What moves markets?
Markets bend to forces on the immense scale of macroeconomics. But they’re also nudged, poked, and even redirected by the individuals who work in them. In a 20-plus-year career, Teresa Barger has hit nearly every financial sector and every continent.
Teresa Barger started at the International Finance Corporation (IFC) — the private sector arm of the World Bank Group — in 1986. Her job was to build and strengthen capital markets around the world. Imagine her surprise when she learned her first assignment would be a secret mission in league with a cadre of communists.
Barger worked with the Communist Party of Hungary to create debt and equity markets in the then-communist country. The project turned out to be an early step in the dismantling of communism in Eastern Europe. “It was great fun,” she says. “Most of the Communist Party members I worked with later became stockbrokers and entered the mainstream capitalist world.”
Another time, Barger went to India. The country was then tangled in bureaucracy and regulation, which was a hindrance to its markets. She provides an example of how issues that today would be left to the market were then decided by a regulator: “I had to visit the controller of capital issues, a wonderful man. His position in the Indian government was to go through every issuance of public stock to decide whether or not the number of shares was the right number for the company to issue, that the price was right, that the timing was right.”
Barger’s task was to set up the first private venture-capital company in India. But private-sector unit trusts were not allowed under the tax code. Barger’s solution, developed with lawyers and colleagues, was to set up the venture as a charitable trust. This novel structure had the risk of inviting government interference, but it turned out well. “What happened was another fund was set up with the same structure, and then another, and another. And then the government was forced to give in and allow private-equity funds to use the trust structure that only state-owned entities were allowed to use before.”
In 1987, Chile was caught in the effects of the Latin American debt crisis. The government was struggling to escape the drag of dollar-denominated debt and had started a debt-equity conversion program, whereby holders of debt could convert that debt into equity positions in Chilean industry. Barger and others at the IFC saw an opportunity again to bolster market functioning. “We said, ‘Why can’t we kill two birds with one stone here and use the debt-conversion mechanism to also develop a capital market and create a mechanism for holders of debt to convert their debt into investments in the stock exchange — in listed companies?’”
They negotiated with the Chilean government over how an investment fund should be structured, drew up a draft law, and saw it put into effect in a week. Barger was soon raising money for the fund, though coming just after the Black Monday stock market crash, her efforts only netted about $25 million. The fund ultimately earned a 66% internal rate of return, and was part of a surge of outside investment in the Chilean market. She says, “An interesting thing that I’ve seen, over and over again, is that in these small, local markets, when foreign investors start investing in the market, then the locals get interested in their own markets.”
Barger says the rapid lawmaking in Chile “may not be replicable.” She points out that it happened because Chile had an autocratic government that was also strongly pro-free market — a rare combination. But she has often found herself working in the space where government programs and market dynamics intersect. “The governments of the countries are our shareholders at the IFC, and we never want to do anything that is in the negative interest of our shareholder. On the other hand, we want to make sure that investors can invest — that it’s reasonable for the private sector — because we believe in reasonable and well-regulated free markets.”
A little more than a decade after her Chilean adventure, Barger was named director of the Private Equity and Investment Funds at the IFC, which held commitments in all regions of the globe. She found that the emerging-markets private-equity industry was rife with problems. “We had all sorts of fun and games. I had forensic accountants going into the books of some companies. We had outright fraud. We had people stealing from us. We had plain incompetence.” She made one of her priorities to bolster professionalism in the field.
Barger argues that private equity can have a huge impact on a nation’s economy. Companies usually first develop and grow — and thus create jobs — using funding from sources other than the major stock exchanges. Non-listed companies outnumber listed companies. The leverage of $1 billion in funds allowed Barger to push the field toward professionalism. “We were very tough in those first couple of years on the fund managers who were not acting with high integrity. And since we were the biggest investors in emerging-markets private equity, I’d like to think that it had some spillover effect, and people understood that they wouldn’t have IFC as an investor if they didn’t operate with very high standards of integrity.” She cofounded the Emerging Markets Private Equity Association in 2004 to further entrench professional standards in the industry.
Barger has found no conflict between being an investment manager and her charge to improve the societies that are affected by her work. In fact, she argues that good business is often good for society. “An internal study of IFC projects showed very high correlation between high development impact and high financial return. That’s what we who have been working in this area intuitively knew to be true. That if you invest in a poor company that’s badly run, that does not give good returns to its shareholders, it’s probably not very sustainable and probably not creating a lot of jobs. It’s probably not contributing a lot to GDP.”
