World bank group governance is here to stay

World Bank Group Governance is Here to Stay:

Corporate governance is the foundation of the World Bank group governance. Founders of the World Bank group governance structure did study the corporate governance and adapt it to the reality of the ‘social’ corporation or ‘social’ bank in order to come up with the World Bank group Governance.(see table 1)

This structure guides policy decision affecting the World Bank group leadership and operation of the IBRD, IDA, IFC, MIGA, ICSID and trust funds. (see table 2)

The board of governors is like the board of directors, the highest decision making authority holding fiduciary duty to people who appointed them. The board of governor role is ceremonial during which finance ministers and treasury secretaries of the member countries meet twice a year to drink, talk and get pictures taken. In

1 Research conducted by Arthur Mboue

addition, they will receive audit of accounts, administrative budget and annual report on the bank operations without any obligation to read them. It is why the board of governors, appointed for 5 years renewal, delegate authority to the board of executive directors to exercise any of its power except for certain powers enumerated in the Article of Agreements. That said, they delegate responsibility for supervising day to day operation to a board of executive directors, known as the board but a shadow board rank. As you may realize, founders was right when they empowered all operational responsibilities to a Full Time board of directors to facilitate the work of approval of requests from the management of the world bank about the complex issues related to loans, grants, loan modification and more from the whole world. It could have been too costly in term of time, money and knowledge for these full time department chiefs to meet more than twice a year but they are still accountable to their people through their 188 parliaments. That said, they must be informed about all the decisions made here on their behalf. How? For some it is not that easy. The board of executive directors is comprised of 25 executive directors to represent 188 member countries. According to the article of agreements, executive directors are appointed or elected every 2 years. Executive directors are neither officers nor staff of the bank. Eight non-borrower shareholders including US, UK, Japan, China, Russia, Germany, France and Saudi Arabia are represented by 8 executive directors that mean one executive director each non borrower member. 17 executive directors represent 180 member countries that mean there is sharing representation where one executive director represents a lot of countries grouped into 17 constituencies from 3 to 23 member countries. (see table 3)


The disparity of voting power between US (now 340,000 votes) and the lowest voting member country, Palau (with 630 votes) did create the system of constituencies. This big difference is reduced with the constituencies system where US executive director with 340,000 voting power will deal with (Nigeria, South Africa and Angola ) executive director, EDS 25, with 33,500 voting power to come to an agreement, it is why this Bylaw is called article of agreements. But, will this multi-countries executive director position have power, control and faith to create incentives for its executive director to represent the interests of all the countries he represent instead of the interests of his own country and people and be accountable to all these governors when the banks is distributing a lot of grants and free help? I do not have the answer to that question but Ann Florini did say ‘governments, answerable only to domestic electorates, face few incentives to act for the benefit of someone else’s constituency”. There is not better provision that shift control from non-borrower member countries to borrowing member countries than the consensus doctrine instead of votes. When decisions are made by the search of consensus between the borrower and non-borrower member countries, the voting rights is not exercised while minority and ‘preferred’ shareholders’ interests will be prioritized. The World Bank President, the only US citizen to chair a board meeting does so sometimes and most of the times delegate this chair to somebody else. After discussion if there is not sufficient support for a project, its discussion is postponed while waiting for behind closed doors negotiations between executive directors’ offices. Rarely, does these decisions and discussions will be interrupted with divisive vote. Decisions are made by the way you argue your case, your friendship with non-borrower shareholders representatives, your committee’s position and how sorry others will feel for you. These decisions are against corporate governance and do not maximize all shareholders value.


At the World Bank group, the only time voting number matters it is when the governors of the borrowing member countries are voting for their executive directors and alternates to represent them because non-borrower member countries appoint their own executive directors and alternates. The case of US representation is very troubling to me because all accusations against US and its co-non-borrower member countries are getting cannot materially be proven in practice. U.S with 16 to 20 % voting rights has had 9 vacancies of either executive directors or alternates since 2005. This absenteeism has kept it from representing US interests in all committees of the board of executive directors (Audit, Budget, ethic, CODE, COGAM and HRC). (see table 4)


As you may know, alternate can assume all power and responsibilities as an executive director and register as a full member of the committee with rights to participate in negotiation toward the search for consensus. It is why half of the US seats have been vacant since 2005. Who to blame? Congress. (See illustration 1) US congress did provide this provision to shift control from US to developing countries by failing to confirm nominee for either the position of executive director or alternate on time.(see table 5)

For an institution that rules through the search for consensus, I do not believe increasing developing countries voting power tied to increase in subscription and paid in contribution or not will add transparency to the World Bank group management’s information. Borrowing member countries have less incentive to improve transparent information related to approval of loan modification and grants than non-borrowing member countries. Borrowing member countries have less incentive to support issues related to environment, gender equality, tax fund and anti- corruption because they require transfer of funds from IBRD and IFC to IDA that means declining incomes from IFC and IBRD will reduce available funds for lending and grants to poor countries. (see table 6)

Table 6-Characteristics of ShareholderExecutive directors

Voting power accountability Dividend

Non Borrower shareholder

1 high directly reinvested

Borrower shareholder

Sharing director

low indirectly Through available cheap liquid

At the same token, these issues punish these developing member countries and keep them from investing their funds where their governments may want with a change of heart because of the Bank monitoring system and earmarks. Although capital structure and voting rights, if it matters, at the World Bank have shifted from 1944 to 2016, the strength of the U.S, from 35 % when it was created to 18 % today voting rights and agreement with European countries to appoint the World Bank President is still felt strongly in the present governance structure. It does not matter that the US is


not exercising its power through attendance to board committees and consensus, the World Bank President who is appointed and reappointed by the US Treasury Secretary and President is controlling what issues will come for discussion to the Board and what kind of issues will continue behind closed doors. That said this is one of the two important powers left to the US after 72 years of reign in addition to power to veto any change of Article of Agreement. (85 % votes needed to approve any change of the Article but US has more than 15 % voting rights)

