GEG WP 2008/37 The corporate governance of the World Bank Group
The World Bank is, from a financial standpoint, organised like a corporation. Using its top credit rating (AAA), it raises funds in the international capital markets like any other financial institution for on-lending to its borrowing clients. As of June 2006, almost half (US$ 100 billion) of its US$ 212 billion total assets were in loans, while the stock of borrowings from financial markets amounted to US$ 96 billion.
Like a large financial conglomerate, the World Bank is actually a group comprising five entities. Its primary component is the International Bank for Reconstruction and Development (IBRD), established at the Bretton Woods Conference in 1944 ‘to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes’ (Art. I). Subsequently, four additional components were created to enhance the Bank’s ability to fulfill its purpose. In 1956, the International Finance Corporation (IFC) was established with the purpose of promoting the growth of the private sector in the economies of the World Bank’s member countries. A few years later, in 1960, the International Development Association (IDA) was founded to provide financing to less-developed economies. Subsequently in 1985, the Multilateral Investment Guarantee Agency (MIGA) was added to provide guarantees against noncommercial, or political, risk to foreign investors in the developing countries that are members of MIGA. Finally, the International Center for the Settlement of Investment Disputes (ICSID), established in 1966, provides arbitration and conciliation for investment disputes between states and individual nationals of other states.
Reform discussions of the World Bank Group (hereafter the ‘Bank’) have constantly focused on how to enhance the representation and the voice of poor countries in the institution, consistent with the political nature of its sovereign members. At the April 2007 meeting of the Development Committee, Ministers discussed the latest in a long series of papers detailing various options on voice and representation (World Bank, 2007).2 Likewise, academics and policy analysts outside the Bank have focused on the issue of balancing the distribution of voting power between rich and poor countries, advocating a more inclusive decision-making (CGD, 2006; Buira, 2005). As a multilateral organisation, in fact, the Bank’s governance should aim for a wide participation of its membership in the institution’s decision-making, as most decisions have a direct bearing on its (sovereign) members.
The current debate has, however, overlooked another important aim of the Bank’s governance, that is, how to ensure that the incentives of its management (agent) are aligned with the goals set by the organisation’s shareholders (principal).4 The view of governance as a set of arrangements that enable the principal to oversee the agent is broadly applicable to organisations of different natures—be they private, public, non-profit, or multilateral—whenever the shareholders (principal) delegate the achievement of organisational objectives to management (agent).
While the literature has mainly focused on how the oversight takes place in the corporate sector, this is equally relevant in the case of a large multilateral financial institution like the World Bank Group. The study intends to shed light on the issue by providing a methodology to assess the degree to which the governance of the Bank follows relevant best- practice principles that its own entity, the IFC, expects from the private financial institutions with which it does business.
The plan of this study is as follows: Section II reviews the institutional aspects of the Bank’s governance framework; Section III highlights the Bank's current decision-making practice and provides a historical perspective on how this practice has evolved over time; Section IV presents the methodology used to assess internal corporate governance, employs this methodology to assess the Bank’s own governance framework, and points to the aspects that emerge as most in need of reform; finally, Section V draws conclusions.