Barger adds, “Investing is just so much fun.” After three years leading the IFC and World Bank’s corporate governance initiatives, Barger recently announced that she plans to retire and start her own emerging markets investment venture. Thinking about the evolution of global capital markets since she started at the IFC — more and more markets opening to investors, governments improving macroeconomic policies — Barger says, “I have to say, it’s very nice to have been here for long enough to see the world change.”
By Jonathan T.F. Weisberg
Photograph by Tony Rinaldo
Director of Corporate Governance, World Bank and International Finance Corporation
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In the interview that formed the basis for this piece, Teresa Barger provided the following insights about the development of rules in international markets and how clear rules benefit the poor.
Q: Does the development of a stock market tend to go hand-in-hand with more investment flowing into a country?
Yes, but not solely. It helps when there are also some big macroeconomic forces at work.
We were involved in the creation of the Novo Mercado in Brazil. In 2000, the Brazilian stock exchange, called BOVESPA, was at its wit’s end. They had a huge number of delistings, and liquidity was nowhere. Having fewer and fewer companies listed on your stock exchange is never fun.
Success has many fathers, so we were only one of the parties, but we brought together an investor task force that went down to Brazil and talked about the issues for them, as investors, with BOVESPA. Also, some of the BOVESPA people then went to visit our task force members in New York and elsewhere.
It was very clear that, from the investors’ point of view, there were some structural problems in Brazil. The biggest one was that there were two classes of shares in most companies, voting and nonvoting. And most companies were structured so that the controller could own 17% of the shares and control 100% of the vote. This was probably the single biggest structural problem in the market.
We worked, along with others, with the Brazilians on what to do about it. They created a new segment within BOVESPA called the Novo Mercado, which is a good-governance segment. The companies on Novo Mercado can only have one class of shares. They have to give tag-along rights to minority investors. They have to abide by IFRS [International Financial Reporting Standards] accounting. And they also agree to arbitration in shareholder disputes.
Virtually all new listings in Brazil have been on the Novo Mercado, and the Novo Mercado has attracted more than 100 new listings. That is huge. There are very, very few markets that, in a period of just a few years, get that many new listings. And it’s been a huge boon for the financial markets of Brazil. It’s also been a very nice fillip for corporate governance, because it helps us all make our point, which we make ad nauseam, which is that it’s just good business to have good corporate governance. It lowers your cost of capital, lowers your cost of debt, and increases your productivity.
Q: It seems like an example of how good rules make a market much more dynamic.
Absolutely. And, in making rules, you always want to reach for a min-max solution — the minimum regulation that will give you the maximum effect. We very much believe in rules. In addition to being a director of the IFC for many years now, I’ve also been a director of the World Bank for the last three years. And to the extent that the World Bank is primarily occupied with policy work in the private sector, the policy work really is about the rules that make markets work.
Q: Would you say the Novo Mercado is a good example of what it takes?
It’s a great example, because you’ve got new rules that are tougher on companies, but that companies are gladly abiding by because it lowers their cost of capital. It also, many times, aligns the company with the values of their customers.
Take, for example, Natura, which is one of the companies in our Companies Circle, which we developed in Latin America. They make natural cosmetics — they use no artificial dyes or materials. Their image is of a responsible company, so how could they be a responsible company without being responsible to their minority shareholders? They feel that their commitment to corporate governance nicely mirrors their commitment to their customers and their commitment to being responsible members of the community.
Q: And clear rules are always going to be a little less arbitrary than an individual’s decision.
Very good point. This was why I was concerned with the Basel II Framework. The Bank of International Settlements came out with guidelines on capital adequacy in Basel I. In that, they said that banks should have a capital base equal to 8% of their asset base. Very simple. And then a lot of banks complained, because, in fact, some banks had much less risky assets and some had more risky assets, and they thought they should be allowed to risk-adjust the capital. Under Basel II, there are a couple of different plans that one can sign up for, but in one of the plans, the bank assesses the risk of its specific portfolio and then negotiates with the central bank as to how much capital they should have.