In 1979, the World Bank did adopt Articles of Agreement, Article V, Section 3, stating that each member has 250 basic memberships plus one additional vote for share of stock held. This provision to shift control from non-borrower member countries to borrowing member countries is just a concession toward equality in control without increase in ownership. In the long run, it will affect the world bank credit rating from AAA because when the bank is controlled by developing countries with no incentive to protect its lending and projects, the higher the risk the lower the credit rating, the higher the world bank will get its capital from Wall Street, the higher it will sell its loans. It will affect its ability to compete against other Multilateral Development Banks including China Development bank. (see table 7)

Over the past years, when there is a new membership to the IMF, because you must be an IMF member in order to apply for a World Bank membership, the Board of


Governors will examine the candidate member wealth and determine its value and its size of voting power to the World Bank group. Its entrance and acquisition of required shares of the World Bank group including subscription and paid in contribution (6% of subscription) will require changes in ownership for all pre-existing shareholders including US by the reliance of the corporate formula about new shares number (see the formula below)

The same scenario will take place when any existing member countries file for increase in ownership based on some triggering events including annexation/recognition of new lands and other values added (GDP, GNP,…), it is why China did file for increase in share ownership after the accession of Hong Kong and huge economic boom. Although I believe that its case was easy at the IMF board, when it comes to the World Bank board, I have reasons to believe that it did get more than it did bargain for when it did receive its own executive director as a bonus from the deal. Because of classified documents related to this vote, I cannot say for sure why one of the World Bank group top 1 borrowing countries ($21.76 Billion in 2015) cannot have incentive to argue against the World Bank group interest payments. In addition, China Development Bank and China export-import bank are now one of the strong competitors of the World Bank group with more than $100 Billion loan committed to developing countries since 2010. (see illustration 2)


As long as these borrowing countries will have substitute products to the World Bank group lending coupled with easy requirements and low global interest rate, it will be a decrease in demand for the World Bank group lending products and IBRD and IFC incomes and increase in global financial competitive environment. ( see table 8)


It should be noted that the World Bank has always faced pressure to lend at no cost coupled to higher default risk from structural factors, institutional factors and external factors including demand from its own non-borrower shareholders and this pressure is worsening with top borrower shareholder and competitor is enjoying the rights reserved to non-borrower shareholder and the entrance of very low global interest rate in the global market.(see Chart 1)

Chart 1-Tentative Remedies to the World Bank Group Problems Increase loan price (but it must remain competitive to increase demand) Revisit and implement new soft requirement to maintain loan commitment

(less demanding metrics for democracy, tax fraud, corruption,…) Reduce transfers from IBRD and IFC to IDA (you must replace the end of

poverty by 2030 slogan with development and industrialization focus to share prosperity)

Slightly increase lending volume (watch default risk but cap China borrowing or become its partner ‘if you cannot beat China, join China’)

Remember to keep your advisory service demand, you must show that you can manage yourself. This reputation is necessary for others to seek your advises.

In sum, the debate about how the World Bank Group is managed did take its worse turn weeks ago and it is that event that triggered my search for the truth. If I was not expert in this field I could just believe in everything I did read from others and Prof Stephany Griffith-Jones because she did build a good case against US and all non- borrower member countries. When it comes to University President Jim Y Kim, I would say only a few university presidents are alike. A lot of university presidents would have turned down this kind of offer because they believe they will not have the respect and knowledge needed to run this kind of specialized institution. (see table 9)

The mechanism through which Dr Kim and others executive directors were chosen for their positions did not perform very well. I believe we can downplay this kind of protests of the leader by choosing leader the same way we are choosing our US DoJ leaders. I would say even the brother of the US President, Robert Kennedy, did have 2 years legal experience before being hand the powerful position of the Attorney


General of the US. That said, the international prestigious positions of executive directors and American citizen World Bank president must be financial (financial related) experts through education and/or experiences. The Board of the Governors can adopt an amendment to the article of agreements and/or special rules of election. (see Chart 2)

Another proposal is a mandatory hiring of independent compensation consultant to guide the HRC when dealing with World Bank top executives compensation packages. In addition, no person related to the World Bank president and his lieutenants should be allowed to attend this portion of the board debate. Another proposal is that 5 out of 8 members of the audit committee must be financial experts. Also, this committee must work with other committees and make sure that the World Bank helps an average expert to understand its operation and management with a consolidated financial report of the World Bank Group. This annual report guided by a disclosure expert must add clarity, transparency and understanding to the World Bank information it makes available to the public.(see Chart 3)


To close, I would say, for the last 72 years, the World Bank lending system did develop China, Singapore, Malaysia, Taiwan, Thailand, South Korea and provide clothes, shelter, health care and food in Haiti, Djibouti, Ethiopia, Papua and other poor countries, all of this with US, Japan, France and UK donation, we cannot afford to replace a winning system just to feed a small number of people with hunger to change things negatively for power. When human beings were forced from their homes because of corrupted and/or addicted leaders or when human beings were dying from Aids or when the world was dealing with people who were just born this way, poor, the World Bank was there with its help, can you truly compare these institutions to the World Bank? It is true, the World Bank group is experiencing problems now but we can fix them and adapt them to the new global competitive environment dictated by rapid changes, speedy technology and respect for talents. Thus, we should know that after trying this experience, US will end up doing the right thing to keep the world a better place.


Law

World bank group governance is here to stay