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The OECD Principles: Important Issues of the Multilateral Policy Dialogue on Corporate Governance

Elena Miteva EconomistCorporate Affairs, Directorate for Financial and Enterprise Affairs

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The OECD Principles: Important Issues of the Multilateral Policy Dialogue on Corporate Governance

Improving the function and the role of the boardsEnsuring high quality auditsHow can institutional shareholders become effective ownersHow should codes and principles respond to the need to keep down the cost of regulationOther topics of concernThe role of the OECD

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The Six Chapters of the Principles (2004)

The Six Chapters of the Principles (2004)

Full text www.oecd.org/daf/corporate/principles

I. Ensuring the basis for an effective corporate governance framework

II. The rights of shareholders and key ownership functions

III. The equitable treatment of shareholders

IV. The role of stakeholders in corporate governance

V. Disclosure and transparency

VI. The responsibilities of the board

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We are now loading the board with more responsibilities…

Prime function Supervise management, oversee strategy and internal control systems. A shift in emphasis in

single board systems, where boards have played a role as an advisor to CEO.

In addition Accountability to shareholders and other parties on managerial compensation, overseeing audit of

financial statements, conflicts of interest and related party transactions

To fulfil these Boards should be able to exercise an independent objectives objective judgement, independent from management and others in a position to control the firm

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…although bords have not always proved effective, they are changing

Concern has grown on how boards actually function Rubber stamp boards Boards “captive” of major shareholders, management, a political

party Slow to exercise control over or question CEOs

Duties of boards have often been exercised by members compromised by conflicts of interest Ample evidence from the US and Europe

In taking up new duties, board composition and structures are changing Reduced the size of boards Increased number of meetings and preparation time Specialised committees Increased fees Towards professional board members (independence issues)

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The move to more independent boards

Many countries focus on independent directors to avoid a conflict of interest

To deal with related party transactions, audit and remuneration US, UK: at least half of the board Germany: wholly independent Supervisory board

What do we mean by independence of directors?

Independence from a major shareholder or absence of business relations with the firm

Boards to determine the meaning of independence

A move towards improved checks and balances

About compliance, but also About improving performance

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But this does not mean that all should be independent directors

“Independents” might well lack valuable “insider” information

Balance between “independents” and “insiders”

Should the ratio be prescribed by law?

US: NYSE listing requirement UK: “apply or explain”

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Making sure that independent directors don’t become captured

Can be sure that objectivity and independence will continue once directors are serving on the board? Making the directors legally liable: class action law suits But: may result in difficulties of attracting good quality

investors And may run counter the principle of collective responsibility

of board members A more fundamental mechanism

Empowering shareholders to elect and remove board members

European countries: legal penalties of little relevance if board members can be easily removed

US: stronger case for legal liability

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Defining the duties of the board

Collective board responsibility expressed by fiduciary responsibility in many common law countries

Duty of loyalty to the company and its shareholders Change needed to reflect the expanding tasks of the board In civil law countries, the concept of fiduciary duty may not be

adequately specified – priority for EU action

Company groups, including pyramid structures, raise special policy issues

Potential for abuse by « tunelling » from one company to another with a different goup of shareholders

Define duty of loyalty to the company and not to the group

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Ensuring high quality audits: what the firms can do?

Public confidence in audited financial statements is crucial for preserving financial market integrity and trust in boards and management

Concern about how to ensure high quality standrds

Audit scandals across the world – Parmalat Business plans of accounting firms may still see management as their

client The Revised Principles emphasise that the ultimate responsibility for

ensuring an independent audit must lie with the board Audit committee External auditor accountable to shareholders

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Ensuring high quality audits: what is the role of the authorities

Many countries are now moving to establish independent public audit oversight bodies (advocated also by the International Organisation of Securities Commissions, IOSCO)

According to another approach, countries ban or restrict auditors from providing other services, such as tax advice and consulting: Greater transparency, reduced conflicts of interests EU Accounting Directive May have a negative impact by reducing recruitment opportunities Audit fees will rise

Audit liability as a tool for ensuring professional care and enforce accountability: US, UK: full or penalty liability for auditors Audit certificates Proportional liability (Australia), cap on liabilities (Germany),

contractual agreement (Netherlands and Spain)

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How can institutional investors become effective owners?

Institutional shareholders have become major owners of listed companies

Institutional investors and conflicts of interests

Institutions pursuing political agenda, which is not in the interest of their beneficiaries

Need for improved transparency: disclosure of voting of stocks (US), call for disclosure of voting policies (Netherlands, Spain, UK)

New policies bringing about new concerns: will they contribute to effective ownership?

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How should codes and principles respond to the need to keep down the costs of regulation?

Rising regulatory costs: Sarbanes Oxley (US)

Are costs worthwile – if the end result were improved performance and avoidance of major corporate failures

Codes and Principles

Voluntary or Impelmented on a « comply and explain » basis Greater flexibility and cost saving

Attention to be paid to

Actual compliance with voluntary codes Quality of explanation for « comply or explain » codes

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In conclusion

Process of trial and error

Need for a policy dialogue

OECD role

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Founded in 1961 as a follow on to the Marshall Plan, the Organisation for Economic Co-operation and Development promotes international codes, guidelines and principles by which countries can make their economic systems compatible.

Co-operation programmes (49)Co-operation programmes and participation in OECD bodies* (16)OECD Members (31)

* Non-Members not participating in OECD bodies take part in OECD meetings and activitiesupon ad hoc invitations.

OECD Member Countries and Co-operating Countries

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For further information...

On OECD activities, regional roundtables and the MENA Working Group on corporate governance

www.oecd.org/daf/corporate-affairs