Social and Corporate Governance

Joseph Winthrop B. GodoyMMT – Batch 36

De La Salle LipaMaster in Management Technology

Organization for Economic Cooperation and Development

OECD 2014 Principles of Corporate

Governance

Inequality worst in decades in range of countries – OECD

• Rising inequality threatens social cohesion and growth

• The Organization for Economic Cooperation and Development (OECD) says most of its 34 member countries has seen a growing widening in the inequality gap - www.rappler.com

• Inequality: In 2012 the bottom 40% owned only 3% of total household wealth in 18 OECD countries https://youtu.be/xyprxOa1H1s

• The gap between the rich and poor in a range of countries has reached its widest in 30 years and the trend has harmed growth, the OECD said

Principles of Corporate Governance

III. Equitable Treatment of Shareholders

1. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

Draft of Corporate Governance Principles

IV. Role of Stakeholders in Corporate Governance

1. “ “The corporate governance framework should The corporate governance framework should recognise recognise the rights of stakeholders established by law or through the rights of stakeholders established by law or through mutual agreements and encourage active co mutual agreements and encourage active co-operation operation between entities, including family owned businesses and between entities, including family owned businesses and state state-owned/controlled enterprises, and stakeholders in owned/controlled enterprises, and stakeholders in creating wealth, jobs, and the sustainability of creating wealth, jobs, and the sustainability of financially sound enterprises. financially sound enterprises.” ”

Draft of Corporate Governance Principles

Benefits To SocietyHelps create competitive, modern

and healthy companies An effective tool against corruptionHelps attract investment Helps foster healthy competition Helps prevent banking crises

Perspective of the Corporation

Maximizing value subject to meeting the corporation’s financial, legal and contractual obligations. Board of directors must balance the interests of shareholders with stakeholders: employees, customers, suppliers, investors, communities in order to achieve long-term sustained value. (World Bank)

III. The Equitable Treatment of ShareholdersThe corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

A. All shareholders of the same series of a class should be treated equally1. Within any series of a class, all shares

should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in voting rights should be subject to approval by those classes of shares which are negatively affected.

2. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress.

A. All shareholders of the same series of a class should be treated equally4. Votes should be cast by custodians or

nominees in a manner agreed upon with the beneficial owner of the shares.

5. Impediments to cross border voting should be eliminated.

6. Processes and procedures for general shareholders meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.

C. Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.

B. Insider trading and abusive self-dealing should be prohibited.

IV. The Role of Stakeholders in Corporate GovernanceThe corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Defining Stakeholders

With regard to identifying relationships with stakeholders there is a difference between “taking into account” and being “accountable to” stakeholders. (The Economist)

B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

A. The rights of stakeholders that are established by law or through mutual agreements are to be respected.

C. Performance-enhancing mechanisms for employee participation should be permitted to develop.

E. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

D. Where stakeholders participate in the corporate governance process, they should access to relevant, sufficient and reliable information on a timely and regular basis.

F. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.

Stakeholders to be “Accountable To Accountable To…”

•Banks and creditors •Institutional investors •Employees

Defending Stakeholder Interests: Banks and

Creditors

• Transparency - or full disclosure of financial and key performance information• Laws/regulations preventing conflicts of interest involving boards of directors and managers • Procedures for bankruptcy• Enforcement of creditor rights

Defending Stakeholder Interests: Institutional

Investors•Transparency and disclosure •Duties of the auditor and professional care in the conduct of audits •Protection of minority shareholder rights •Procedures for bankruptcy Procedures for bankruptcy •Access to information

Defending Stakeholder Interests: Employees

• Transparency and disclosure • Ethical codes for directors and senior management• Whistleblower protection • Well-defined role for employees in corporate governance structures

Concentrated Ownership in Brazil• CIPE/OECD survey revealed only 5% of large firms

and only 33% of medium firms are widely held• Family Owned Firms:

• Agency Conflict Agency Conflict –in family owned firms occurs in successor generation and in relationship with banks

• Pyramid Structures Pyramid Structures –firms controlled by families holding small number of controlling shares

• Dual Class Shares Dual Class Shares –minority shareholder’s don’t have the same rights as majority shareholders

Family Owned Firms in Colombia

• Ownership and control - 68% of corporations are family owned and out of those 59% are still managed by the founders

• Poor survival rate Poor survival rate –8.5% of family firms have specified procedures for managerial succession and only 13% of family business survive to 3rd generation

• Little access to capital markets –only 124 out of 148,000 legal enterprises are listed

Western Hemisphere Experience

• Brazil—Instituto Brasileirode Governança Corporativa (IBGC)

• Chile—Universidad Católica/Chamber of Commerce/Center for Excellence in Governance

• Colombia—Confederation of Chambers of Commerce and Industry (Confecámaras)

• Peru—Procapitales and the Universidad de Ciencias Aplicadas(UPC)

Reducing income inequality would boost economic growth, according to new OECD analysis.

Inequality hurts economic growth• The Organization for Economic

Cooperation and Development (OECD) said in a new report that most of its 34 member countries had seen a growing widening in the inequality gap. -Rappler

• Income inequality has reached record highs in most OECD countries and remains at even higher levels in many emerging economies. The richest 10 per cent...

• Countries where income inequality is decreasing grow faster than those with rising inequality. Read more bit.ly/1Bulb1i

Emerging Consensus• For businesses to succeed in the world

economy, they must have healthy corporate governance mechanisms including rule of law

• Building corporate governance in developing countries requires refashioning institutions

• Private sector must participate in developing governance mechanisms

• The reward is increased investment and growth

Developing Countries Need Institutional

ReformsCorporate governance systems depend upon a set of institutions (laws, regulations, contracts, and norms) that create self-governing firms as the central element of a competitive market economy. These institutions ensure that the internal corporate government procedures adopted by the firms are enforced and that management is responsible to owners (shareholders) and other stakeholders

Strategy for Corporate Governance Reform

1. Initial Assessment and Advocacy 2. Outreach and Institutional Development3. Capacity and Institutional Development4. Consolidation

Recommendations •Further strengthen shareholder rights groups and Institutes of Directors Institutes of Directors •Risk ranking by ratings agencies•Reports on Standards and Codes (ROSC) –on going evaluation •Legal and institutional enforcement

Principles of Corporate Governance

III. Equitable Treatment of Shareholders

1. All shareholders should have equal rights and privileges

2. Minority shareholders must be protected from abusive controlling shareholders

3. Abusive self-dealing should be prohibited

4. Corporate moral and ethical norm must be clarified

5. Transparency in transaction dealings of the board members

IV. Role of Stakeholders in Corporate Governance

1. Legal rights of the identified stakeholders must be respected

2. Stakeholders are empowered to exercise their legal rights

3. Employees participation are encouraged

4. Stakeholders can freely communicate to the board any illegal and/or unethical concerns.

5. Effective, and efficient insolvency framework and effective enforcement of creditors rights in corporate governance

Questions?