THE REVISED OECD PRINCIPLES OF CORPORATE GOVERNANCE

1
THE REVISED OECD PRINCIPLES OF CORPORATE
GOVERNANCE

• Daniel Blume OECD

2
Presentation

• What are the major issues and recommendations
  emerging from the OECD review of its Principles
  of Corporate Governance?
• How do the Principles address information
  disclosure issues?
• How can OECD support further corporate governance
  improvements in the future?

3
Policy concerns and driving forces
New awareness of links between corporate
governance arrangements and growth
Corporate scandals and large failures
Problems of Compensation and legitimacy
need for improving
Transparency and disclosure Alignment of
incentives Monitoring by boards Shareholder
rights Implementation and enforcement
4
OECD Ministers at their 2002 Annual Meeting

• Observed
• Agreed
• Agreed

that the integrity of corporations, financial
institutions and markets is essential to maintain
confidence and economic activity and to protect
the interests of stockholders to implement best
practices in corporate and financial governance,
which entails an appropriate mix of incentives,
balance between regulations and self regulation,
backed by effective enforcement. to survey
recent experience and assess the Principles of
Corporate Governance.
5
Why core principles?
Detailed codes, best practices should be
established at national and regional levels
Enormous variation in ownership and control
structures in the world
No single model of good corporate
governance but need for a global language

• Objective
• to identify common elements or core principles
  underlying good corporate governance across the
  different systems
• a multilateral policy framework

6
FINANCIAL STABILITY FORUM GUIDANCE FOR THE REVIEW
Recent improvements in national standards should
be reflected in the revised Principles
While the Principles themselves should remain
general, they should be strengthened
Provide more substantial guidance on
applicability, implementation and enforcement in
different economic and legal contexts
7
The Review Process and Timetable
OECD Steering Group on Corporate Governance
Ministerial Meeting May 2004
Public Consultation On the Web
Survey of CG Developments since 1999
Experiences in non-member countries
Consultations with interested parties
Consultations with non-OECD countries
Consultations with high-level roundtables
8
The major changes to the core elements of the
OECD Principles
NEW

1. Implementation and enforcement
2. Improved rights of shareholders
3. The equitable treatment of shareholders
4. Role of stakeholders / whistle blower protection
5. Improved disclosure and transparency
6. Tightened responsibility of the boards

9
How do the revised principles tackle major issues
ISSUES
CHAPTERS

1. Controlling executive and director remuneration
2. Abuse in company groups
3. Self dealing and abuse by insider
4. Improving financial market integrity
5. Improving enforcement
6. Better exercise of ownership

1. Implementation and Enforcement
2. The rights of Shareholders
3. Equitable Treatment of Shareholders
4. The role of stakeholders
5. Disclosure and transparency
6. The responsibility of the boards

10
How do the revised principles tackle major issues
Boards to align key executive board
remuneration with the longer terms interests of
company and shareholders And establish a
remuneration policy Statement that special
remuneration committee with independent
directors regarded as best practice in more
countries The remuneration policy to be
disclosed Shareholders to have ability to make
their views known on the policy and to approve
equity components of the scheme

1. Controlling executive and director remuneration

Chap VI
Chap VI
Chap V
Chap II
11
How do the revised principles tackle major issues

• Clear
• statement
• on fiduciary duties
• of board members to
• company, not to the group
• Explicit statement that boards
• to review related party transactions
• using independent directors
• More general statement of board independence
• to cover those in a position to influence the
  company
• and not just management
• Stronger call for protection of minority
  shareholders
• Stronger annotations to disclosure of related
  party transactions
• Stronger principle on board and executive
  disclosure of material interests

• Abuse in company groups

Chap VI
Chap VI
Chap VI
Chap III
Chap V
Chap III
12
How do the revised principles tackle major issues

• Strengthened
• principle calling
• for boards to establish
• ethical guidelines and
• effective compliance procedures
• Boards to oversee internal controls and
• provide confidential access to whistleblowers
• Tightened disclosure standards
• to the board and to the market
• Strengthened criteria for board independence
• Greater possibilities for shareholders to
  question boards and to participate

1. Self dealing and abuse by insiders

Chap VI
Chap VI
Chap V
Chap VI
Chap II
13
How do the revised principles tackle major issues

• Improved
• Enforcement
• Better disclosure by
• the company including
• related party transactions
• Those providing analysis and advice
• to be free of conflicts of interest
• More emphasis on auditor independence
• and reference to IOSCO standards
• Accountability of external auditors to
  shareholders
• and duty of professional care to the company
• Boards to focus on overseeing internal controls
• and major accounting assumptions through
  independent audit committee

Chap I

1. Improving financial market integrity

Chap V
Chap V
Chap V
Chap V
Chap VI
14
How do the revised principles tackle major issues

• Greater
• role for
• shareholders and
• improved transparency
• Tightening of fiduciary
• responsibility of boards
• Improved financial market integrity
• Clear objectives for policy in establishing a
• system leading to transparent and efficient
  markets
• Supervisory, regulatory and enforcement
  authorities
• should have authority, integrity and resources to
  fulfil duties
• Clear division of responsibilities between
  domestic authorities
• Legal and regulatory instruments to be
  transparent and enforceable

Chap II V

1. Improving enforcement

Chap VI
Chap V
Chap I
Chap I
Chap I
Chap I
15
How do the revised principles tackle major issues

