act of 1995 required that firms listed on the first segment of the German Stock Exchange must disclose shareholders controlling more than 5 percent of their voting rights and additionally the crossing of certain thresholds49. Even though corporate governance is not mandatory or enforceable, the Deutsche Borse took aggressive steps that supported corporate governance in Germany.

47 Hommel, Ulrich (1998): “Regulating the Market for Corporate Control: Lessons from Germany”, International Journal of Business, 3(1). 48 The web site of the Deutsche Borse: www.exchange.de 49 Johnson, Simon 2000, “Private Contracts and Corporate Governance Reform: Germany’s Neuer Market”, Working Paper, MIT, 27 July 2000.

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Asia 5. Japan: Corporate governance efforts in Japan are still in their very early stages. The Corporate Governance Forum of Japan (CGFJ), consisting of representatives from Japanese corporations, institutional investors and academia, has developed an interim report that promotes a two-step approach to reforming Japanese corporate governance. The first step includes reforms that should be implemented by 2002 while the second step includes more substantive reforms that should be implemented afterwards. Important short-term reforms proposed by CGFJ include:

A quick transition to International Accounting Standards to provide improved disclosure and correct and substantive information to investors.

The inclusion of independent, non-executive directors who have no direct interests in the company .

Appropriate changes in the size of boards to guarantee effective discussions and quick corporate decisions.

Clear and separate responsibilities for the board and executive management. More independent auditors on the Boards with stronger definitions of

independence . Increased dialogue between management and shareholders at the Annual

General Shareholders Meeting. Important longer-term reforms proposed by CGFJ include:

A majority of independent, non-executive directors on corporate boards. Implementation of special board committees including nominating and

remuneration committees comprised of a majority of independent directors. Split Chairman and CEO positions.

Publicly traded large companies in Japan depend on bank borrowing as the most important source of capital. In recent years they have been active in issuing debentures and commercial papers as well as issuing new shares. The bank customer relationship has several distinct characteristics. First banks and their firms engage in a wide range of transactions from straightforward lending to a more uncommon types of transactions such as swap transactions and extending to stockholding in their customer firms. Usually a company establishes a long-term relationship with one main bank as well as two or three others. Banks obtain a strong legal position under a standard form of contract known as the “Banking Transactions Agreement” but sometimes their behavior is inconsistent with their legal position. A familiar situation is that when a company is in financial trouble, the traditional action of the main bank, that

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has a first mortgage over the company’s property securing its loans, is to pay-off other debts (debts which are legally subordinated to the bank’s claims) and pay-off publicly outstanding bonds50. Looking at the ownership structure of listed companies on several Japan stock exchanges, it can be noted that individuals constituted 28 percent, financial institutions 45 percent (banks owning 22 percent, life insurance companies 11 percent & investment trusts 12 percent) and non-financial companies 27 percent51. A strict one-vote rule is adopted in company law. Dual voting is prohibited. Non- voting shares are only allowed as preference shares in dividend; up to one third of the total issued shares may be of this type. If the dividend is not paid to the preference shareholders, they receive voting rights instead. By practice, mail voting, rather than proxy voting, is more common in major Japanese public companies. Japanese boards often have 20-60 directors reflecting the Japanese concept that board seats are status positions provided to long-term employees as rewards for loyalty and long-service. Japanese company law operates on a one- tier board system. Kanda further explains that the board of directors in Japan are homogenous, most of them are fifty years old, former employees of the company, no executives of other firms, no women, no academics and no outsiders52. This view of the board is in direct conflict with global concepts of the board as an instrument of corporate oversight and strategic decision-making. Large boards cannot be effective in monitoring executive performance and making strategic decisions regarding business activities. When boards contain 50 directors or more, the directors represent divisional interests within the corporation rather than the corporation as a whole. Such a board is unlikely to represent outside shareholders. On the other hand, independent directors allow a corporation to focus less on the interests of insiders and more on shareholder returns. In the short run, it is expected that Japanese boards will continue to be dominated by insiders. However it is being opined that, Japanese corporations should be required to appoint some independent directors. At a minimum, corporations should fully disclose any current or former relationships between board nominees and the corporation or its affiliates. Japanese law requires corporations over a certain size (JY 500 million or more) to have audit committees of three statutory auditors, one of whom must be outsider. An outsider means that he has not served as a director or employee of the company for at least five years preceding his appointment as an auditor. 50 Kanda, H. (1998). Comparative Corporate Governance: Country Report: Japan ,Oxford, Clarendon Press. 51 Ibid. 52 Kanda, H. (1998). Comparative Corporate Governance: Country Report: Japan ,Oxford, Clarendon Press.

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To improve the audit function in Japanese companies and increase the accountability of auditors to shareholder, it is being suggested that companies should appoint as auditors, those who have not worked for the company or any of its affiliates in the past. From the above it is clear, that though the CGFJ exists as an entity, its impact on corporate governance is minimal and non-effective. South East Asia 6. Korea Though the Second World War adversely affected Korea and turned it to one of the world’s poorest nations in 1960, the picture changed completely and by the late 90’s Korea transformed itself into the world’s 11th largest industrial economy. With per capita GDP in excess of $10,000, Korea is now a member in the OECD as one of the world’s developed economies. The Korean government’s heavy and chemical industries (HCI) drive in the 1970s was a major factor in the growth of large conglomerates, known as chaebol. The term chaebol means“ financial house” and is commonly used to refer to conglomerates consisting of many related companies, including a number of companies listed on the stock exchange, which are engaged in a broad range of industrial and service businesses53. Most chaebol have highly centralized autocratic management by the founder and his immediate family members. High levels of debt and a low proportion of equity characterize the financial structure of the chaebol, when compared to international standards. Most debt financing were sourced from Korean commercial banks and government-owned financial institutions. During the first half of 1996, 12 percent of corporate financing in Korea came from banks, 14 percent from non-bank financial institutions, 17 percent from corporate bonds, 21 percent from commercial paper, 16 percent from foreign borrowings and only 8 percent from equity54. In 1995, the 30 largest chaebol represented 41 percent of total sales in the Korean domestic economy, 40 percent of value added, 44 percent of total fixed assets, and 18 percent of employment. The five largest chaebol – Hyundai, Daewoo, Samsung, LG (Lucky Goldstar) and SK (Sunkyong (– represented 26 percent of total domestic sales, 27 percent of total value added, 26 percent of total fixed assets and 11 percent of total employment55. The debt-to-equity ratios of Korean companies significantly exceed those prevailing in Japan, Germany, US and UK, which made Korean firms financially fragile with rather very low interest coverage ratios than those prevailing in other countries. Nevertheless,

53 Olin, J. (2001). “Corporate Governance in Korea at the Millennium :Enhancing International Competitiveness”, Stanford Law School, Law and Economics Working Paper No. 196. 54 Ibid. 55 Ibid.

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Korean banks had in the past not exercised a significant monitoring and credit control relationship with their principal corporate customers, the chaebol. Additionally, institutional shareholders have not been a significant influence on corporate decision-making. Shareholding by institutional investors in Korean companies are low compared to other developed countries, and many institutional investors are affiliated with and controlled by the chaebol. Foreign institutional investors have recently become significant investors in Korean firms, but thus far have had very modest influence on Korean corporate governance. Only a small number of contested takeovers have taken place in Korea. Given the high aggregate shareholdings in the chaebol by family members and corporate affiliates and the unavailability of takeover financing, the threat of a hostile takeover has not been a source of management discipline. During the Asian financial crisis in mid-1997 the chaebol were characterized by low transparency of corporate decision-making, low accountability of senior managers, and higher debt-equity ratios than their principal international competitors. The Asian financial crisis overtook the Korean economy in late 1997. The crisis in Korea had many causes, though it was triggered by a number of large-scale corporate failures, beginning with the failure of Hanbo Steel in early 1997. Corporate failures placed financial institutions at risk and led to a collapse of international confidence in the economy and the withdrawal of foreign investors and financiers from the Korean markets. A principal focus of the government’s policy response to the crisis was to reform Korea’s corporate governance standards. The government undertook a series of measures to force the chaebol to focus their business operations on a small number of core businesses in each group, rely less on debt financing, improve transparency in corporate decision-making, and enhance the accountability of controlling shareholders and managers. In addition, the government undertook a series of general legal reforms. In Korea, the laws most directly affecting corporate governance are the corporate laws found in the Commercial Code; in the Joint Stock Companies Law; the Securities and Exchange Act; the Act on External Audit of Joint Stock Companies and the Bankruptcy Law etc. Amendments to the principal Korean legislation and regulations relating to corporate governance included the following: • Boards of Directors must be independent outside directors. For the largest listed companies (with assets greater than 2 trillion Won), at least one-half of the members of their Boards of Directors must be independent. • New intra-group guarantees among the top 30 chaebol have been prohibited and existing guarantees were to be eliminated by March 2000. • The preparation of combined financial statements for the 30 largest chaebol, increasing penalties for fraudulent audit reports and revising selection procedures for external auditors.

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• The regulation on Securities Listing granted to the Korea Stock Exchange enhanced its powers to ensure the independence of listed companies’ external auditors. • Accounting standards for companies were revised by the Financial Supervisory Commission and the Securities and Futures Commission, to bring them into substantial compliance with International Accounting Standards (IAS) or United States Generally Accepted Accounting Principles (GAAP). • Listed companies must file quarterly reports in addition to the annual and semi-annual reports previously required . • Shareholders may propose matters for consideration at a general shareholder meeting. • Shareholders can demand cumulative voting, unless precluded by the company’s articles of incorporation. • The minimum shareholding level required for shareholders to assert rights has been reduced for (i) demanding removal of directors and auditors for wrong-doing (ii) seeking an injunction against a director who violates applicable law or a company’s articles of incorporation (iii) initiating a derivative lawsuit (iv) convening a general shareholder meeting (v) inspecting a company’s account books (vi) applying to court for appointment of an inspector to investigate the company’s actions and (vii) demanding the removal of a liquidator. These levels were further reduced for listed companies and yet further reduced for the largest listed companies (with paid-in capital of not less than 100 billion Won). • An explicit fiduciary duty has been established, requiring directors to“ perform their duties faithfully for the good of the company” in accordance with applicable law and the company’s articles of incorporation. Additional corporate governance reforms have been initiated for banks and non-bank financial institutions. In March 1999, the Ministry of Finance and Economy initiated the creation of a Private Sector Committee on Improving Corporate Governance. In September 1999, the Committee adopted a non-binding Code of Best Practices for Corporate Governance (the “Best Practices Code”). It is anticipated that disclosure about a firms’ compliance with the Best Practices Code will be incorporated into Korea Stock Exchange listing rules, probably in a manner similar to the incorporation of the British Combined Code in the listing rules of the London Stock Exchange. The process of corporate governance reform is ongoing in Korea and it will obviously take time to change current practices. To ensure the success of the corporate governance reforms enacted over the past two years and to build further on these reforms, the following problem areas in terms of implementation must be addressed56. • The role of the Board of Directors must be strengthened. Despite the Board of Directors’ role as a central decision-making body in the Korean corporation, in reality it has been a weak institution, seldom meeting, seldom openly discussing corporate strategy and policies, and dominated by controlling shareholders. • The role of independent directors must be further strengthened. The directors’ independence should be enhanced, they should be ensured effective access to corporate and financial information necessary for informed decision-making and they should have 56 Olin, J. (2001). “Corporate Governance in Korea at the Millennium :Enhancing International Competitiveness”, Stanford Law School, Law and Economics Working Paper No. 196.

