Session I. International Reference Points The OECD Principles of Corporate Governance and the OECD Efforts on Promoting Corporate Governance Reform

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Session I. International Reference PointsThe
OECD Principles of Corporate Governance and the
OECD Efforts on Promoting Corporate Governance
Reform

• Motoyuki YUFU
• Principal Administrator, OECD
• Karachi, Pakistan
• 29 May 2006

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Before we start the OECD as global
standard-setter

• OECD (Organisation for Economic Co-operation and
  Development) is a group of 30 developed countries
  sharing a commitment to the market economy.
• Consultation and co-operative programmes with
  75-100 countries (non members) in nearly all
  regions of world.
• Corporate governance work is a good example five
  regional roundtables (e.g. Asia, Latin America,
  Eurasia, Russia and Southeast Europe).

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Outline presentation

1. The OECD Principles of Corporate Governance
   (revised in 2004)
2. The OECD Guidelines on CG of State-Owned
   Enterprises (2005)
3. The Asian Roundtable on CG and the White Paper
   (2003)
4. The Policy Brief on CG of Banks in Asia (2006)

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1. The OECD Principles of Corporate Governance
(OECD Principles)

• Originally drafted in 1999, among others in
  reaction to the Asian financial crisis
• Revised in 2004 following high-profile cases of
  CG failure
• One of the 12 Key Standards of the Financial
  Stability Forum (FSF)
• Provide basis for multinational efforts on
  improving CG
• The World Bank country review on CG (ROSC)
• The Basel Committee on Banking Supervision
  Enhancing Corporate Governance for Banking
  Organisations

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1.1 What is the OECD Principles?

• Represent common basis that OECD countries
  consider essential for the development of good CG
  practices (best practices)
• Principles and annotations
• Non-binding. Intended to assist OECD and non-OECD
  governments, and to provide guidance for stock
  exchanges, investors, corporations and others
  related to CG
• Mainly focus on publicly traded (listed)
  companies, both financial and non-financial
• Also useful to non-listed companies (e.g. family
  owned or state-owned companies)

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1.2 A working definition of corporate governance

• Corporate governance involves a set of
  relationships between a companys management, its
  board, its shareholders and other stakeholders.
• CG also provides the structure through which the
  objectives (i.e. strategies) of the company are
  set, and the means of obtaining those objectives
  and monitoring performance are determined
• Moreover
• Good CG should provide proper incentives for the
  board and management to pursue objectives that
  are in the interests of the company and
  shareholders, and should facilitate effective
  monitoring, thereby encouraging firms to use
  resources more efficiently

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1.3 Core elements of the OECD Principles

• Six chapters
• Ensuring the basis for an effective CG framework
• The rights of shareholders
• The equitable treatment of shareholders
• The role of stakeholders including creditors
• Disclosure and transparency
• The responsibilities of the boards

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1.4 What are the major new issues addressed by
the revised Principles?

• New chapter for ensuring effective enforcement
• Stronger role of shareholders
• Controlling conflicts of interest and self
  dealing
• Preventing abuse of related companies
• and others

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1.5 New chapter for ensuring effective enforcement

• (Principles I.B) The legal and regulatory
  requirements that affect CG practice should be
  consistent with the rule of law, transparent and
  enforceable
• (I.C) The division of responsibilities among
  different authorities should be clearly
  articulated and ensure that public interest is
  served
• (I.D) Supervisory, regulatory and enforcement
  authorities should have the authority, integrity
  and resources to fulfill their duties in a
  professional and objective manner

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1.6 Controlling conflicts of interest
(of external bodies)

• (II.F.2) Institutional investors acting in a
  fiduciary capacity should disclose how they
  manage material conflicts of interest that may
  affect the exercise of key ownership rights
• (V.F) The provision of analysis or advice by
  analysts, brokers, rating agencies and others
  should be free from material conflicts of
  interest that might compromise the integrity of
  their analysis or advice
• (V.C) An annual report should be conducted by an
  independent, competent and qualified auditor in
  order to provide an external and objective
  assurance that the financial statements fairy
  represent the financial position and performance
  of the company

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1.7 Controlling conflicts of interest (of
boards, mgt. shareholders)

• (VI.C, VI.D.7) The board should apply high
  ethical standards. It should also ensure that
  appropriate system of control are in place (e.g.
  systems for compliance with the law and relevant
  standards)
• (VI.D.6) The board should monitor and manage
  potential conflicts of interest of management,
  board members and shareholders, including misuse
  of corporate assets and abuse in related party
  transactions
• Contd.

