Title: THE%20OECD%20CORPORATE%20GOVERNANCE%20PRINCIPLES%20AND%20THE%20ONGOING%20REVIEW
1THE OECD CORPORATE GOVERNANCE PRINCIPLES AND THE
ONGOING REVIEW
- Grant Kirkpatrick OECD
- Policy Dialogue on Corporate Governance in China
- Shanghai
- February 25, 2004
2Core Elements of the OECD Principles
- The rights of shareholders
- The equitable treatment of shareholders
- The role of stakeholders
- Disclosure and transparency
- The responsibility of the boards
3Why core principles?
- Enormous variation in ownership and control
structures in the world - No single model of good corporate governance but
need for a global language - Detailed codes, best practices should be
established at national and regional levels - Objective to identify common elements or core
principles underlying good corporate governance
across the different systems a multilateral
policy framework
4The call for an assessment/review of the
Principles
5OECD Ministers at their 2002 Annual Meeting
- Observed that the integrity of corporations,
financial institutions and markets is essential
to maintain confidence and economic activity and
to protect the interests of stockholders. - Agreed to implement best practices in corporate
and financial governance which entails an
appropriate mix of incentives, balanced between
government regulations and self regulation,
backed by effective enforcement. - Agreed to survey recent experience and assess the
Principles of Corporate Governance.
6THE FINANCIAL STABILITY FORUMS 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.
7Policy concerns and driving forces
- Corporate scandals and large failures,problems of
compensation and legitimacy. - New awareness of links between Corporate
governance arrangements and growth - Reveal need for improving
- Transparency and disclosure
- Alignment of incentives
- Monitoring by boards
- Shareholder rights
- Implementation and enforcement
-
8The Review Process and Timetable
- OECDs Steering Group on Corporate Governance has
carried out the Review (30 OECD Governments,
World Bank, IMF, IOSCO, BIS, Basel Banking
Committee, BIAC, and TUAC) - Consultations were held with a wider group of
interested parties, with non-OECD countries, and
with several high-level roundtables chaired by
the Secretary-General - A survey of corporate governance developments in
OECD countries since 1999, and a summary of
experiences in non-OECD countries were prepared
are available on our web site -
www.oecd.org/daf/corporate-affairs - Draft revised Principles were placed on the web
for comment in January 2004 and resulted in some
100 replies which are posted on our web site. - Final version will go to Ministers in May
9The current state of the discussions,
chapter-by-chapter - Major issues - Possible
solutions
10Chapters I and II, The rights of shareholders
(plus their key ownership functions) and their
equitable treatment
11The corporate governance framework should protect
shareholders rights
- Right to have shares registered and secure
- Should be able to take part in shareholder
meetings and in major decisions concerning the
firm - Equitable treatment of all shareholders, foreign
and minority especially - Should not be abused by insiders
12But in practice the rights are often weak and
redress is difficult
- Need for greater voice through strengthened
voting rights and information - More active institutional investors and
disclosure of their conflicts of interest - In presence of major shareholders improve
protection of minority shareholders - Takeovers often blocked
13Improving Shareholder voice
- The ability of shareholders to elect board
members o their choice, to table proposals and
ask questions of directors is, in reality, very
limited in a number of countries. - Should shareholders be given more decision rights
with respect to board and executive compensation? - Need to avoid shareholders second guessing
management
14Ownership and shareholding structures
- The transparency of ownership and shareholding
structures, including pyramids that result in
control rights being greater than cash flow
rights is limited in many cases. - The Regional Roundtables have called for
improvements in the disclosure of beneficial
ownership to assist in efforts to curb abusive
related party transactions. - Beneficial ownership information also is
important for the battle against international
financial crime
15- Regional Roundtables on shareholder rights and
equitable treatment - Typically high degree of concentrated ownership,
with control through pyramids and cross-holdings,
combined with weak shareholder protection and
insufficient disclosure equitable treatment of
shareholders is a pivotal issue. - Need to facilitate the exercise of shareholder
rights. - Minority shareholder rights in relation to
changes in capital structure, in corporate
control and delisting a concern (lack of
pre-emptive or tag-along rights, etc.) - Voting of depository receipts.