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access to independent professional advice and training. Independent directors must be encouraged to be proactive in their role as directors and must have the information and resources needed to be proactive. • The significant expansion of shareholder rights through legislative amendments over the past two years has resulted to date in only a modest increase in shareholder activism. Further attention is required to the corporate decisions requiring shareholder approval, the procedural rights of shareholders, and the obstacles facing shareholders who want to challenge corporate actions in the courts and before regulatory agencies. • Despite expanded regulatory monitoring of related party transactions, these transactions require approval by non-interested decision-makers (independent directors and, for large transactions, non-interested shareholders) and also enhanced disclosure, to ensure their commercial reasonableness and that they do not harm minority shareholders. 7. Malaysia The economic turmoil faced by so many countries, including Malaysia, that started July 1997, to a certain extent, was contributed by lack of proper corporate governance in the corporate sector. Thus in 1997 at the APEC meeting in Canada, the Malaysia government made a pledge that Malaysia would take a leading role in corporate governance in the Asian Pacific Region. The Malaysian government placed emphasis towards establishing good corporate governance practices carried out by the private sector as well as the government. Next, the government established a High Level Committee on Corporate Governance including senior officials of the relevant government agencies and representatives of the private sector. A special report on the Malaysian Corporate Governance was prepared by the Committee and later handed over to the Ministry of Finance. In March 1998, another milestone in creating good corporate governance was created when the Registrar of Companies together with few professional bodies formed an entity known as the Malaysian Institute of Corporate Governance (MICG). The principal activity of the Institute is to promote and encourage corporate governance development, education and training for the benefit of its members and other interested institutions or bodies in Malaysia. In 1998, in conjunction with its 100 years celebration, the Registrar of Companies had also introduced a Corporate Governance Award and Best Secretaries Award. Both the Securities Commission (SC) and Kuala Lumpur Stock Exchange (KLSE) played a very crucial role in enhancing corporate governance in Malaysia. KLSE finalized amendments to the Listing requirements that will be implemented by the Exchange on 1st June 2001. The key objectives of revamping the old listing rules are to enhance corporate governance and transparency; enhance efficiency in capital market activities; strengthen investor protection; and promote investor confidence. In line with these objectives, the

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following points were incorporated in the new listing rules that will be adopted by KLSE i.e. strengthening provisions in areas relating to disclosure, corporate governance, continuing listing obligations, financial reporting and protection of minority shareholders; codifying unwritten rules and procedures relating to listed issuers; simplifying procedural requirements and processes; clarifying requirements and removing ambiguities and adopting global trends and standards in listing rules, where applicable. The SC also initiated recommendations to the role of internal auditors. This requires all publicly listed companies to set up an internal audit function. Where there is no internal audit function, the Code provides that the audit committee should assess whether there are other means of ensuring that there is regular review and appraisal of the company's internal controls. Furthermore, compulsory education programs for directors of a company seeking listing is mandated as a pre-requisite to listing. Along with mandatory accreditation for all existing directors of listed companies. Appropriate programs have been developed for this purpose. The Research Institute of Investment Analysts (RIIAM), the training arm of the KLSE is expected to launch some of the director accreditation programs in 2001. This is intended to help with the problem that directors tend to be subjected to law and statutory responsibilities without having a full understanding of the significance of these responsibilities. Furthermore Malaysian market participants consider that education in relation to corporate governance should not be only confined to director accreditation. Training and education must be pursued at all levels for all those who can contribute to promoting and enhancing corporate governance. In the area of accounting standards and reporting requirements the SC in 1998, set up, a "Financial Reporting Surveillance and Compliance" Department. Since then, the SC has also established a program to ensure that listed companies comply with accounting and financial reporting requirements in preparing and presenting their financial statements. In 1999, the KLSE also introduced a requirement for quarterly reporting by listed Companies that would be mandatory commencing from quarters ending on or after 31st July 1999. They are, in addition, required to issue their annual audited accounts, auditors' reports and directors' reports within 4 months from the end of a financial year, with effect from the financial year ending on or after 31 July 1999. Market institutions such as the Kuala Lumpur Stock Exchange (KLSE), the Malaysian Exchange for Automated Dealing and Securities (MESDAQ), the Securities Clearing and Automated Network (SCANS), the Malaysian Central Depository (MCD), the Futures Exchange and Clearing House, are in the process of voluntarily developing a "Code of Conduct for Market Institutions”. This Code is to serve as a guide to their directors, managers, and employees to clarify obligations and to provide general governance guidelines that apply to the institutions and persons within the institution.

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The setting up of the Code for Market Institutions is deemed important, to explain and clarify the manner in which issues of inherent conflicts of interests and duties within these market structures should be addressed. Furthermore, institutions such as the KLSE, that impose corporate governance requirements on their listed companies and members, should also adhere to the highest standards of conduct and thus lead by example. One of the essential issues with the whole corporate governance exercise is its credibility. Thus regulators and rules do play an essential role for enforcement. In terms of promoting effective enforcement, transgressions must be penalized and rules must be effectively enforced. Thus the KLSE web site listing the number of public reprimands imposed by the KLSE, has approximately doubled in 1999 from 1998 and the number of fines has tripled in 1999 from 1998. In 1999 there were approximately 40 public reprimands and 25 fines imposed by the KLSE on listed companies. Many of these infringements related to the failure to make timely announcements. While the effectiveness of regulators in enforcing good governance is crucial, shareholder activism is another other key to ensuring governance. Shareholders could take steps to enforce governance e.g. by setting up a Minority Shareholder Watchdog Group, which is currently encouraged by SC. Latin America Most large firms in Latin America has been traditionally organized as business groups (BGs)57. These BGs are conglomerates owned and controlled by families or closed groups of investors. Each network of firms presents vertical and horizontal links and thus the consortium takes advantage of economies of scale or scope, reduces transaction costs, earns monopolistic profits and diversifies risk by undertaking production in different economic activities. Cross shareholding among associated entrepreneurs and the exchange of positions in the board of directors are also characteristic features. Moreover, it is common to find that banks and other financial institutions are part of a BG. The BG is typical of countries where financial markets are poorly developed, and where public offerings constitute a small percentage of the total capital of the firm. 8. Brazil The promotion of corporate governance standards or reforms in the Brazilian market is still in an early stage of development. The Brazilian Institute of Corporate Governance (IBGC) is the first entity devoted to the matter. In April 1997, the IBGC published a “Code of Best Practices of Corporate Governance” whose primary focus is on the Board of Directors. The Code emphasized various areas including: the composition and selection of board of directors, their independence, transparency and disclosure, board processes, meetings of the board of directors etc. 57 Da Ramos ,G. (2000). “Corporate Governance in Mexico”, Presentation at The Latin American Corporate Governance Roundtable, Sao Paulo, Brazil, 26-28 April 2000.

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Another initiative to enhance disclosure is a proposal to include some changes in Brazilian Corporate Law. These changes would introduce cash flow as basic financial statement, segment information disclosure, consolidation of subsidiaries and pension accounting. Another active promoter of corporate governance standards in Brazil is BOVESPA (Sao Paulo Stock Exchange), which has developed a project aimed at improving the relationship between companies and investors. In this sense, BOVESPA has published a number of manuals and publications notably the “ Manual on Corporate Actions and Communications”, “BOVESPA Guide for IPO” and the “BOVESPA Guide on Investors Relations”, in addition to an informal partnership with the IBGC which included the publication of the IBGC Code. BOVESPA lays down a series of standards for the conduct of companies, managers and controlling shareholders considered as important for valuation of shares and other assets issued by the company in its Listing Rules. The adherence to these practices distinguishes a company as either Level 1 or Level 2 depending on the degree of commitment assumed by the company. The adherence to BOVESPA "Special Corporate Governance Levels" better advertises the efforts of the company to improve the relations with its investors and increases the potential for appreciation in the value of its asset. Companies largely undertake to improve methods of disclosure to the market and to disperse their shares among the largest number of shareholders possible. Thus, the principal practices required of a “Level 1 Company” are:

Maintenance of a free-float of at least 25 percent of the capital; Holding of public offerings for placing shares through mechanisms that favor

capital dispersion to a broad spectrum of shareholders ; Improved disclosure of quarterly information including the obligation of

reporting consolidated figures and special audit revision; Adherence to the disclosure rules for transactions involving assets deployed by

the company on the part of the controlling shareholders or company management ;

Disclosure of shareholder agreements and stock option programs ; Provision of an annual calendar of corporate events .

To be classified as a Level 2 Company, in addition to the obligations of Level 1, the company and its controlling shareholders must adopt and observe a much broader range of corporate governance practices and minority shareholder rights. In summary, the criteria for listing as a “Level 2 Company” are:

A single one-year mandate for the entire Board of Directors ; The annual balance sheet to be made available in accordance with US GAAP

or IAS GAAP ;

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In case of the disposal of control, whether by one single transaction or in a series of successive transactions, the buyer undertakes to tender, within ninety days thereafter, a public offer for acquisition of all further shares held by the other shareholders in the Company, so that they may be accorded the same treatment as the Selling Controlling Shareholder; if the Company has issued preferred shares without voting rights or with restricted voting rights, the public offer to the holders of these preferred shares shall be tendered at a minimum value corresponding to 70 percent of the price offered to the holders of common shares;

Voting rights granted to preferred shares in certain circumstances such as transformation, incorporation, spin-off and merger of the company and approval of contracts between the company and other companies of the same group;

Obligation to hold a tender offer by the economic value criteria should the capital be closed or registration as a Level 2 Company be cancelled;

Adherence to the Market Arbitration Chamber as the vehicle to resolve corporate disputes .

