THE OECD CORPORATE GOVERNANCE

PRINCIPLES AND THE ONGOING REVIEW

Grant Kirkpatrick OECD

Policy Dialogue on Corporate Governance in China
Shanghai
February 25, 2004
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Core Elements of the OECD Principles

1.
2.

3.
4.
5.

The rights of shareholders

The equitable treatment of
shareholders
The role of stakeholders
Disclosure and transparency
The responsibility of the boards
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Why 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
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The call for an

assessment/review of the
Principles

OECD 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.
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THE 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.

Policy 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

The 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 highlevel roundtables chaired by the Secretary-General
A survey of corporate governance developments in OECD
countries since 1999, and a summary of experiences in nonOECD 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.
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Final version will go to Ministers in May

The current state of the

discussions, chapter-by-chapter:
- Major issues
- Possible solutions

Chapters I and II, The rights of shareholders

(plus their key ownership functions) and
their equitable treatment

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The 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
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But 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

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Improving 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
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Ownership 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
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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.
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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.

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The 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.
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III. 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
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Stakeholders 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.
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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
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IV Disclosure and transparency

Objective is to ensure meaningful and
reliable disclosure, which allows markets
to judge the fair value of a company.

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Key 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
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The 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.
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Reactions

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

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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.
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The 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
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with IAS.

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.
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V. Towards independent and more effective

boards

Moves towards increasing not only the number of nonexecutive 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.
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Board 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

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Typology of Directors
Executive Directors Knowledge of Day-

To Day Operations;
Communicate
Implement
Decisions

Management NexusFocused

Non-Executive
(Outside)
Directors

Strategy; Continuity; Long-Term Planning;

Expertise
Oversight of Key Risk
Areas

Independent
Directors

Perspective;
Objectivity

Conflict-Sensitive
Functions

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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.
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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 evenhanded 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
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countries go in same direction.

The 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.
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Implementation 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.
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Steps 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.
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