- Frequent abuse of related party transactions
improved disclosure needed.
16- Improving and facilitating the exercise of
voting rights - Exercise of voting rights varies widely
- VOTES CAST BY INVESTORS AS A OF TOTAL
- U.S. Japan
U.K. - 83 71-80
50 - Greater use of electronic communications?
- Institutional investors that act as fiduciaries
being pressed to be more active. - Legal and practical problems to cross-border
voting widespread among the OECD countries.
17The rights and responsibilities of institutional
investors.
- While institutional ownership is growing in size
and importance, institutional investors typically
play a limited role in corporate governance. - The issue is not always to add to their already
established rights as shareholders. The problem
is that they do not make use of them. - This is partly due to a lack of proper incentives
and sometimes due to restrictions on their
ability to set aside sufficient resources to
carry out key ownership functions in an informed
way. - Should those who act as fiduciaries disclose
their voting policies. If they do, it would also
be natural to ask that they disclose how they, in
practice, will implement these policies for
example what resources will they set aside to
carry out their ownership functions.
18III. The role of stakeholders in corporate
governance
- Stakeholders include creditors, depositors and
employees - Encourage active co-operation between between
company and stakeholders - Performance enhancing mechanisms should be
available - Redress for violation of legal rights
- Access to relevant information
19Stakeholders Issues are complex and difficult.
Best to consider two major groups- creditors and
employees separately
- Creditor rights are important for the terms and
conditions of finance - These rights arise from bankruptcy and other
laws, but in some countries these rights are
deficient and/or the courts are poorly structured
to enforce them. - Recent reforms in Germany, Japan and Italy.
- Reorganization procedures and the rights of
creditors to remove management vary widely. - World Bank and UNCITRAL developing principles.
20- Regional Roundtables have stressed their concerns
about corporate practices that impede the
opportunity for stakeholders - to seek redress for violation of their rights.
- To communicate their concerns about illegal or
unethical transactions they have observed or
asked to undertake. - Such complaints can provide important information
to shareholders. - In response to such concerns, in a number of
countries, boards are encouraged to - Protect whistle blowers
- Give them confidential access to someone on the
board - Establish an ombudsman to deal with complaints
21IV Disclosure and transparency
- Objective is to ensure meaningful and reliable
disclosure, which allows markets to judge the
fair value of a company.
22Key elements of disclosure and transparency
- Major share ownership and voting rights
- Material foreseeable risk factors
- Full financial disclosure
- Governance structure and policies
- Information should be prepared audited and
disclosed in accordance with high standards of
accounting, audit and non-financial disclosure - Regular disclosure
23The integrity of the disclosure process and of
transparency have been called into question
- Rules based accounting lead to show me I cant do
it mentality. - Holes such as derivative, pension and options
accounting too wide. - Audit independence called into question. They
think they are employed by management. - Standards of the big 4 not what they were
expected. Peer review failed.
24Reactions
- Auditor independence strengthened both
structurally and by rules. - Move effective responsibility to another organ
than management - Convergence of accounting standards -- but
implementation an issue. - Greater consideration of disclosure of material
information and conficts of interest - More calls for non-financial disclosure
25- IOSCO released (Oct. 2002) principles for
national standards covering auditor independence
and auditor oversight. - Reflect a growing international consensus.
- Many in OECD consider these principles to be
minimum requirements. - Importance of audit firms establishing internal
monitoring and control systems. - Auditors should be subject to an independent
auditor oversight body, or if a professional body
plays that role, it should be overseen by an
independent body.
26The Financial Stability Forum has underscored
the importance of progress towards a single set
of high quality principles-based accounting
standards, with due regard to financial stability
concerns.
- US moving closer to a principles-based system.