Furthermore, the Novo Mercado, a new listed segment of the BOVESPA, requires Brazilian companies to comply with a series of strict practices of corporate governance. Such practices cover international standards of accounting, equal voting rights for all shareholders, mandatory public offering to purchase shares in the cases of change in controlling shareholding or de-listing and an in-house arbitration panel to settle disputes arising between shareholders and the company. The Brazilian experience shows that though adherence to the Code of Best Practice is still voluntary, BOVESPA has already implemented new listing rules that help differentiate between its various issuers according to their corporate governance compliance standards. 9. Mexico According to the 20-F Report of the SEC submitted by 25 Mexican firms listed on the New York Stock Exchange in 1996, the president of the board, usually the main stockholder and the general director, does not have practically any opposition from independent board members. On average, only 20 percent of the firms present a majority of external members on the board. This fact does not necessarily mean independence, since they could be related to another company of the same Business Group. Besides, an average of 35.2 percent belongs to the family of the president and 38.7 percent are executive managers. All in all, close to 57 percent of board members are either employees or relatives of the president58. These findings point to several facts of the big Mexican firms. (i) Large stockholders hold executive positions. (ii) Firms continue to be family centered. (iii) The board of 58 Da Ramos ,G. (2000). “Corporate Governance in Mexico”, Presentation at The Latin American Corporate Governance Roundtable, Sao Paulo, Brazil, 26-28 April 2000.

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directors represents the interests of a block of large shareholders, instead of being formed by autonomous external directors monitoring the interests of minority shareholders. Furthermore, a common practice in Mexico is the use of a dual-stock structure, where firms issue some of their equity in the domestic market through the use of non-voting rights stocks. A law passed in 1990 allows a firm to issue at most 25 percent of its equity in non-voting stock, in addition to the ADRs and the use of neutral funds, where foreign investors obtain financial rights but no voting rights. On the contrary, the dual-stock structure is very rare in industrialized countries where the stock market is highly developed. The corresponding percentages for Canada, Japan, United Kingdom and United States are 10 percent, 1 percent, 1 percent, and 4 percent, respectively59. The application of the rule one-stock-one-vote takes place in 60 percent of the 121 Mexican public firms60. The legal system in Mexico lacks the proper protection for the small investor, either stock or debt holders. The relative absence of independent external auditors prevents the protection of minority shareholders. Likewise, small shareholders have very limited channels to state their positions and to participate in decision making. In order to summon a stockholder assembly, it is necessary to have at least 33 percent of the voting rights. Besides, vote by mail is not allowed, and the discussion agenda, received usually only few days in advance, is very vague. Despite the fact that commissioners are not employees of the firms, they are usually hired by the main stockholders and by their board. Thus the role of commissioners as independent auditors willing to disclose any conflict of interest is questionable. Small shareholders have few mechanisms to defend their interest in a court of law. Veto power is non existent. Only "minorities" holding at least 33 percent of voting rights can delay any decision for three days, in order to get more information, and then ask a judge to stop any resolution considered against company regulations. Besides the difficulties to prove an explicit fraud in an environment of lax regulations and lack of transparency, only "minorities" can sue the administration in a civil demand in case of wrongdoing. This is compounded by the corruption and the inefficiency observed in the Mexican judiciary system61. Even in case of firms listed on the Bolsa Mexican de Valores (BMV), disclosure is not very transparent. In particular, the statement of expenditures is not properly broken up and firms are not obliged to declare investments, sales and acquisitions involving individuals related to the company. Furthermore, there are practically no exit-clauses,

59 Ibid. 60 Babatz, Guillermo (1997); "Agency Problems, Ownership Structure, and Voting Structure under Lax Corporate Governance Rules: The Case of Mexico"; Ph.D. thesis; Harvard University. 61 Da Ramos ,G. (2000). “Corporate Governance in Mexico”, Presentation at The Latin American Corporate Governance Roundtable, Sao Paulo, Brazil, 26-28 April 2000.

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where the company is obliged to repurchase the stock at the ex-ante prices, in case of disagreements with the assembly of stockholders. As regard to creditors' rights, the scenario in Mexico is also very bleak. Debtors have the right to unilaterally file for reorganization and, even if it is not objected, secured creditors cannot get their collateral out of the firm. Accordingly a group of leading Mexican business organizations published a new Corporate Governance Code for Mexico in June 1999. The document was prepared jointly by the Mexican Stock Exchange, the Mexican Bankers' Association, the Mexican Institute of Finance Executives and the Mexican Institute of Public Accountants, as well as representatives from the industrial, retail and service sectors. It was then submitted to the National Banking and Securities Commission so that the securities authorities could issue the necessary regulatory provisions on disclosure of information regarding conformity to the practices suggested therein. The recommendations contained in the Code do not in any way conflict with current legislation; in fact, they complement many of the applicable legal provisions. They can be applied to any Mexican company, whether listed on the stock exchange or not. Compliance is voluntary, but publicly traded firms must report to the BMV on the degree to which their practices conform to the Code. If they do not follow the Code, they must establish an alternative mechanism for this purpose. The Corporate Governance Code for Mexico is the first of its kind in Latin America. It has its root in the abiding interest expressed by various sectors of the economy, in the ability of Mexican companies to attain international standards and to be more competitive. Its purpose is to encourage more transparent management practices in order to enhance the confidence of local and foreign investors and thus attract more investment to benefit the Mexican economy. The Corporate Governance Code for Mexico consists of five sections:

Board of Directors. Includes recommendations on the functions, makeup, structure, operation and duties of the Board .

Evaluating and Compensating Directors. To allow company management to function more efficiently .

Auditing. Selection of auditors or examiners, verification of financial information, internal controls and compliance with applicable legal provisions in this area.

Finances and Planning. Suggestions and operating aspects . Stockholder information. Aspects covered in the agenda of stockholders'

meetings, quality and promptness of information, and communication between the Board of Directors and investors .

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As indicated, compliance to the Code in Mexico is still voluntary. Conclusion Despite the diversity of the countries discussed above, it was noted that all of them are undertaking corporate governance reforms. This emphasizes the strong trend in changing law and regulations or/and setting best practices of corporate governance. The goal is to have strong and independent boards of directors, enhanced shareholder rights and activism, fuller financial disclosure, tighter control of insider trading and self-dealing transactions, greater accountability of controlling shareholders, directors and stronger regulatory environment. Comparison of the Anglo-Saxon countries with other countries show that even if governance reforms are being undertaken in various countries, the US and the UK surpasses the rest in terms of having good corporate governance embedded in their systems. This is mainly because in the US and the UK the ratio of market capitalization to gross national product (GNP) is considerably greater than in other major industrial nations. Moreover, both countries have considerably more listed companies per one million people than do countries such as Germany, Italy, France and Japan62. While an outsider/arm’s-length system of ownership and control might prevail in the US and the UK, corporate governance in continental Europe and in market-oriented economies in East Asia is organized on a much different basis. Publicly quoted companies do not play as nearly as important a role in the economy63. In many countries ,including major industrial nations such as France, Germany, Italy and Spain, families currently play an important role in many large business enterprises64. A significant number of these business enterprises have competed successfully on an international basis, which suggests that family capitalism can be a successful alternative to the Anglo-Saxon type of corporation. Faccio and Lang further explain that while the Berle-Means corporation does offer potential advantages, there are also drawbacks. A detrimental feature of depersonalized managerial hierarchies is that they can become dysfunctional bureaucracies. In addition, shareholders in such firms may well lack a sufficiently large financial stake to motivate them to keep a careful watch on what is going on. Correspondingly, executives may have substantial scope to further their personal interests and impose ‘agency costs’ on investors. Contrast the Berle-Means corporation with a firm dominated by an entrepreneur and other family members. A successful family company can, by virtue of continuity, develop 62 Brian R. Cheffins, “Current Trends in Corporate Governance: Going From London to Milan via Toronto”, (1999) 10 Duke J. of Comp. and Int. L. 5 at 11-12; John C. Coffee, “The Rise of Dispersed 63 Rafael La Porta ,et al., “Corporate Ownership Around the World”, (1999) 54 Journal of Finance 471 at 1137-38. 64 Faccio, M. and Lang P. (2000), “The Separation of Ownership and Control: An Analysis of Ultimate Ownership in Western European Corporations”, unpublished working paper, 2000, Table 2.

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strong relationships with loyal employees, customers and suppliers. This sort of corporate ‘architecture’ can yield powerful competitive advantages that managerially oriented enterprises find difficult to copy. With respect to agency costs, the family members, as ‘block holders’ have a financial stake that is substantial enough to motivate them to monitor executive performance closely. Also they should have sufficient influence to orchestrate the removal of ineffective managers. Though the inherent superiority of the Berle-Means corporation can be questioned, recent events suggest that this type of business organization constitutes the evolutionary pinnacle. In continental Europe and market-oriented economies in Asia as well as Latin American countries, public offerings of shares are becoming more common and those who own large blocks of equity in publicly quoted companies appear to be unwinding their holdings to some degree. An inference one can draw from this is that, as globalization and internationalization of capital markets march on, the best model, the Berle -Means corporation, will be prevailing. Current trends show that there is a fundamental shift towards Anglo-American capitalism taking place in insider/control-oriented countries. For instance, there have been headlines in the financial press proclaiming that “A Governance Revolution”65 is in progress, that Asia is witnessing“ The End of Tycoons” and that “The Americanization of European Business” is underway66. While capitalism is organized on a different basis in continental Europe and East Asia than it is in the US and the UK, matters are in flux. Frequent flotations (initial public offerings of shares) mean the number of listed companies is growing rapidly in Continental Europe67. Similarly, Japan’s equity issuance market has been booming68. Firms that have already issued shares are seeking out broader markets for their equity, often by seeking out listings on US stock markets or on the London Stock Exchange69. Finally some of the important lessons learnt from the above-mentioned countries that should be incorporated in the Egyptian case:

65 The Wall Street Journal Europe, May 19/20, 2000, 10. 66 The Economist UK edition, April 29, 2000, 93. 67 Coffee, ”Rise”, supra note at 16-17; Chirstoph van der Elst, “The Equity Markets, Ownership Structures and Control: Towards an International Harmonisation”, (2000), Financial Law Institute, University of Ghent, Working Paper 2000-04 at 5-6, 9-11. 68 Paul Abrahams, “A Sudden Increase in Demand Has Caught Everyone by Surprise”, Financial Times, Survey on Japanese Investment Banking, May 8, 2000, 2. 69 On cross-listing in the US, see Marco Pagano et al., “The Geography of Equity Listing: Why Do European Companies List Abroad?”, (1999), Salerno University Centre for Studies in Economics and Finance Working Paper No. 28, at 16-18; Gerard Hertig, “Western Europe’s Corporate Governance Dilemma”, in Theodor Baums, et al., (eds.), Corporations, Capital Markets and Business in the Law (London, Kluwer, 2000), 265 at 271-72. On the London Stock Exchange, see Iain MacNeil, “Competition and Convergence in Corporate Regulation: The Case of Overseas Listed Companies” (2001), unpublished working paper, at 3.

