Title: CORPORATE GOVERNANCE: THE OECD PRICNCIPLES AND THEIR RELEVANCE TO SOUTHEAST EUROPE
1The Responsibility of the Board according to the
OECD Principles and Patterns of Change in the
aftermath of Recent Corporate Events
Presentation for the Fourth Eurasian Corporate
Governance Roundtable Elena Miteva,
Administrator, OECD
Bishkek, October 2003
2Corporate governance and the OECD Principles
- A set of behavioural patterns
- vis-à-vis shareholders, stakeholders and boards
- A normative framework
- Legal and voluntary norms
CG
- Address both areas
- Best provisions on behaviour
- active ownership by institutions and
intermediaries - competent boards
- LT value increasing behaviour of companies
- Key normative requirements, e.g.
- Shareholder protection and equitable treatment
under the law.
OECD Principles
3Focus on corporate governance
- Reduces equity risk
- Equity exposure of larger numbers of households
- CG signals information assymetries and
probability of expropriation of shareholder value - Improves performance
- With good corporate governance, companies can
improve their earnings potential - Improves institutions
- Lack of properly functioning private institutions
and corporations impacts on growth by limiting
access to equity financing and - The distribution of income within a society
- Spill-overs into the realm of public governance
- Lack of accountability potentially undermines the
rule of law and - Effectiveness of government
4- Functions
- Structure and profile
- Accountability
- Qualities of directors
- The OECD Principles and the Boards
5Board functions
- Reducing risk
- Monitoring management to avoid expropriation
- Detecting incompetence in boards
- Improving performance
- Strategic guidance selecting, compensating and
firing management, reviewing strategy,
preparation of strategic action plans, devising
risk policy, overseeing major transactions,
disclosure and compliance with law. - Monitoring performance review remuneration,
reviewing conflicts of interest and related party
transactions, ensuring the integrity of reporting
systems - Served as vehicle for reforms and financial
innovation - Supported the involvement of the private sector
6Board profile and structure
- Monitoring
- Independence from the ones monitored and from
the that control the company (not in itself
substitute of quality of boards) - Integrity capability for resisting pressure and
litteracy in accounting and control systems - Strategic guidance
- Knowledge of the company (products, functions,
management systems) - Capacity for strategy design
7Independent boards
- Normative framework for independence
- Definition of independence
- Two best behaviour clauses
- Separation of Chair and CEO
- Resources of the board and its independent
members - Cumulative voting
8Board Committees
- Exercise functions focused on specific issues
- Particular importance of audit, nomination and
remuneration committees
9Board accountability to the company and its
shareholders
- Companies elect and fire boards
- Boards are accountable to all shareholders
- Boards are elected regularly
- Boards take into account other stakeholders
interests, such as employees and creditors
10Director duties
Duty of care
- Potential for misinterpretation
- Might limit risk-taking behaviour
- Rationale behind US business judgement rule
- Important in the transition context, where the
level of shareholder expropriation is higher - Envisage criminal consequences
Duty of loyalty
Other duties
- Duty of compliance
- Duty to act in good faith
- Duty of oversight
11Quality of directors
- Education
- Integrity and Ethics
- Professional associations of directors
- Voluntary codes
- Compensation
- Availability
- Limit multiple directorships
- Scarcity factor
- Access to information
12A few points of relevance for Eurasia
- Some trade-off between monitoring and strategy
formation functions - Scope for voluntary rules
- Importance of individual company behaviour
- Boards are not substitutes of management
- Management accountability to boards
13Recent corporate events and boards of directors
- Trust as a fundamental ingredient of the
financial market - A corporate governance bear market, at least in
part - Increasing responsibilities for boards and
independent directors - Failures of boards in current cases of corporate
distress and scandals - Response to the crisis impacts boards
- Enhanced liability and tougher rules
- Higher requirements for director professionalism
and ethics
14Implications for boards
- Integrity
- More responsibility for compensation and
incentives - Careful assessment of conflicts of interests
- Monitor risk
- Warning signals
- Timely response to problems
- Transparency
- Monitor disclosure practices
- Implementation and evaluation of management
15Founded 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.
OECD Member Countries and Co-operating Countries
16For More Information on Corporate Governance
- www.oecd.org
- elena.miteva_at_oecd.org