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OECD work on Corporate Governance and its relevance for MENA

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UAE Central Bank / IFC High Level Workshop Bank Corporate Governance. 5 ... Preparation of SOEs for successful privatisation. Development of capital markets. 5 ... – PowerPoint PPT presentation

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Title: OECD work on Corporate Governance and its relevance for MENA


1
OECD work on Corporate Governance and its
relevance for MENA
  • Elena Miteva
  • Directorate for Financial and Enterprise Affairs,
  • OECD
  • UAE Central Bank / IFC High Level Workshop Bank
    Corporate Governance
  • 5 March 2006, Abu Dhabi

2
Scope of Presentation
  • The OECD Corporate Governance Principles
  • On-going Work of the OECD
  • MENA Working Group on Improving Corporate
    Governance

3
Working Definition of Corporate Governance
  • The relationships between the managers, the
    board, the shareholders, and other stakeholders.
  • The structure for setting objectives and
    monitoring performance
  • Main responsibility lies with private sector
  • But governments shape legal and regulatory
    framework

4
Role of Corporate Governance
  • Underpins company performance and aggregate
    economic growth, reduces risk and improves
    stability
  • Mobilisation of capital
  • Allocation of capital to productive uses
  • Monitoring of corporate resources
  • Development of corporate culture
  • Preparation of SOEs for successful privatisation
  • Development of capital markets

5
Shareholder value destruction from bad corporate
governance
Shareholder Value Destruction in 16 Leading
Russian Companies 1999 US billions

2,650 billion, or 99, of shareholder value
destroyed
  • Adjusted for political risk ,
  • Source Bernard Black

6
Bad Corporate Governance as a Deterrent to
Foreign Investment
Foregone Investment Opportunity in 16 Leading
Russian Companies, 1996-1999, US billions
/Rough estimate/

129
79 billion of foregone foreign investment
between 1996-1999
50
Assumes P/E of 20 ROE of 20 accumulated
depreciation/depletion of 27 reinvestment
through 75 equity capital investment of half of
all Russian capital flight (25 billion/year) in
16 companies Source Bernard Black, Preliminary
OECD analysis
7
Corporate Governance Reforms are a Worldwide
Phenomenon
Corporate governance codes during the last
decade Date code published (latest code)
  • 2000
  • Denmark (2001)
  • Indonesia (2001)
  • Philippines (2002)
  • Romania (2002)
  • Singapore (2001)
  • 1999
  • Brazil (2002)
  • China, Hong Kong (2001)
  • Italy (2002)
  • Kenya (2000)
  • Malaysia
  • Mexico
  • Portugal
  • South Korea
  • 1997
  • Finland (2000)
  • Japan (2001)
  • Kyrgyz Republic
  • Netherlands (2003)
  • Sri Lanka
  • Thailand
  • Pre-1997
  • Australia (2002)
  • Canada (2004)
  • France (2002)
  • Ireland (1999)
  • New Zealand (2000)
  • South Africa (2002)
  • Spain (2003)
  • Sweden (2001)
  • UK (2003)
  • US (2003)
  • 1998
  • Belgium (2000)
  • Greece (2001)
  • Germany (2003)
  • India (2003)
  • 2001
  • Argentina
  • China, mainland
  • Czech Republic
  • Malta
  • Peru (2002)
  • 2002
  • Austria
  • Chile
  • Colombia
  • Pakistan
  • Poland
  • Russia
  • Slovakia
  • Switzerland
  • 2003
  • Cyprus
  • Mauritius
  • Oman
  • Turkey

Source ECGI web sites clippings
8
The OECD Corporate Governance Principles
  • The OECD Principles as a Global Benchmark
  • The Main Chapters of the Principles

9
Development of 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
  • The objective to identify common elements or
    core principles underlying good corporate
    governance across the different systems a
    multilateral policy framework

10
Who are the Principles addressed to?
  • Specific guidance for improving the legal,
    institutional and regulatory framework FOR
  • Policymakers
  • Regulators
  • Market participants
  • Practical guidance and suggestions FOR
  • Stock exchanges
  • Investors
  • Corporations
  • And other parties with a role in corporate
    governance