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Corporate governance encompasses rules and market practices which determine how companies, especially listed companies, make decisions, the transparency of their decision-making processes, the accountability of their directors, managers and employees, the information they disclose to investors, and the protection of minority shareholders. It involves issues of company law, securities laws, the listing rules of a country’s stock exchanges, accounting standards applicable to listed companies, competition or antitrust laws, and bankruptcy or insolvency laws. It includes the government regulations and regulatory agencies with which corporations and their shareholders deal and those regulators’ actions to ensure compliance with applicable laws and regulations. Corporate governance involves the courts as well, since shareholders, directors, managers and regulators call upon courts to resolve corporate governance disputes and enforce government regulations. Thus a number of entities need reform and changes.

Since Egypt seeks to attract foreign direct investment, it must assure prospective international investors that they will find equivalent standards of corporate governance in Egypt, as prevalent elsewhere.

It is better to set a“ Code of Best Practice for Corporate Governance in Egypt” rather than wait for regulatory or law modifications, which will take longer to implement.

The proposed Code for Egypt should be simple, practical, easily implemented and enforceable. Reforms must fit within a country’s existing laws and institutions and cannot just be imported from other countries.

The Egyptian Stock Exchange i.e. CASE should be one of the main driving forces towards establishing a“ Corporate Governance Forum or Institute” in Egypt.

Even if corporate governance needs time to be embedded in the Egyptian system, CASE should in the interim, change its listing rules to differentiate between issuers that adhere to good corporate governance practices and others who do not. This is already done by Deutsche Borse, KLSE, BOVESPA and others.

The Disclosure Department at CASE should have the right enforcement tools to make sure that information disclosure is timely and available to all shareholders at the same time. Thus good issuers must be rewarded and non-compliant ones should be penalized.

Training and educational seminars to directors of listed companies about the importance and adherence to corporate governance should be manadated, as viewed in the KLSE case.

Enhancing shareholders activism in GA meetings is a crucial issue towards which countries are striving .This, is of course, a long-term goal that can be facilitated by providing educational publications/seminars/ads to the public at large as well as investors on how to become active shareholders.

)3(Chapter

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Corporate Governance in Egypt Introduction

This chapter will start by analyzing the current corporate governance practices employed in Egypt based on the OECD principles and thus serve to identify current problems in the existing system. The chapter and paper ends by recommending certain actions (both short and long term ones) that need to be addressed to improve the overall corporate governance practices in Egypt. This corporate governance assessment, following OECD principles, emphasizes, six topics: the stock exchange & the legal framework, the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency and the responsibilities of the board of directors.

It should be pointed out that corporate governance in Egypt has gained more importance in recent years due to the integration of the Egyptian economy with the global economy; internationalization of capital markets; the increasingly important role played by the rivate sector in the economy (accounting for 73 percent of GDP in 2000).

Early in 2001, a mission from the World Bank, based on an initiative from the Minister of Economy and Foreign Trade, came to Egypt and prepared a report on the Observance of Standards and Codes ROSC, which will be published on the World Bank web site70 by the end of 2001. It should be pointed out that CASE, in particular, Disclosure, Listing, Research & Markets Development, Surveillance & Market Control Departments has assisted in the preparation of many sections of the World Bank report with further contributions of the Legal Department/General Counsel’s Office at CASE.

Finally, it should be mentioned that this paper is the first of a series of working papers tackling corporate governance issues in Egypt. It briefly highlights the current situation and proposes solutions. It will be later followed by other working papers that address in more depth the steps that should be undertaken to improve corporate governance practices in Egypt e.g. the procedures to implement a Corporate Governance Code for Egypt.

Analysis of corporate governance practices in Egypt according to OECD principles:

The following analysis of the current corporate governance in Egypt follows more or less the findings of the World Bank Report.

A. The Stock Exchange & the legal framework

70 www.worldbank.org

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Egypt’s Stock Exchange has two locations: Cairo and Alexandria. The same Chairman and Board of Directors govern both exchanges. The Alexandria Stock Exchange was officially established in 1888 followed by Cairo in 1903. The two exchanges were very active in the 1940s and the Egyptian Stock Exchange ranked fifth in the world. Nevertheless, the central planning and socialist policies adopted in mid 50’s led to a drastic reduction in activity on the Stock Exchange, which remained dormant between 1961 and 1992.

In 1990, the Egyptian government started its economic reform and restructuring program. The move towards a free-market economy has been remarkably swift and the process of deregulation and privatization has stimulated the stock market activity. Between 1992 and 1996, the Capital Market Authority (CMA) played an instrumental role in initiating and leading the effort for the revival of the Egyptian stock market. Capital Market Law 95/1992 laid the regulatory framework within which financial intermediaries such as brokers, venture-capital firms, underwriters and fund managers can operate.

The principal method utilized to activate the stock market was through public offerings of state-owned enterprises. This provided the impetus for the revival of the stock market activity. Around LE 15.7 billion were received from privatization of public sector companies via initial public offerings on the stock market 71.

Companies listed on the stock exchange are eligible for a tax exemption equivalent to the current three months deposit rate paid by the Central Bank on the paid up capital, irrespective of which schedule they are listed on. To remain listed, there must be at least one trade every six months (which may be done among insiders), however this rule is not enforced vigorously by the Exchange.

As of March 2001, there were 10,668 joint stock companies and partnerships limited by shares. The great majority (10,652) was joint stock companies. Both corporate forms can be listed 72.

Since December 1991, the number of listed companies on CASE has grown from 627 companies to 1,070 companies in June 2001 73.

Market capitalization increased from LE 10.8 million (US$ 2 million) or 4.8 percent of GDP in 1991 to reach LE 120 billion ($ 28.2 billion) as of end of December 2000, representing 37 percent of GDP in 2000 74. Table (1) gives a summary of the main market indicators of the Egyptian market over the period 1991 up to June 2001.

Since 1996, international organizations such as Standard & Poor’s/IFC, Morgan Stanley and IFC have added Egypt to their emerging country indexes.

71 Public Enterprise Office, June 2001. 72 Ministry of Economy & Foreign Trade, June 2001. 73 Factbook, CASE, September 2001. 74 Factbook, CASE, September 2001.

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Nine companies are traded abroad through Global Depository Receipts (GDRs), eight in London and one in Luxembourg.

Of the companies listed on CASE, 659 companies or 61 percent were traded in 2000 75. The thirty most active companies accounted for more than 85 percent of the trading volume over the period 1998-2001 76. The ten most actively traded companies represented more than 75 percent of trading volume and value as of end of June 200177.

As of June 2001, average free float was around 25 percent based on CASE most active traded fifty companies 78.

Legal and regulatory framework

The corporate legal framework is primarily French civil law in origin. Anglo-American common law concepts became more prominent in Egyptian corporate law with the drafting of the Central Depository Law in 2001 and the proposed new Capital Market Law in 2002.

The main laws governing the securities market in Egypt are:

The Capital Market Law (CML 95/1992) regulates the capital market and provides the framework and regulation of the Cairo and Alexandria Stock Exchanges. It also regulates the incorporation and operations of securities intermediary companies.

The Central Depository Law (CDL 93/2000) supports shareholder record keeping, clearing and settlement. The law will become more effective once the executive regulations are in effect, which is expected by end of 2001.

As for the corporate sector there are three laws under which a joint stock company listed on the exchange may be incorporated: The Companies Law (159/1981) for Joint Stock Companies, Partnerships Limited by Shares & Limited Liability Companies. The joint stock company is divided into shares of equal value and the liability of shareholders is confined to the values of shares subscribed. In the partnerships limited by shares form, the capital consists of the part that belongs to one or more partners and of shares of equal value subscribed by one or more shareholders. The joint partners are answerable for the liabilities of the company in unlimited partnership, but the shareholder partner is only responsible for the value of the shares subscribed. Finally the limited liability company is not allowed to issue negotiable shares.

75 Statistical Highlights, CASE, January 2000. 76 Financial Securities, CASE, Monthly Issues, February 1998- June 2001. 77 Financial Securities, CASE, June 2001. 78 Ownership structure of CASE 50 Index constituents, Research & Markets Development, June 2001.

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The Investment Law (8/1997) promotes investment in specific economic sectors and new industrial locations by granting privileges and income tax exemptions for five, ten, twenty years or permanently for tax free zones. In all other respects, law 8/1997 refers to law 159/1981. The Public Business Sector Companies Law (203/1991) identified 314 public sector companies and public enterprises for sale to the public. These companies were incorporated as joint stock companies and transferred to holding companies. Once 51 percent of any public sector company is privatized, the company automatically moves to Law 159/1981.

The Ministry of Economy and Foreign Trade is in the process of drafting one unified company law to incorporate the various company laws 79. The proposed Capital Market Law, is expected to be discussed in Parliament by early 2002 and the law puts more stress on CASE as being an SRO defining its own procedures and regulations, emphasizes minority shareholders rights. Furthermore, the law introduces the concept of class action, defines the procedures to be undertaken in tender offers, explicitly prohibits insider trading and relies on large cash fines in case of violations of the law by market participants 80.

According to law 95/1992, the Capital Market Authority (CMA) is the entity responsible for the implementation of the Capital Market Law and developing the market. It regulates and controls market activity, and drafts rules and regulations for submission to the Ministry of Economy & Foreign Trade for approval. The CMA has wide administrative powers, including the ability to issue warnings, de-list, suspend and revoke licenses, cancel transactions (even after settlement), and nullify shareholder decisions under special circumstances. Under the Constitution, only courts can issue penalties, including fines, however, the CMA can request the Prosecutor General to initiate proceedings and then offer to settle. This is an indirect way of imposing a fine. Since 1997, CMA has received 2,136 complaints involving claims in the amount of LE 740 million. Of these, 1,402 cases for a total value of LE 629 million were resolved in May 2001 81. The most common case involves allegations that brokers did not fulfill clients’ orders.

CASE is responsible for monitoring compliance with the listing rules, but it does not have investigative powers. CASE may enforce penalties ranging from moving a company from the official to the unofficial schedule, to suspension of trading or de-listing, depending on the type of violation 82.

79 Ministry of Economy & Foreign Trade, June 2001. 80 Draft copy of New Capital Market Law, December 2000. 81 CMA, June 2001. 82 Listing Department, CASE.

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While structurally a SRO, CASE is a quasi-governmental body under the supervision of CMA. The board includes eleven members; the Chairman is appointed by the Prime Minister whereas the Board of Directors are elected from market participants, representatives of the Capital Market Authority, the Central Bank of Egypt and the banking sector. There are also three appointed non voting members. The CMA must approve CASE board decisions.

The Companies Department reports to the Ministry of Economy and Foreign Trade. It supervises the implementation of law 159/1981 and is the general supervisory authority for auditors and accountants. The General Authority regulates companies incorporated under Investment Law 8/1997 for Investment and Free Zones (GAFI).