I just can’t imagine a trickier situation for some companies. The central bank governor, who is always part of a political party, could say, “For you, my friend who made the campaign donation, you have very low capital needs. And for you, my enemy who funded the other party, you have a very high capital requirement.”
One of the very nice things about this new emphasis on the rules for doing business is that having clear rules which are consistently applied on the basis of objective factors is pro-poor. It helps poor people if they can go into an office and say, “Here are the five papers I need to create a new company, and I need the stamp that says that all these five papers are here.” It’s binary — I have my papers or I don’t have my papers. And the bureaucrat behind the desk has no discretion to say yes or no. He can just say, “I only count four” or “I count five.” So having clear rules is much more favorable to poor people than having opaque rules -- where “who you know” becomes important. Poor people are less likely to know the important people in an economy.
The World Bank started a very successful project called the Doing Business indicators. The Doing Business indicators are fascinating because they simply measure 10 items for over 170 countries. Ten items: starting a business, dealing with licenses, hiring and firing workers, registering property, getting credit, protecting investors, paying taxes, etc. Within these ten, there are some sub-indices, so all together there are, roughly, 40 items. How many procedures does it take to get a license? How many days does it take? What’s the cost as a percent of the income per capita of that country? One of my favorites is enforcing contracts. How many days does it take to enforce a contract?
So all we do is gather this data and publish it. And countries start competing with each other to provide simpler and simpler rules for doing business for their country. The president of one South American country called up the fellow whose name is written in the report and said, “How do I get enforcement of contracts down from 360 days to 45 days? That’s my goal.” [For more on Doing Business, see www.doingbusiness.org.]
Q: And they’re competing because the reward is to get more investment in the country?
Exactly.
Q: And is there a tendency toward more unified global rules as a result of that kind of competition?
That’s such an interesting question. Probably, the answer is yes. I’m not sure if we have the data on that.
I think, worldwide, there is a convergence in the sense that everyone — all investors around the world — wants to have a court system that’s objective and fair and fast and rules that make sense and are applied fairly. There is a great rethinking in the world as between local, generally accepted accounting principles and the adoption of IFRS, for example. Now, a lot of people will say, “We have specific circumstances here. We have to keep this local.” And a lot of investors will go along with that. I would say there’s a tendency towards commonality in some kinds of regulations, but not all. And then there are some countries which opt out, like Venezuela.
Q: In what ways is investing in emerging markets different from investing in more developed countries?
The biggest difference overall is that, in the emerging markets, most of the companies are controlled by a family or founder, whether they’re public or private. In the U.S. and in the U.K., companies, particularly listed companies, tend to have widely dispersed shareholding. The problems you encounter in widely dispersed shareholding situations often have to do with the “imperial manager.” How do you make sure that the folks managing the company are working in the best interests of the shareholders and everybody else?
In the emerging markets, as a third-party investor, your main concern has to do with self-dealing in relation to related-party transactions that are robbing the company, either of opportunity or just robbing the company. Tunneling, shifting of assets, asset stripping, over-invoicing, under-invoicing, giving contracts to your cousin, things like that. Now, we’ve been around. We’re realistic enough to know that not all related-party transactions are bad transactions. Sometimes the best fellow in the entire market to be doing your logistics is your cousin. There are only so many educated and smart and good businessmen, and your cousin might be one of them. So these things have to be taken with a very commonsensical approach, which we pride ourselves on. But that’s, I think, one of the biggest structural differences.
Then, the other obvious difference is in the business-enabling environment. I’m doing a study, now, on policy impediments and expedients to private equity. The U.S. and the U.K. have enormous advantages over other markets in domestic private equity, because they are good places for people to start and build and run companies.
In a lot of emerging markets, some of the things that might be taken for granted by a U.S. entrepreneur are tough. Some of these are the “Doing Business” items. How long it takes to get a permit. How much money is required to become a company. The minimum capital requirement to set up a new company in the U.S. is zero. In Saudi Arabia, last year, it was 1,200% of income per capita. I think I worked that out to be about $100,000. So, there are a lot of these differences in the rules. [Note: Saudi Arabia just dropped its minimum capital requirement this year and is now in line with the US.]
Note from Teresa: As much as I have loved working at the IFC, I am leaving in October 2007 to set up my own emerging markets corporate governance fund. I feel that I will actually be continuing the mission of the IFC, but will be doing it in a private sector context.