CORPORATE GOVERNANCE: THE OECD PRICNCIPLES AND THEIR RELEVANCE TO SOUTHEAST EUROPE - PowerPoint PPT Presentation

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CORPORATE GOVERNANCE: THE OECD PRICNCIPLES AND THEIR RELEVANCE TO SOUTHEAST EUROPE

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Title: CORPORATE GOVERNANCE: THE OECD PRICNCIPLES AND THEIR RELEVANCE TO SOUTHEAST EUROPE


1
The 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
2
Corporate 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
3
Focus 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

5
Board 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

6
Board 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

7
Independent 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

8
Board Committees
  • Exercise functions focused on specific issues
  • Particular importance of audit, nomination and
    remuneration committees

9
Board 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

10
Director 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

11
Quality of directors
  • Education
  • Integrity and Ethics
  • Professional associations of directors
  • Voluntary codes
  • Compensation
  • Availability
  • Limit multiple directorships
  • Scarcity factor
  • Access to information

12
A 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

13
Recent 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

14
Implications 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

15
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.
OECD Member Countries and Co-operating Countries

16
For More Information on Corporate Governance
  • www.oecd.org
  • elena.miteva_at_oecd.org
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