The Egyptian Capital Market Association (ECMA) was created in 1996 as a professional association for members who operate in the capital market. Membership is voluntary and it presently includes 211 members (62 institutions and 149 individuals). It organizes training courses for its members and provides input to the drafting of regulations. Another association was established in 1998 i.e. the Egyptian Investment Management Association (EIMA), which has the same purpose and scope of functions like ECMA, but is limited to members that manage mutual and portfolio funds.

Registration and listing requirements Companies that want to float shares via the stock market must file an application with the CMA. A summary of the prospectus must be published in two widely read daily newspapers, at least one of them in Arabic language, which states where the prospectus can be purchased. The CMA has to notify companies regarding their applications after two weeks.

Companies are listed on one of three tiers on the stock exchange: the “official schedule”; the “Unofficial schedule 1” or the “Unofficial schedule 2”. Automatically, Public Sector companies and Public Enterprises of law 203/1991 are listed on the official schedule, while foreign securities are listed on the unofficial schedule 83. Appendix (1) shows the differences among schedules under the current listing rules. The multiple schedule system was initially devised to encourage the listing of companies with special conditions like partially privatized and closed companies. Currently, there are no differences among schedules in terms of ownership structure, free float, size, sector or cost of capital. Since listing conditions are more stringent on the official schedule, the majority of listed companies choose to list on Unofficial schedules (1) or (2). CASE revamped its current listing rules and proposed new rules that, are on par with 83 Current Listing rules, CASE.

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international standards, emphasize disclosure and prohibit insider trading. The new listing rules were sent to the CMA for review and are expected to be implemented by the end of 2001. Appendix (2) contains a summary of the new proposed listing rules.

Ownership structure

As of end of June 2001, domestic retail investors represented 51 percent of the market versus 49 percent as institutional investors84. Mutual Funds amounted to approximately LE 4 billion i.e. less than 4 percent of market capitalization as of end of June 2001. There are no restrictions on foreign ownership of securities and no taxes are levied on dividends and capital gains, thus making the Egyptian market very attractive compared to other markets. According to the Public Enterprise Office (PEO), the ownership structure of the privatized companies changes dependent on the percent of the company actually privatized. In cases where the government is the majority shareholder, board and management structure often remain identical to pre-privatization. Table (2) shows the ownership stake sold by the government in privatizing its state owned companies as of end of June 2001. Employee shareholding is common in privatized firms and ranges between 5 to 10 percent of the newly privatized company85. Currently, ownership disclosure requirements, as defined by law, are insufficient to allow shareholders to obtain detailed information on ultimate owners, which is reported to be concentrated amongst a small number of families. The Research & Markets Development Department at CASE initiated a pioneering exercise by end of 1998, in conjunction with the Disclosure Department. The exercise, was based on the spirit of mutual cooperation between the companies and CASE given that disclosure was on a voluntary basis and not enforced by existing laws, is to determine the detailed ownership structure of CASE 50 companies that constitute its index in order to be able to calculate their free float.

B. The rights of shareholders Listed shares are freely transferable. More than 90 percent of trading volume was in dematerialized or scripless shares. Only 463 companies of a total listed number of companies 1,070 were registered with MCSD as of end of June 2001 86. This number is expected to increase when all listed companies comply with the depository law and move from materialized into dematerialized form, once the executive

84 Financial Securities, CASE, June 2001. 85 Public Enterprise Office. 86 Misr Clearing Settlement Depository Company (MCSD) and CASE, June 2001.

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regulations of the law are implemented. The trading cycle is as follows: Trade instructions are received and executed by the brokers at time (T). Matching is completed within the trading system in the Stock Exchange at T. All trades are recorded through the Stock Exchange. On T+1 the seller’s broker delivers the shares to MCSD. On the evening of T+2 the account at the buyer’s brokers with the clearing bank will be debited with the value of the trade and seller’s broker will be credited. On the T+3 the trade is concluded and the buyer’s broker should receive the shares and certificates of the ownership, which enables the shares to be re- traded, from MCSD. With the respect to physical shares, clearing and settlement take place on the afternoon of T+4, as for the scripless shares, settlement takes place on T+3. Payments are made to seller’s broker through the clearing banks on the date of settlement.

However, payment is not final due to inefficiencies in the payment system87. Thus ownership transfer and settlement are not in full compliance with simultaneous Delivery versus Payment (DVP). In other words, clearance and settlement are in compliance with ISSA G30 recommendations, with the exception of three issues: efficient and geographically extensive payment system, securities lending and borrowing (included in the new depository law) and registration of all listed companies with MCSD (also included in the new depository law). In January 2000, a Settlement Guarantee Fund was established with contributions from brokerage firms. Since the inception of the Guarantee Fund, the number of unsettled transactions has been reduced greatly. The main role of the Fund is to buy shares on behalf of the defaulting party (in case the selling broker does not deliver the shares) or pay cash (in case the buying broker defaults in payment. The size of the fund is LE 30 million and is adjusted every three months according to a specific formula related to the brokers’ turnover. The number and value of transactions settled by the Fund in 2000 amounted to 169 transactions valued at LE 6.6 million, compared to total number of transactions of 1.27 million and value traded LE 45.7 billion 88. In the first six months of 2001, the Fund settled 367 transactions valued at LE 7.1 million, compared to total number of transactions of 593,524 and value traded LE 10.4 billion for the whole market. Shareholders have the right to access a company’s balance sheets, profit and loss statement and audit report for the previous three years. Law 95/1992 gives all shareholders the right to review the directors’ report, the balance sheet, the profit and loss accounts and the auditors’ report at the company’s headquarter during the two weeks prior to the AGM, provided that their formal request is duly recorded and signed.

87 Trading and Settlement Cycle, CASE & MCSD. 88 MCSD, January 2001.

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Twenty out of the 100 most actively traded and listed companies on CASE have an investor relations officer 89. However all listed companies have a senior officer or owner (in case of closely held companies) that replies to Exchange or investor queries, usually the general manager or the financial director of the company.

The Annual General Meeting approves the distribution of cash dividends following the review of the auditor report. Shareholders can obtain dividends either in cash at one of the thirty-seven bank branches where MCSD has representatives via bank transfers 90.

Annual General Meetings (AGM) and disclosure of capital structures

The Annual General Meeting (AGM) must meet within six months of the end of the previous financial year. Summaries of the financial statements and auditor report must be either published in two daily Arabic newspapers within three months of the end of the financial year or sent to each shareholder by registered mail at least fifteen days before the date of the meeting. Most companies prefer the first alternative. The AGM is convened by the Chairman. The notice must include date, time and place, as well as an agenda, the annual report, auditor’s report, as well as the directors’ report. In addition to shareholders, three entities must be notified of the AGM: the auditor, CMA, and the appropriate government department (Companies Department or GAFI). Quorum requirements include at minimum three board members, the auditor and shareholders representing at least one quarter of capital. If there is no quorum, a call must be published at least five days in advance for the second meeting. There is no minimum quorum for the second meeting. Shareholders representing five percent of capital are permitted to add items to the agenda until three days before the meeting. The law does not specify whether the company should publicly distribute the amended agenda before the AGM. Urgent matters can be discussed and voted on without being on the agenda, if a majority of shareholders decides in favor. Shareholders have the right to ask questions. The board answers the questions to the extent to which these questions do not cause “harm to the interests of the company or the public interest”. If the shareholder judges that the answer is insufficient, he/she may appeal to the AGM to decide on the issue. Shareholders who have paid up 50 percent or less of the share issues value have full voting rights as all other shareholders, but they receive dividends in proportion to the amount disbursed 91.

89 Disclosure Department, CASE, June 2001. 90 MCSD. 91 Capital Market Law 95/1992.

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Voting is allowed in person or by proxy. Proxy voting is subject to certain limitations: if the proxy is a physical person, he/she must be a shareholder (this limitation does not apply to a juridical person), have a power of attorney and cannot be a board member. No natural person may represent more than ten percent of total shares and 20 percent of represented shares at the meeting (this does not apply to juridical persons). Postal ballots are not permitted. Voting is secret if it involves the election/removal or sanction of directors or if the chairman of the board or shareholders representing one tenth of capital at the meeting makes a request. The chairman appoints two vote counters who oversee the ballot. Law 159/1981 gives shareholders representing five percent of capital the right to call the AGM, if the board did not do so. Extraordinary AGM are held at the request of ten percent of share capital or the board of directors. Quorum of the first meeting is half of the capital. If there is no quorum, the requirement for the second meeting is one quarter of capital. Shareholders can obtain information about the voting rights attached to all classes of shares through the company statutes, the Commercial Registry at the Ministry of Supply & Internal Trade for a fee or the CMA and the Companies Department. Another source of information is the prospectus or brokerage firms. Disclosure on the capital structure and beneficial ownership is not included in the annual report, but voluntarily may be stated by the company. C. The equitable treatment of shareholders The legal framework allows for multiple share classes, provided that within a given class shareholders are treated equally and have the same rights. There are two main classes of shares: ordinary shares and preference shares. Ordinary shares are either nominal or bearer shares. The majority of listed shares on CASE are nominal shares except few that are in bearer form (only eight companies out of 1070 companies had bearer shares as of end of June 2001)92. The percentage of bearer shares must not exceed 25 percent of the total share capital and the value of these shares must be fully paid up. Owners of bearer shares may attend the AGM, if they deposit their shares at a bank, the company or MCSD, but they are not allowed to vote. Contrary to the majority of capital markets in the world, preference shares in Egypt have privileges in terms of voting. They are also entitled to earn fixed dividends before other shareholders and have priority during liquidation. Cumulative preference shares exist. Preference shares may also have priority in capital increases. They may have priorities in terms of capital increases if permitted in company’s statutes and approved by extraordinary Annual General Meeting. In most cases voting rights are capped at two votes per share, but there is no legal limit. The number of preferred shares listed on 92 Listing Department, CASE.