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1.7-1 Controlling conflicts of interest (of
boards, mgt. shareholders)

• (III.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 interests in
  any transaction or mater directly affecting the
  corporation
• (VI.E.1) The board should consider assigning a
  sufficient number of non-executive board members
  capable of exercising independent judgement to
  tasks where there is a potential for conflict of
  interest.
• (II.C.3) Effective shareholder participation in
  key decisions (e.g. nomination election of
  board members) should be facilitated.

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1.8 Preventing abuse between related companies

• (V.A.3 annotation) Public disclosure should
  include material information on major share
  ownership (i.e. ownership structure). It should
  also extend to information about the structure of
  a group of companies and intra-group relations.
  In cases where major shareholdings are held
  through intermediary structures or arrangements,
  information about beneficial owners (i.e. real
  owners) should be obtainable.
• (V.A.5) Public disclosure should include
  material information on related party
  transactions
• Contd.

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1.8-1 Preventing abuse between related companies

• (VI.A) Board members should act, in good faith,
  with due diligence and care, in the best
  interests of the company and the shareholders
  (not to the controlling company of the group)
• (VI.E annotation) Board independence from
  controlling shareholders and other controlling
  body will need to be emphasized. Some
  jurisdictions calls for some board members to be
  independent of dominant shareholders (not only of
  management
• (VI.E.1) Boards should consider assigning a
  sufficient number of non-executive board members
  capable of exercising independent judgement to
  tasks such as review of related party
  transactions

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2. The OECD Guidelines on CG of State Owned
Enterprises (SOE Guidelines)

• Dveloped in 2005. Do not preclude privatization
  policies
• Non-binding. General advice to governments to
  improve the performance of SOEs
• Based on, and complementary to the OECD
  Principles (fully compatible)
• Specific challenges of SOEs
• - Relationship with owners
• - Dilution of accountability

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2.1 Scope of the SOE Guidelines

• Primary target SOEs
• using a distinct legal form
• having a commercial activity (i.e. with a bulk of
  income from sales and fees), either non-financial
  or financial
• may/may not pursue a public policy objective as
  well (except those mainly pursue these
  objectives)
• either in competitive or non-competitive markets
• The state has significant control through full,
  majority or even significant minority ownership
• owned by central government
• Also useful to SOEs other than above

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2.2 One of the suggestions by the SOE Guidelines

• The state as an owner should clearly set
  policy objectives of the SOEs according to the
  law, refrain from intervening in their day-to-day
  management, and instead, fully utilize company
  structure of the SOEs
• for this purpose,
• Empower the SOE board
• Independent external audit in addition to the
  state audit
• The state should act as an active owner

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3. The Asian Roundtable on Corporate Governance

• The OECD and the World Bank Group promotes policy
  dialogue on CG and established the Asian
  Roundtable in 1999.
• The Roundtable comprises policy-makers,
  regulators, academics and business leaders from
  13 Asian jurisdictions including Pakistan.
• In 2003, Roundtable participants agreed on the
  White Paper on Corporate Governance in Asia
• Please see
• http//www.oecd.org/dataoecd/48/55/
  25778905.pdf

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4. The Policy Brief on Corporate Governance of
Banks in Asia

• One of the six priorities of the White Paper
• Governments should intensify their efforts to
  improve the regulation and corporate governance
  of banks.
• The Roundtable established a Task Force (2004)
• Both banking supervisors and capital market
  authority
• Both Asian and OECD countries
• The Task Force developed the Policy Brief on CG
  of Banks in Asia (2006)
• Non binding
• Based on, and fully compatible with the guidance
  of the Basel Committee (Enhancing Corporate
  Governance for Banking Organisations)

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4.1 What is the Policy Brief ?

• Main chapters
• The responsibilities of the board and board
  members
• The composition and committees of the board
• Preventing abusive related party transactions
• Banking groups
• Banks autonomy in relation to the state
• Banks monitoring of the CG structure of their
  corporate borrowers

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4.2 One suggestion of the Policy Brief

• Banking supervisors (or related institutions), in
  conjunction with capital market authorities,
  should develop national codes of CG of banks
  (i.e. template)
• Banking supervisors should provide incentives for
  banks to improve their CG (e.g. the rating of CG
  of banks)

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4.3 Further discussion in Asia

• OECD/BIS Joint Seminar on CG of Banks in Asia
  (Hong Kong, June 19-20)
• Inviting banking supervisors in Asia from 26
  jurisdictions including Pakistan.
• Not an event, it is a process

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Thank you. For more information,

• www.oecd.org/daf/corporate-affairs