• Improved
• possibilities
• for shareholders to
• consult with each other
• on key governance issues
• Inst. Inv. acting in a fiduciary
• capacity to declare voting policies and
• how they are handling conflict of interests
• Eliminating impediments to cross border voting
• More detailed annotations covering use of proxy
  voting
• and conduct of shareholder meetings
• Call for effective shareholder participation in
  key decisions
• such as the nomination and election of board
  members,

• Better exercise of ownership

Chap II
Chap II
Chap III
Chap II
Chap II
16
The OECD Principles chapter on Disclosure and
Transparency

• The corporate governance framework should ensure
  timely and accurate disclosure on all material
  matters, including financial situation,
  performance, ownership and governance of the
  company.
• At minimum annually, or even semi-annually or
  quarterly or more frequently for material
  developments.
• Material info is that information whose omission
  or misstatement could influence economic
  decisions taken by users of information.
• Should be simultaneous to all shareholders.
• Requirements should not create unreasonable
  administrative or cost burdens.

17
Why is transparency and disclosure important?

• Strong transparent disclosure regime is pivotal
  for market-based monitoring of companies and
  central to shareholder ability to exercise
  ownership rights.
• Can be powerful tool for influencing companies
  and protecting investors.
• Can help to attract capital and maintain
  confidence in the markets.
• Weak disclosure can contribute to unethical
  behaviour and loss of market integrity, costing
  not only company but economy as a whole.
• Insufficient or unclear information may hamper
  ability of markets to function, increase cost of
  capital and result in poor resource allocation.

18
What information should be disclosed?

• Financial and operating results of the company.
• Company objectives.
• Major share ownership and voting rights.
• Remuneration policy for board members and key
  executives, and info about board member
  qualifications, selection process, other company
  directorships and whether they are independent.
• Related party transactions.
• Foreseeable risk factors.
• Issues regarding employees and other
  stakeholders.
• Corporate governance codes and policies, and how
  they are implemented.

19
Other key disclosure issues

• Financial, non-financial and accounting
  information should be prepared and disclosed
  consistent with high quality, internationally
  accepted standards.
• Annual audit should be prepared by independent,
  competent qualified auditor to provide assurance
  that statements fairly represent company
  financial position and performance.
• External auditor should be accountable to
  shareholders and owes duty to the company to
  exercise due professional care.

20
Other key disclosure issues, continued

• Channels for disseminating information should
  provide for equal, timely and cost-efficient
  access to the relevant information by users.
• The corporate governance framework should be
  complemented by an effective approach for
  addressing and promoting the provision of
  analysis and advice by analysts, brokers, rating
  agencies and others that is free from material
  conflicts of interest that might compromise the
  integrity of their analysis and advice.

21
Supporting guidance on disclosure

• IOSCO
• Principles of Auditor Oversight
• Principles of Auditor Independence and the Role
  of Corporate Governance in Monitoring Auditor
  Independence
• Statement of Principles for Addressing Sell-Side
  Securities Analyst Conflicts of Interest
• Statement of Principles Regarding the Activities
  of Credit Rating Agencies
• OECD
• Guidelines for Multinational Enterprises
  (ethics)
• Options for Obtaining Beneficial Ownership and
  Control Information

22
Encouraging active use of the Principles

• OECD Ministers adopted revised Principles in May
  and encouraged the wide dissemination and active
  use of the Principles, and a sustained policy
  dialogue among governments and other concerned
  parties.
• The World Bank will take into account changes and
  update its framework for reviewing corporate
  governance performance in developing countries as
  part of the ROSC financial review process.
• OECD will develop own process for reviewing OECD
  country progress.
• Regional Roundtables on Corporate Governance
  organized by OECD in partnership with World Bank
  Group (and supported by GCGF and CIPE) will
  continue to promote reforms.
• Roundtables in Asia, Eurasia, Southeast Europe,
  Russia and Latin America.
• GCGF also supports Forums in MENA, Africa and
  Caribbean regions.

23
How can OECD support future efforts in the region?

• OECD MENA Initiative on Investment and Governance
  for Development
• Building on previous meetings addressing
  governance and investment issues in Beiruit and
  Istanbul, meeting in Amman planned June 30-July
  1.
• Five investment-related sub-topics to be
  addressed
• Transparent and open investment policies
  (integrity)
• Encouraging investment promotion agencies to act
  as driving forces for reform
• Providing a Tax Framework for Investment
• Investment strategies in support of
  diversification
• Improving Corporate Governance

24
OECD MENA Initiative on Investment

• It is proposed to create an overall steering
  group on investment and one regional working
  group for each sub-topic.
• Regional dialogue on corporate governance has
  already been launched through separate process
  with GCGF, CIPE. This process should continue
  and be enlarged.
• As a MENA Roundtable on Corporate Governance, it
  would be oriented toward providing fuller access
  to international expertise and dialogue on
  corporate governance, and development of regional
  and possibly country-specific recommendations.

25
Next Steps

• Conclusions of this meeting to be reported to
  Amman meeting, June 30-July 1, 2004, and
  follow-up plans to be considered.
• Propose to launch three year Roundtable programme
  from late 2004 to late 2007
• Phase 1 Updating of assessments of current state
  of corporate governance (country visits,
  meetings).
• Phase 2 Completion of action plans (White
  Paper).
• Phase 3 Review, monitoring and co-ordination to
  promote progress.
• Your feedback welcome will report to my
  Director and co-ordinate follow-up with you on
  participation from the region.