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CASE is few (only 15 companies) compared to 1070 common stock listings as of end of June 2001 93. The Central Depository Law 93/2000 differentiates between registered ownership and beneficial ownership. In the past, a nominee could not split up votes. Once the executive regulations are issued, registered owners must cast votes in a manner agreed upon with the beneficial owners. Failure to do so carries a fine of up to LE 100,000. Every shareholder has the right to file a complaint with Companies Department regarding violation of law 159/1981. A shareholder who attends the AGM can register his opposition to a decision in the minutes, can initiate a case in court within one year from the meeting. Law 159/1981 states that “all resolutions issued for the benefit of a certain category of shareholders or causing harm to them, or bringing special benefit to the members of the board of directors or others without considering the company’s position, shall be revoked.” If shareholders representing at least five percent of capital file a complaint, the CMA has the power to override resolutions of the AGM that are considered to unfairly favor a given group of shareholders, or cause harm to them, or unfairly bring about a benefit to the members of the board or others. The parties involved should submit the issue to arbitration within fifteen days. Shareholders representing ten percent of capital can request CMA or Companies Department to conduct an inspection. The proposed capital market law introduces the concept of class action to be initiated by the CMA. The implementation of class action is, however, doubtful since it is in conflict with some clauses in the Constitution. Currently, collective action, where each plaintiff is known, is possible under the Egyptian law. Any dispute involving securities matters is referred to the arbitration board under the supervision of the Minister of Justice. This board must make a decision within thirty days after having reviewed the case. Decisions are final and enforceable, unless suspended by the court of appeals. There are no specialized courts in Egypt. On average, it takes longer than four years to resolve a dispute in court. Litigation is expensive and courts are often delayed in enforcing judgements. Decisions about granting preferential treatment to existing shareholders before a capital increase; the misapplication of pre-emptive rights if granted in company statutes, adding corporate objective, require a two-thirds majority vote in an extraordinary meeting. Similarly, two thirds of the holders of shares in the same class must agree to any variation in voting rights. A majority of seventy five percent is required for decisions involving an increase or reduction of capital; changing the original purpose of the corporation; prolonging or shortening the life of the company and deciding on dissolution or merger. 93 Financial Securities, CASE, 2001.

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If losses amount to half of the issued capital, the board must convene an extraordinary meeting to consider dissolution. Share buy-backs are allowed and these shares can be held for up to one year before which they must be cancelled. Any person who plans to conclude an operation resulting in ownership of at least ten percent of a company must give the company two weeks’ notice via registered mail. Within one week of this notification, the company must inform all shareholders owning at least one percent or publish this information in two widely circulated newspapers. The same rule applies to directors or employees who want to buy five percent of capital. The transaction must be concluded within one month from the date of notification. If the shareholding percentage exceeds 20 percent before or after the intended acquisition (15 percent in the case of directors or employees), the law stipulates that a tender offer for a certain amount of capital must be issued to all shareholders. The tender offer can either be for all outstanding shares or for part. The offered price must be at least equal to the average of closing prices during the week prior to the notification. The tender offer is valid for two weeks, but can be extended. If tendered shares exceed those demanded, the bidder must purchase proportionately from all shareholders on a pro rata basis. It should be pointed out that the new capital market law has a special new section that handles tender offers in a manner comparable to international standards. Insider trading, as such, is not specifically addressed, but the Capital Market Law states that “any person who divulges a secret, which is in his possession by virtue of his duties under government by the provisions of this law, or has benefited he, his spouse and his children, from insider information of his work, or who used material misstatement, or omitted any material information in reports, submitted by him, to the extent that it affects the results contained in such reports” is punishable by law. Penalties for breaching these provisions include a fine in the amount of L.E. 20,000-LE 50,000 and/or a minimum prison term of two years. Market participants are generally unaware that insider trading, as defined above, is a criminal offense in Egypt. The Surveillance & Market Control Department of CASE is responsible for on line surveillance during trading hours and CMA for off line surveillance. The Surveillance & Market Control Department of CASE consists of fourteen professionals who monitor market activity to spot improper trading. In year 2000, 60 out of 330 cancellations were due to improper trading 94. Both CASE and CMA are connected through a real time electronic link. If any price manipulation is detected bid and offer prices are suspended by the Chairman of the exchange or CMA and transactions can be revoked. Egyptian accounting standards require directors and managers to disclose any material interest in transactions or other matters affecting the company, irrespectively, of whether such transactions have taken place. Disclosure must be made in the notes to the financial statements. The director with a conflict of interest in a given transaction must notify the 94 Surveillance & Market Control Department, CASE, June 2001.

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board accordingly, record the notification in the minutes of the meeting and abstain from voting. The board must notify the AGM and receive approval to engage in any related party transaction. In practice, there is not sufficient information available to establish whether expropriation due to below market transfer pricing or to the movement of assets between subsidiaries of the same holding company takes place in Egypt. There are no clear rules on the transfer of assets and shareholders do not vote on this issue. Often the majority shareholder at the subsidiary level and the majority shareholder at the holding level are the same and it is the minority shareholders that are at risk of expropriation. D. The role of stakeholders in corporate governance Law 159/1981 grants employees the right to share in profits that amounts to the lower of ten percent profit or the equivalent of one annual salary each year. This right is only exercised if profits are distributed. The same law states that employees of joint stock companies shall participate in “management” and that the company’s statutes and bylaws shall specify appropriate methods, rules and conditions. This was more or less applicable prior to privatization and the economic reform program that started in 1991. Nowadays employee representatives do not generally sit on boards except in few cases of public sector companies. Instead companies created an “Employee Committees” to deal with all matters related to employees, including salary and other compensation issues. A director is assigned the task to coordinate with this committee. Law 95/1992 gives bondholders special protections. They have the right to form “Bondholders’ Association” and elect a legal representative who acts on their behalf and attends the AGM of the company. The association makes recommendations for submission to the AGM or the board of directors, but does not have the right to vote at the AGM. Bondholder Associations have the right to access all documents, data and notifications and to send a representative to the AGM. Stakeholder rights are protected by contract or specific laws, such as labor law, business law or insolvency regime. Stakeholders have access to the legal system to obtain redress for the violation of rights. Employees may establish Employee Shareholder Associations (ESAs) for the purpose of owning part of the shares of the company and distributing profits among the members. Each ESA is registered with CMA and has written statutes. Only employees of the company can be members. The board of directors manage the ESA and the general assembly is the highest authority. In privatized companies, ESAs hold five or ten percent of share capital on behalf of the employees 95. At ten percent, the ESA has the right to a seat on the board of directors. 95 Public Enterprise Office.

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Employee stock option plans are not contemplated in the legal framework. This is because shares must be issued at fair market value (unless they are issued to existing shareholders). The CMA reviews the valuation method used to calculate the fair market value of the company. Some private companies have started implementing share ownership programs for their employees and executives. As shareholders, employees are entitled to the same information as all other shareholders. E. Disclosure and transparency Any listed company must disclose its financial and operational performance to CMA and CASE on a quarterly, semiannual and annual basis. Mandatory information includes hard copies of balance sheet, income statement, directors’ report, information on any change in board composition, material events that may affect business and/or earnings, as well as the external auditor report. CMA examines compliance with disclosure requirements and requests more information if needed. In case of non-compliance, CMA will publish its observations at the company’s expense. Once the CMA approves the financial statements, the company publishes a summary of both the quarterly and annual reports in two newspapers, at least one of which in Arabic. Financial statements are to be prepared in compliance with Egyptian Accounting Standards issued by the Ministry of Economy and Foreign Trade. These standards are generally in line with International Accounting Standards (IAS), except in few areas. In the absence of an Egyptian accounting standard for a specific issue, IAS is applied. Companies are required to make immediate disclosure of all material events that may affect business and/or earnings. Once the Disclosure Department of CASE is informed, the information is immediately published on the brokers’ trading screens. CASE recently established a Disclosure Department to monitor disclosure and transparency rules. Penalties for intentionally disclosing false or misleading information or forging company records include jail of up to five years and/or a fine of L.E. 50,000- LE 100,000. The currently used penalty for not abiding by disclosure rules is de-listing. Annual and semi-annual financial statements of public companies must be fully audited, while quarterly statements are submitted with a limited auditing report. The power of appointing and removing auditors is vested with the AGM, which also sets their remuneration. Consulting fees do not have to be disclosed at the AGM. To ensure independence, the auditor must not become a founder, board member, employee or otherwise associated with company or board or elected to the board until

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three years after his auditing function has ceased. The auditor has the right to examine all documents, data and other information necessary and can count on the support of the board to fulfill his duty. In case this is not possible, the auditor should submit a report to the board or, finally, to the general assembly. The auditor does not report to the board, only to the AGM, to whom the auditor’s report is submitted. Any shareholder may submit a motion to remove an auditor once he/she has explained his or her motives to the company, in writing, ten days before the AGM. The auditor may respond in a letter defending any actions under review, which will be read by the Chairman to the AGM. The auditor is liable for misrepresentation and errors and should compensate the company and/or shareholders for any resulting loss. Currently, there is no obligation for companies to establish audit committees or other mechanisms to ensure oversight of the audit function. Prospective auditors must register with the Ministry of Finance. After eight years they automatically acquire the right to audit any company. The Egyptian Society of Accountants and Auditors has 785 active members and 375 non-active members in a country with 17,000 registered accountants 96. There is no formal system of monitoring members and the Society does not act a review panel. The sanction for not abiding with the code of ethics is membership suspension. MCSD maintains an updated register of shareholders. They must disclose ownership in the bylaws, prospectus and at the AGM, but not to the level of ultimate ownership and not in the annual report. Shareholders have the right to review the minutes of the AGM, which includes an attachment with the names of all registered owners and the amount of shares held by each. This information is also available at the office of the Companies Department. Also listed companies can obtain detailed ownership structure from MCSD but for a rather high fee. Recently, MCSD started providing this information to issuers via electronic format 97. It is up to the company’s bylaws to determine the level of disclosure, relating to the board and management, to be revealed to shareholders at the AGM. For example, the names of directors and their remuneration are disclosed to the AGM, but is not published in the annual report. Executive remuneration is not disclosed in the annual report. The remuneration should not exceed, including sitting fees, travel expenses and annual share of profits, ten percent of net income. CMA requests companies to submit on a yearly basis, a list with the names, nationalities and other characteristics of board members and senior management. CMA must be immediately notified of any change.