11
The OECD Principles a Global Benchmark for
Policy Dialogue and Reform
Governmental
  • 30 OECD member countries
  • Numerous Security and Exchange Commissions
  • G7 International Financial Stability
    Forum/principles
  • The World Bank/ROSC assessment
  • International Organisation of Securities
    Commissions
  • The Global Corporate Governance Forum

International Organisations
Private Sector
  • International Corporate Governance Network
    (network of institutional investors with
    aggregate of 11 trillion under management)

12
The OECD Principles Revised in 2004
  • To remain relevant to new developments
  • 30 countries agree that the integrity of
    corporations, financial institutions and markets
    is essential to maintain confidence.
  • They agree to implement best practices, introduce
    incentives with a mix of regulation and
    self-regulation backed by enforcement
  • The OECD Steering Group on Corporate Governance
    surveyed developments and assessed the Principles
    in 2004
  • Major issues in the Revised Principles
  • Stronger role of shareholders
  • Conflicts of interest and self dealing
  • Abuse of related companies
  • The role of stakeholders including creditors
  • Executive and director remuneration
  • Financial market integrity
  • Transparency and effective enforcement
  • Ensuring the basis for an effective corporate
    governance framework

13
The Six Chapters of the Principles (2004)
14
Boards fulcrum between shareholders and
professional management
  • Monitoring managerial performance
  • Guiding corporate strategy and establishing risk
    policy
  • Setting the ethical tone and a compliance culture
    (incentives, feedbacks etc)
  • Managing conflicts of interest
  • Ensuring integrity of accounting and financial
    systems internal control
  • Selecting and compensating key executives
  • Overseeing the external audit and major
    accounting principles

15
Boards objective judgement on corporate affairs
  • Must be independent from management and in many
    countries block-holders and controlling
    shareholders
  • Should consider using a sufficient number of
    non-executive board members capable of exercising
    independent judgement where there is conflict of
    interest
  • Should devote sufficient time to their
    responsibilities
  • Appropriate qualifications

16
Board Integrity Issues
  • Responsibility to whom? Is it clear?
  • Duty of Loyalty / Duty of Care
  • Status of Independent Directors
  • Committees

17
Protecting shareholders rights
  • Right to have shares registered and secure
  • Should be able to take part in shareholder
    meetings and in major decisions concerning the
    firm
  • Equitable treatment of all shareholders, foreign
    and minority especially
  • Should not be abused by insiders

18
Stakeholders creditors, depositors and employees
  • Encourage active co-operation between between
    company and stakeholders
  • Performance enhancing mechanisms should be
    available
  • Redress for violation of legal rights
  • Need for effective, efficient insolvency
    framework and effective enforcement of creditor
    rights
  • Access to relevant information

19
Disclosure and Transparency
  • Major share ownership and voting rights
  • Material foreseeable risk factors
  • Full financial disclosure
  • Governance structure and policies, and what code
    if any followed
  • Information should be prepared audited and
    disclosed in accordance with high standards of
    accounting, audit and non-financial disclosure
  • Regular continuous disclosure
  • Full disclosure of related party transactions,
    usually with controlling shareholders

20
Scope of Presentation
  • The OECD Corporate Governance Principles
  • On-going Work of the OECD
  • MENA Working Group on Improving Corporate
    Governance

21
On-going Work of the OECD
  • Corporate Governance of SOEs
  • Corporate Governance of Non-listed companies
  • Continuation of the global policy dialogue focus
    on implementation and enforcement

22
OECD Guidelines on CG of SOEs
  • Remaining significant size of state ownership in
    commercial enterprises
  • Specific challenges undue political
    interference,  soft  budget constraint, passive
    ownership, complex chain of accountability with
    multiple and not always clearly identifiable
    principals
  • The OECD Guidelines on CG of SOEs are meant to be
    a complement to the Principles
  • Non-binding, aiming to assist states in
    exercising their ownership function
  • Two-year discussion within a dedicated Working
    Group

