THE OECD PRINCIPLES OF CORPORATE GOVERNANCE

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THE OECD PRINCIPLES OF CORPORATE GOVERNANCE

• Stilpon NESTOR
• OECD

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What is corporate governance?

• A set of behavioural patterns
• A normative framework
• OECD Principles address both areas

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Why corporate governance

• Mobilisation of capital by corporations
• Allocation of capital
• Monitoring of the use of capital

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WHY IS CORPORATE GOVERNANCE IMPORTANT FOR POLICY?

• The limited liability corporation
• The public corporation and the agency problem
• The growth of the private corporate sector
• The growth of equity markets and their
  institutions
• The new economy
• The growth of international private capital flows

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The limited liability company

• More than a century- old debate continuity and
  limited liability
• Still relevant Company law reform in UK, Sweden,
  France, Japan, Germany

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The Agency problem

• The public corporation markets instead of
  monitors market for corporate control, market
  for managers
• Securities regulation focus on market integrity
  ?the state intervenes when there are big
  information asymmetries to enhance credibility
• In the past, largely an Anglo problem?most
  countries have adopted Anglo solutions
  ?regulatory convergence

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The growth of the private sector privatisation
totals more than 700 billion since 1990-- more
than one trillion since 1980
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Privatisations Impact on Stock Market
Capitalisation

• Market Cap Of Privatised Enterprises (PEs)Rose
  From lt50 Billion To 2.44 Trillion
• PEs Are 10 Of Total, 21 Of Non-US Market Cap
• About 30 of total equity issuance during the
  last 5 years. More than 50 of total issuance in
  Europe.
• Market indices 28 in UK and Germany, 30 in
  France, 48 in Spain, 46 in Italy
• Five Largest--And 7 Of 8 Largest--Firms of the
  200 largest firms in emerging markets are PEs

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Over The Past Two Decades Institutional
Investors Have Grown Steadily In Size and
Importance
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Trends In Financial Assets of Institutional
Investors
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The new economy

• high risk requires special financial structure
  and dynamics few fixed assets little debt
  equity finance and the need of venture capital to
  exit they all require a vibrant equity market

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• The private, market-based investment process,
  underpinned by better corporate governance is now
  much more important for most economies, then it
  used to be 10-15 years ago. The state has a clear
  interest in developing a domestic capital market
  if it wants to capture the benefits of increased
  investment both on the supply and demand side
  otherwise flight towards the Nasdaq

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FDI and Portfolio Investment Have Increased Their
Share of International Investment Flows.
2,021
384
Direct Investment includes equity capital,
reinvested earnings and inter-company
loans. Portfolio Investment includes equity
securities, bonds, notes and money market
instruments. Other Investment includes loans and
other financial assets and liabilities (both
short term and long term), such as trade credits
and currency deposits.
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Decision to Develop Core Principles

• Governance systems vary widely
• 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
• Task Force objective to identify common elements
  or core principles underlying good corporate
  governance across the different systems a
  multilateral policy framework

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Intended Uses of the Principles

• Primarily aimed at governments
• Guidance also for stock exchanges, investors,
  corporations, commissions
• Views primarily listed companies

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I. Rights of Shareholders

• Protection of shareholders rights and the
  capability of shareholders to influence behaviour
  of the corporation are pillars of good corporate
  governance

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I. Rights of Shareholders

• Secure ownership and registration,
• Participation in basic decisions (pre-emption
  and appraisal),
• general shareholder meetings accountability
  procedures, in absentia voting, proxy rules the
  IT impact
• disclosure of capital and control structures
  corporate groups and block-holders
• fair and transparent transfers of control
  transparency and fair treatment of all
• Institutional voting pointing to the trend

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II. Equitable Treatment of Shareholders

• All shareholders - including foreign shareholders
  - should be treated fairly by controlling
  shareholders, boards and management

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II. Equitable Treatment of Shareholders

• Insider trading prohibition a cornerstone of
  market integrity in developed economies
• Self -dealing and the disclosure of potential
  conflicting interests the curse of emerging
  markets
• Effective redress the possibility to seek
  remedies in courts for all shareholder a key
  implementation aspect
• Ex ante transparency with respect to distribution
  of voting rights and ways voting rights exercised
• Beneficial ownership and the role of custodians
  OECD trends and ADR issue

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III. The Role of Stakeholders

• most stakeholders rights are protected by other
  laws (labour law, environmental law, etc.)
• In some countries, the Board is also accountable
  to some stakeholders, particularly the employees
  (but not only)
• The Principles are agnostic on formal stakeholder
  participation,
• The Principles urge transparency, including to
  stakeholders
• They urge incentives for stakeholder
  participation as a value enhancing mechanism
  driven by the corporations themselves i.e.
  encourage firm specific- investment.

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IV. Disclosure and Transparency

• A strong financial and non financial disclosure
  regime is the heart of corporate governance

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IV. Disclosure and Transparency

• Financial and operating results
• Company objectives
• Ownership and control structure
• Board and executive information and
  recommendation
• Foreseeable risk factors
• Stakeholder information
• Governance information
• Independent audit and high quality dissemination
  channels

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V. The Role of the Board

• The Board is the main mechanism for monitoring
  management and developing strategy

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V. The Role of the Board

• The key issueindependence from management
• Target non -executive participation (but the
  boards should consider..) with specific tasks
  audit , remuneration, nomination
• Act fairly with respect to various groups of
  shareholders, deal fairly with stakeholders,
  assure compliance with laws
• Review strategy and planning, manage potential
  conflicts of interest, assure integrity of
  accounting, reporting and communications
• Board members need to spend time and have good
  information

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• Often there is a tension between markets vs.. the
  law. The Principles do not address this issue.
  They provide a conceptual framework of issues.
  These are taken up in the OECD/World Bank Round
  tables and discussed in all the regions of the
  world. So these regions can provide their own
  agenda for reform and improvement of corporate
  governance.