96 KPMG Hazem Hassen Auditors & Management Consultants, June 2001. 97 MCSD, June 2001.

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Directors must disclose conflicts of interest to the board and not participate in decisions involving a conflict. The board must subsequently inform the AGM. Directors must obtain special authorization from the AGM to trade on their own account in the same business line and to be a party to any contract submitted to the board for approval. A board member must not enter into any remunerated contract with other companies where board colleagues are directors or senior managers. F. The responsibilities of the board Companies have one-tier boards comprising of an odd number of directors, with a minimum of three. There are no rules governing the composition between executive and non-executive directors and the concept of independent directors is not well established among listed companies. In most listed companies, there is no separation between the roles of the chairman and managing director roles. The same person may hold both posts. The board determines each member’s compensation. Directors must be shareholders or represent companies, who are shareholders. Two directors may be chosen because they are “experts in the field”. The board elects its chairman and sometimes a deputy chairman and can change them at any time. The board meets upon request of its chairman or one third of its members. The meeting is valid if attended by at least three directors. Given that most directors are insiders, they have full access to relevant information. The AGM elects directors for three renewable years and approves their compensation. Cumulative voting and block voting are not permitted. Appointment requirements include ownership of a minimum number of shares as per company statutes (with exception of two experts who do not abide to this requirement). These shares are held in guarantee until the term has expired and the latest annual report is sanctioned by the AGM. An employee cannot be appointed director unless he/she has served at least two years with the company and no more than three directors may be employed by the company. The company bylaws may include procedures for nominating reserve directors to replace absent board members. Directors must accept appointments in writing and submit a resume, including a list of companies with which they have been associated during the previous three years. This information must be presented to shareholders. Directors may serve on a maximum of two boards, managing directors only on one. Automatic disqualification of board members results from having declared bankruptcy or committed a criminal act or a felony relating to theft, abuse of trust, forgery etc. The law penalizes directors who commit bribery, forgery, provide misleading

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information, distribute unfair dividends or commit price manipulation with prison terms and/or fines depending on the seriousness of the violation. Rarely does this get publicized. The board is the ultimate body governing the corporation and responsible for monitoring the implementation of the company’s objectives set by the AGM. The board has joint liability vis-à-vis shareholders and is liable for any misrepresentation or falsification. Any member of the board is liable to a penalty of imprisonment of no less than two years and to a fine of no less than L.E. 2000- LE 10,000 if he/she distributes profits contrarily to the provisions of law 159/1981 or the statutes. Board functions include making calls on shareholders, investing the company’s funds and making loans, appointing management and submitting financial statements and directors’ reports to the AGM. The directors’ report includes a summary of activities, plans for the following year and a description of the market. The board can authorize capital increases within the limit of authorized capital without a specific shareholder resolution. According to the legislative framework, the AGM, board of directors, internal and external auditors and government authorities monitor management. The AGM is the supreme power and any decision is binding. In practice, shareholders do not play an important role in monitoring management. The internal audit function does not exist in the majority of listed companies, and if it does, has little power. Boards do not include independent directors nor have board committees dedicated to specific issues. Upon request of shareholders, CMA and Companies Department can exert oversight of management by inspecting the company. Representatives of both organizations attend the AGM to ensure that administrative procedures are followed correctly and that decisions do not unfairly favor one group of shareholders over another. In cases of suspected wrongdoing, the authorities issue inspection warrants. In companies with more than twenty five percent state ownership, the Central Agency for Accounting has the right to inspect the company. Often, there is little separation between board and management. Family members typically play both roles and end up managing and monitoring at the same time. Recommendations for Corporate Governance in Egypt Based upon this above assessment, which benchmarks Egypt’s situation relative to the OECD Principles of Corporate Governance, the following recommendations are suggested for the various entities with more emphasis played on the role that can be played by CASE: General

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Set a “Code of Best Practice for Corporate Governance in Egypt. As indicated in the previous chapter, this is the course taken in countries where modification in the law and regulation takes time to come into effect. Develop training programs (especially for the Incorporation/Listing Departments) at CMA, Companies Department & GAFI since these entities approve the establishment of joint stock companies. The Ministry of Finance should preferably abolish the tax advantages provided to listed companies or rather limit it to only genuinely actively traded companies. This will ensure that listing is a privilege not a right of any listed company and that only companies that want to raise equity, seek floatations. Require public disclosure of all ownership holdings in excess of five percent of a company’s shares for all listed companies. This must be included in the new capital market law. Set clear and well-defined roles for SROs such as CASE, ECMA, EIMA in the new capital market law. Both CMA & CASE should not accept financial statements without notes. Prohibit the issuance of non-voting bearer shares and discourage voting privileges for preference shares. This needs the cooperation between various entities including Ministry of Economy & Foreign Trade, CMA and CASE. Review and strengthen professional requirements, be it directors of companies, members of boards, auditors, senior employees at CMA, Companies Department, GAFI, MCSD, CASE etc. Provide online access to a centralized database of information about ownership structure available at MCSD on a daily basis. MCSD is currently in the trial period of providing ownership structure but only to listed companies. This information should be available to any investor or entity. Enhancing shareholders activism in General Assembly meetings is a crucial issue towards which all countries are striving. This is, of course, a long-term goal that can be facilitated by providing universal awareness campaigns via all information media, about the necessity of activism as shareholders. Ensure that the new capital market & Unified Companies laws are not delayed in promulgation. Prior to the implementation of those laws, the comments of professional bodies, interested parties and the public should be solicited and incorporated.

Code of corporate governance Establish a Corporate Governance Code of Best Practice in Egypt. Until the Code is in place, listed companies should report to CASE in their annual reports whether they voluntarily adhere to certain corporate governance practices (prepared by CASE and distributed to listed companies) or the reasons for non adherence. Listed companies are required to disclose their governance practices in the annual report and the degree of compliance with those rules. CASE should have the right to list or de-list companies that do not conform to the Code (or grant exemptions).

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The proposed corporate governance Code for Egypt should be simple, practical, easily implemented and enforceable. Reforms must fit Egypt’s existing laws and institutions and cannot just be imported from other countries. CASE should be one of the main driving forces towards establishing a “Corporate Governance Code” in Egypt together with other professional bodies such as the Egyptian Society of Accountants and Auditors. This effort should be done under the auspices of the Ministry of Economy & Foreign Trade.

CMA Finalize the review of CASE new listing rules by the CMA and introduce them to the market as soon as possible. The CMA should define detailed disclosure requirements for prospectuses and move to a full disclosure approach. CMA should set a list of qualified auditors from which listed companies must choose for auditing their financials.

Board of Directors & shareholders’ meetings Strengthen the role and effectiveness of shareholders’ meetings. Disclose the board’s remuneration package. The practice of using independent directors should be encouraged. Allow for cumulative voting for directors. Introduce a quorum in case of having a second general shareholder meeting, of at least twenty five percent. Remove limit on the percentage of share capital any one proxy can represent. Allow for postal voting. Either introduce yearly elections instead of the current practice of three years for board members or make use of staggered boards. Establish mandatory audit committees. The new listing rules encourage the use of audit committees by listed companies. Develop training programs for board members. Require that the following decisions be approved by shareholders: all asset transfers in excess of twenty five percent of total assets and all increases in share capital. Closely monitor general assembly meetings to ensure that the majority does not control the AGM at the expense of minority shareholders. The representatives from CMA or Companies Department that attend those meetings should enforce this role. Establish a code of best practices on the role, responsibilities, operation, structures and qualifications for members of the board. Remove requirement that shares be blocked for at least three days for votes to count.

Auditors Clearly define what kind of information must be contained in annual report, in

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consultation with CMA, CASE etc. Support creation of a professional body with the authority to impose standards of professional conduct. This role could be played by the Egyptian Society of Accountants and Auditors. Strengthen audit practices of external auditors by providing training programs to auditors by the Egyptian Society of Accountants and Auditors.

CASE Change the section in listing rules that allows listing shares that are not fully paid. Companies should have fully paid shares and only shares that are fully paid-up enjoy voting privileges. Develop training programs for employees at the Listing Department. Introduce a range of prohibitive administrative penalties, including fines and de-listing, for non-compliant listed companies. Issuers must learn that listing is a privilege not a right, continued listing requires ongoing obligations. Training and educational seminars to directors of listed companies about the importance and adherence to corporate governance is a must, as viewed in KLSE case. The Disclosure in conjunction with Research & Markets Development Departments at CASE should prepare a simple, easy to read document about listing on CASE which includes: importance of listing, benefits of listing to various entities such as issuer, shareholders and directors and obligations of listing etc. Enforce public disclosure of all ownership holdings in excess of five percent of a company’s shares for all listed companies. CASE has included this requirement in its new listing rules but it needs enforcement and compliance from all listed companies. Currently, the Disclosure as well as Research & Markets Development Departments request this information from CASE 50 active companies. Prepare simple, introductory and informative document about the importance of corporate governance. This document can be prepared jointly by Research & Markets Development & Disclosure Departments at CASE that will be later distributed to all listed companies. Issue Corporate Governance Certificate by CASE to all listed companies that fulfill Exchange requirements (to encourage all listed companies to adhere to corporate governance practices). CASE should publish at the end of each month in its publications, whether in printed or electronic form, the name of listed companies that adhere to good corporate governance practices and those that do not, as practiced in other exchanges such as Deutsche Bourse, KLSE, BOVESPA etc. Set up a Committee for Corporate Governance at CASE made up of auditors, CASE senior disclosure staff, investment banks, issuers, international organizations representatives such as World Bank or OECD that decides each year on the listed companies that excel and have exceptionally good corporate governance practices. CASE can acknowledge those companies annually to promote best governance practices among listed companies.

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TABLE (1)

Main Market Indicators For the Period 1991-June 2001

dicators

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Jan-Jun2001

ume of listed securities 19.2 20.7 13.7 29.3 43.7 170.5 286.7 440.3 841.1 1,029.3 556.4ume of unlisted securities 3.5 8.9 4.0 30.5 28.5 37.2 85.8 130.5 233.0 78.7 39.5tal volume of listed & unlisted securities (million) 22.7

29.6 17.7 59.8 72.2 207.7 372.5 570.8 1,074.0 1,108.0 595.9

ue traded (listed securities) 233.9 371.4 274.9 1,214.0 2,294.2 8,769.2 20,282.4 18,500.6 32,851.0 45,789.1 10,480.4 ue traded (unlisted securities) 193.9 225.3 293.7 1,343.2 1,555.2 2,198.3 3,937.4 4,863.4 6,235.1 8,223.3 4,095.7tal value traded (LE million) 427.8 596.7 568.6 2,557.2

3,849.4

10,967.5 24,219.8 23,364.0 39,086.1 54,012.4 14,576.1

erage monthly value traded (listed securities) 19.5 30.9 22.9 101.2 191.2 730.8 1,690.2 1,541.7 2,737.6 3,815.8 1,746.7erage monthly value traded (unlisted securities) 16.1 18.8 24.5 111.9 129.6 183.2 328.1 405.3 519.6 685.3 682.6tal (LE million) 35.6 49.7 47.4 213.1 320.8

914.0 2,018.3 1,947.0 3,257.2 4,501.0 2,429.3

mber of transactions (Listed securities) 9,626 11,648 11,184 51,862 260,964 2,279,521 1,142,510 672,649 892,291 1,276,209 594,297 mber of transactions (unlisted securities) 679 855 750 42,880 208,651 36,843 82,841 14,564 12,909 10,102 2,398tal number of transactions 10,305 12,503 11,934 94,742

469,615 2,316,364 1,225,351 687,213 905,200 1,286,311 596,695

mber of listed companies 627

656 674 700 746 649 654 870 1033 1076 1,070

mber of traded companies 218

239 264 300 352 354 416 551 663 659 522

erage monthly traded companies 79

78 84 91 113 129 168 218 243 232 223

rket capitalization end of year (LE million) 8,845 10,845 12,807 14,480 27,420 48,086 70,873 82,232 112,331 120,982

110,300

rnover Ratio(%) 2.64

3.42 2.15 8.38 8.37 18.24 28.62 22.50 29.24 37.85 9.50

ecurities include stocks, bonds and mutual funds listed on the Exchange rket Capitalization = no. of listed shares x market price end of year rnover Ratio = Traded Value of Listed Securities /End of Year Market Capitalization urce: Cairo & Alexandria Stock Exchanges