23
Some issues covered by the Guidelines
  • Level-playing field in markets where SOE and
    privately-owned firms compete
  • Rationalisation of the ownership function within
    the state administration
  • No interference by state authorities in
    day-to-day management of SOEs
  • Structured and transparent nomination process for
    SOE boards
  • Internal and external control independent audit
  • Minority shareholder protection
  • Stakeholder relations

24
Role of public policy on Non-Listed Companies
  • Simple and clear company law rules that protect
    basic shareholder rights (e.g. cumulative voting,
    periodical information on accounts etc.)
  • Rights include
  • Attendance at AGM and right to ask questions
  • Proposing shareholder resolutions
  • Exercising voting and cash flow rights
  • Preventing non-pro-rata distributions
  • Different classes of shares
  • Proper disclosure practices by boards right of
    inspection of company records

25
Role of public policy on NLC (contd )
  • Access to the judiciary - courts to allow
    shareholders to exercise their rights
  • Development of corporate governance structures
    through contractual mechanisms
  • Corporate governance codes

26
Scope of Presentation
  • The OECD Corporate Governance Principles
  • On-going Work
  • MENA Working Group on Improving Corporate
    Governance

27
MENA OECD Working Group on Improving Corporate
Governance
1. Stock Taking
2. Development of country specific regional
policy advice initiatives
3. Support assessment of progress in
implementation
28
Outputs Directions
29
Concentrated Ownership in MENA
  • Shareholder environment
  • Independenceand performance

Concentrated ownership
Insiderboards
Reliance on family, bank and public finance
Incentivesaligned withcore shareholders
  • These characteristics present considerable
    challenges to policymakers
  • Policymakers must address reforms in both the
    corporate and institutional contexts
  • Institutional context
  • Corporate context

Under-developednew issue market
Limiteddisclosure
Limited takeover market
Inadequateminorityprotection
  • Capital market liquidity
  • Transparency and accountability

Note Examples can also be found in Asia, Latin
America, and many Continental European
countries Source McKinsey
30
Bank Based Corporate Governance in MENA
  • Regulatory framework, deposit insurance etc
    diminished market monitoring
  • Concentrated ownership with weak protection for
    minority shareholders related lending and
    exploitation
  • In many cases State ownership with other CG
    issues
  • Bankruptcy often favour prudential issues rather
    than creditors
  • Severe conflicts of interests may arise from
    scale, scope and size
  • Banks are also a fiduciary should look at
    corporate governance of borrowers
  • Risks are much more important and complex than in
    other sectors

31
Need for Addressing the Broader Framework
  • When
  • Regulators do not have sufficient human and
    financial resources
  • Contracts are difficult to enforce
  • Corruption is rife
  • Judicial system not working
  • How can one pursue
  • Greater disclosure and transparency
  • More independent directors
  • Long-term outlook
  • Foreign investment

32
Twin-track approach
State-of-the-art CG
Basic governance structure practices
  • Build a strategic, value-added board
  • Constructive engagement with investors and
    stakeholders
  • High quality of financial and non-financial
    disclosure
  • Secure adequate board independence
  • Create independent board committees
  • Embrace strict accounting norms
  • Institute risk management structures

Cultural Change
  • Companies
  • Realize importance of good corporate governance

Market discipline
Corporate Governance Reforms
  • Well-developed equity and bond markets
  • Takeover market
  • Enhanced remedies for shareholders
  • Corporate Securities Legislation
  • Equitable treatment
  • Boards Fiduciary Duties
  • Disclosure/listing requirements
  • Strong regulators and vigorous enforcement
  • CG of SOEs, Banks and NLC

Law and Institutions
  • Governments
  • Rule of law
  • Check on corruption
  • Private Sector Development

33
In conclusion
  • Public sector reforms cannot change the CG
    landscape without the private sector adhering to
    good CG standards
  • Public and private governance go hand in hand

34
For More Information
  • www.oecd.org/daf/corporate-affairs
  • www.oecd.org/mena/investment
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