- Process in place to work towards convergence of
IAS and US GAP. - EU (including its candidate states), Australia,
NZ, Hong Kong, Russia, Singapore to adopt IAS. - Indeed, GAAP Convergence 2002 survey of 59
countries indicated that all but three ( Japan,
Saudi Arabia and Iceland) intend to converge
with IAS.
27- Ensuring that corporate service providers work
in the interests of shareholders - In exercising ownership rights, shareholders have
to rely on agents (brokers, investment advisors,
analysts, rating agencies) for information. - Recently a number of cases of serious conflicts
of interest and inappropriate incentives have
come to light. - Responses include changes in stock exchange rules
and professional codes of conduct, structural
changes such as firewalls, and increased
disclosure, e.g., of material conflicts of
interest.
28- V. Towards independent and more effective boards
- Moves towards increasing not only the number of
non-executive directors but also ensuring they
are independent - 1. UK - Higgs Report
- 2. Japan new company law
- 3. US
- Commission on Public Trust and Private
Enterprise NYSE - Sarbanes-Oxley
- Independence of judgement and independence from
management.
29Board Integrity Issues
- Responsibility to Whom? Is it Clear?
- Duty of Loyalty / Duty of Care
- Status of Independent Directors
- Legal Status of Committees
- Alternate / Supplementary Directors
30Typology of Directors
Executive Directors Knowledge of Day-To Day Operations Communicate Implement Decisions Management Nexus-Focused
Non-Executive (Outside) Directors Strategy Continuity Expertise Long-Term Planning Oversight of Key Risk Areas
Independent Directors Perspective Objectivity Conflict-Sensitive Functions
31- Separation of Chairman and Chief Executive
Officer? - UK view Separation (with the Chairman also
independent) would help ensure an appropriate
balance of power, increase accountability and
enhance capacity of the board for independent
decision making. - Many in US and France disagree. In US, while
Commission on Public Trust proposed a separation,
other US codes and principles do not. NYSE
reforms may set precedent. - But there is recognition that the board should be
given more structure. - For example, independent or non-executive
directors should be able to meet separately under
some lead director who can the channel opinions
to the Chairman/CEO.
32- A number of countries have moved to require
better disclosure of board and executive
compensation - Nomination and appointment of the board is a key
corporate governance decision transparent and
even-handed nomination and recruitment process is
needed. - Remuneration including information on the
structure of compensation schemes and termination
conditions relevant not only for financial
implications but also for assessing incentives
and performance. - Some countries call for disclosure of individual
remuneration others ask for only aggregate board
compensation. - NYSE and NASDAQ have proposed independent
compensation committees codes and principles in
other countries go in same direction.
33The use of special purpose committees
- The use of board committees for such tasks as
audit, remuneration, nomination, etc. has spread
rapidly around the globe in the last five years. - However, it has become quite evident that the
underlying concepts are not always well
understood and that such committees serve quite
different roles in different countries. In the
worst case they have become nothing but
window-dressing. - In order to avoid confusion and inform investors
about the added value of board committees, it
has, therefore, been suggested that the
composition, mandate and remit of committees must
be well defined and disclosed, even if they are
established on a voluntary basis.
34Implementation and enforcement of laws,
regulations and codes
- Enacting laws, regulations and codes that meet
international standards is the easy step
effective implementation and enforcement is much
more difficult. - Scope and content of self regulation is under
scrutiny incentives facing the professions may
conflict with their integrity and credibility to
uphold and enforce expected standards. - Capacity and independence of regulatory and
enforcement authorities are a serious concern,
especially in emerging market and transition
countries. - Legal and regulatory framework should provide
shareholders opportunity for effective legal
redress.
35Steps toward implementing a more robust corporate
governance regime
- Review regulatory costs of any proposed measure
and whether there are any more effective
instruments at hand. - Strengthen market disciplines as they are the
most effective continuing discipline on
management. Give emphasis to getting incentives
aligned properly. - Strengthen the ownership function of
shareholders. - Monitor the governance system particularly the
effects of new measures.