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Table (2) Egyptian Privatization Program

Companies Privatized &/or Liquidated From 1994 till 30/6/2001

No. Company Name Sale Proceeds % Sold

L.E. million Majority IPOs 1 Medinet Nasr Housing 190 75 2 Egyptian Financial & Industrial Company 70 75 3 United Housing 5 10 4 Abou Kir Fertilizers 20 3 5 Egyptian Starch & Glucose 68 61 6 Kafr El Zayat Insecticides 60 90 7 Misr Oil & Soap 73 61 8 El Nasr for Dehydrating Agricultural Products 24 100 9 Nile Matches 34 65

10 Middle & West Delta Flour Mills 177 61 11 Development & Engineering Consultants 104 98 12 Upper Egypt Flour Mills 165 61 13 Telemisr 59 100 14 Arab Cotton Ginning 87 100 15 East Delta Flour Mills 110 61 16 Ameriyah Cement 768 71 17 Helwan Portland Cement 541 52 18 Misr Free Shops 133 97 19 Unirab Spinning & Weaving 226 67 20 Nile Cotton Ginning 295 100 21 Cairo Housing 118 79 22 Nobareya Agricultural Engineering 27 99 23 Upper Egypt Contracting 15 85 24 El Nasr Clothes & Textiles KABO 197 63 25 El Nasr Casting 48 33 26 Middle East Paper Simo 55 85 27 El Giza Contracting 33 80 28 Egyptian Electrical Cables 321 100 29 Paints & Chemicals Industries Pachin 836 62 30 Industrial & Engineering Projects 299 90 31 El Shams Housing 31 55 32 Mahmoudia Contracting 54 80 33 Alexandria Spinning & Weaving 82 100 34 Extracted Oils 85 51 35 El Nasr Civil Works 105 81

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36 Bisco Misr 89 63 37 United Arab Shipping & Stevedoring 17 51 38 Cairo Oil & Soap 33 61 Sub-total of Majority IPOs 5,651 Minority IPOs

39 Misr Chemicals 65 51 40 Eastern Tobacco 549 34 41 Nile Pharmaceuticals 55 33 42 Heliopolis Housing 135 27 43 Misr Aluminum 221 8 44 Egyptian Contracting (Mokhtar Ibrahim) 76 13 45 North Cairo Flour Mills 136 42 46 Middle Egypt Flour Mills 32 40 47 South Cairo & Giza Flour Mills 30 40 48 Memphis Pharmaceuticals 48 40 49 Arab Pharmaceuticals 18 40 50 Cairo Pharmaceuticals 62 40 51 Alexandria Pharmaceuticals 52 40 52 General Silos & Storage 148 40 53 Alexandria Flour Mills 125 40 54 Arab Engineering Consulting Co. 4 45 Sub-total for Minority IPOs 1,755 Anchor Investor

55 Coca Cola 286 100 56 Pepsi Cola 131 100 57 El Nasr Boilers 16 100 58 El Nasr Transformers Elmaco 115 90 59 El Nasr Utilities 40 100 60 Al Ahram Beverages 298 100 61 Delta Industries IDEAL 311 100 62 Misr Mechanical & Electrical Projects 103 71 63 Kaha 154 100 64 Assiut Cement 1380 100 65 El Wadi for Exporting Agricultural Products 122 95 66 NobaSeed 103 100 67 Geneklis 32 100 68 Modern Textiles Bolivara 33 - 69 Delta Sand Bricks 62 100 70 Beni Suef Cement 527 100 71 Industrial Gases 60 100 72 Arabia Foreign Trade 15 100 73 Alexandria Cement 670 100 74 Telephone Equipment 100 90 75 Plastic & Electricity Industries 94 100 76 Torah Cement 1226 81

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77 Ramsis Agricultural 161 100 78 Micar 25 100 79 Alexandria Sweets & Chocolates (Corona) 28 90 Ameriyah Cement (remaining stake) 527 29

80 Egyptian Gypsum 83 90 Sub-total of Anchor Investor 6,701 Employee Shareholder Association

81 Engineering Design & Irrigation Projects 1277 99 82 Wadi Kom Ombo for Land Reclamation 70 100 83 General Company for Land Reclamation 60 100 84 Egyptian Real Estate Co. 46 100 85 General Mechanical Excavation 23 100 86 Upper Egypt Dredging 8 100 87 Egyptian Dredging 19 99 88 Arab Co. for Land Reclamation 61 100 89 Riegwa 28 100 90 Societe Anonyme De Behera 49 98 91 Nile Inland Transport 27 95 92 Nile Heavy Transport 27 95 93 Nile Goods Transport 24 95 94 Nile Direct Transport 18 95 95 Nile Transport Operations 12 95 96 Egyptian Maritime Supply 16 51 97 Kafr El Sheikh Rice Mills 13 90 98 El Sharkia Rice Mills 39 90 99 Amoun Shipping Agencies 26 88

100 Tiba & Abou Simbel Shipping Agencies 26 88 101 Memphis Shipping Agencies 43 88 102 Dakahliya Rice Mills 37 90 103 Alexandria Rice Mills 27 90 104 Damietta Rice Mills 49 90 105 Rosetta Rice Mills 12 90 106 Suez Shipping & Stevedoring 22 62 107 El Behera Rice Mills 22 90 108 Egyptian Irrigation and Drainage 5 90 109 San El Hagar Agricultural 18 95 110 Egyptian Maritime Works- Mary Trans 43 95

Sub-total for Employee Shareholder Association 870 Liquidations

111 North Tahrir Agricultural Co. - 100 112 General Agricultural Co. - 100 113 General Agricultural Products & Services - 100 114 Egyptian Meat & Milk Products - 100 115 Al Ama Contracting & Sanitary Works - 100 116 El Nahda Agricultural Co. - 100

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117 Middle Delta Agricultural Co. - 100 118 Nile Agricultural Products Export - 100 119 South Tahrir Agricultural Co. - 100 120 West Nobareya Agricultural Co. - 100 121 High Dam Civil Works - 100 122 Mariout Agricultural Co. - 100 123 Farascour Wood & Building - 100 124 General Co. Mineral Wealth - 100 125 Prefabricated Houses - 100 126 Cairo General Building & Prefabricated Houses - 100 127 General Co. for Foundations - 100 128 Sanitary Installations - 100 129 Upper Egypt Agricultural Company - 100 130 Cairo Silk - 100 131 Sand Bricks - 100 132 El Nasr Refractories - 100 133 Graphite Co. - 100 134 Kanaltex - 100 135 Egyptian for Leather Manufacturing - 100 136 General Co. for Batteries - 100 137 Gimco - 100 138 El Masreyah Refractories - 100 139 General Engineering Works - 100 140 United Poultry - 100 141 Shaher & Romney - 100 142 Segal - 100

Sub-total for Liquidations 0 Asset Sales (18 companies) 839 -

Total proceeds from program 15,817 Source: Public Enterprise Office (30/6/2001)

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Appendix 1- Current Listing Rules

Requirements Official Unofficial (1) Unofficial (2)(C) Minimum Value of Share Issue N/A N/A N/A Minimum No. of Shareholders 150 ** - -

Free Float 30%** - - Paid Up Portion of Issue Value

of Security 100% Minimum 50% Minimum 25%

Shareholders' Equity Not less than company's paid-up capital

Not less than company's paid-up capital

Not less than company's paid-up capital

Disclosure of Potential Risk Required # Required # Required # Disclosure of Unusual

Circumstances or Events that could affect Co.'s Financial

Position

Required Required Required

No Restrictions on Trading Yes Yes Yes Listing Agreement with Central

Depository Yes Yes Yes

Prospectus Required Yes Yes Yes Track Record for Listings 3 years 2 years 1 year

No. of Issued Shares required for Listing

N/A N/A N/A

Items Permitted to List on this Schedule Only

All public sector companies, debt securities

issued by government, treasury bills and treasury

bonds

Foreign shares Temporary or public offering certificates allowed (provided

company prints its shares within two years of listing)

Financial Statements Provided to CASE

Quarterly Quarterly Quarterly

Publication of Financial Statements

Semi-annually Annually Annually

Explanation of Net Profit Retained for Reserves

Required Required Required

Source: Listing Department, CASE

Notes

* The Companies Law (not the Listing Requirement) specifies that minimum capital is LE 250,000 (US$ 65,000)

** With the exception of shares of public sector companies and public business sector companieswhich may not necessarily be sold in public offering or have a given number of shareholders (Law 203)

# The auditors' report must disclose whether the company is a going concern

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Appendix 2 – Proposed Listing Rules

67

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Appendix 2 – Proposed Listing Rules

Official Official **** Unofficial Unofficial * 1 ** 2 1 2

Minimum Value of Shares n/a n/a n/a n/a Minimum No. of Shareholders 150 n/a 100 n/a

Minimum Free Float 30% n/a 10% n/a Issued & Paid up Capital LE 20M, Fully Paid LE 20M, Fully Paid LE 10M, Fully Paid LE 5M, Fully Paid

Shareholders' Equity Must equal issued cap. for last 2 years

N/A Must equal issued cap. for last year

Equal part of issued capital

Disclosure of Potential Risk Required Required Required Required Disclosure of Unusual

Circumstances or Events that could affect Co's Financial

Position

Required Required Required Required

No Restrictions on Trading Yes Yes Yes Yes Listing Agreement wit

h Central Depository

Yes Yes Yes Yes

Prospectus Required Yes Yes Yes Yes Track Record for Listings 3 Years *** 2years 2 years 2 years

Net Profit before Tax 5% of capital 5% of capital 5% of capital N/A No of Issued Shares required

for listing 2 million 2 million 1 million 0.5 million

Financial Statements Provided to CASE

Quarterly Quarterly Quarterly Quarterly

Publication of Financial Statements

Semi-annually Semi-annually Semi-annually Annually

Explanation of Net Profit Retained for Reserves

Required Required Required Required

Source: Listing & Disclosure Departments, CASE

Notes

* The company should have released its financial statements for at least 3 years from the date of registration in the Commercial Registry

** Listing on this schedule is for securities issued by Government and fully offered for public

subscription and irrespective of number of holders unless specified by the law governing their issuance.

It also includes securities which are issued by Public Sector Companies and Public Business Sector Companies with no conditions of public offering or the number of holders.

*** The company should submit financial statements for last 2 years audited by the Central Auditing Agency, prepared in accordance with the Egyptian Accounting Standards and audited according to International Auditing Standards.

**** In this schedule, foreign securities are listed subject to all requirements of the schedule and provided that these securities are listed on a stock exchange which is supervised by a Regulating Agency with similar functions of CMA and provided that they are issued in a currency that can be converted to Egyptian Pounds.

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