Corporate governance: Stronger principles for better market integrity

Director, OECD Directorate for Financial and Enterprise Affairs

The newly revised OECD Principles of Corporate Governance were released on 22 April. The result is a stronger OECD instrument to help improve boardroom behaviour globally. And that means better business and stronger markets for everyone.

How healthy are our corporate boardrooms? A vital question, since we all depend on businesses as the engines of wealth creation, innovation, employment, spreading development and technology, and much more. Healthy, well-governed companies make for thriving economies. But we need to rebuild our faith in them.

Recent high-profile corporate failures such as Enron in the US or Parmalat in Italy have underlined the continuing need to improve corporate governance globally. They have also prompted a re-examination of how the OECD Principles of Corporate Governance might be updated to take account of latest developments.

The OECD has worked to promote use of the Principles since they were first adopted in 1999 to support good corporate governance policy and practice both within OECD countries and beyond. Policymakers, investors, corporations and stakeholders worldwide have used the Principles to tackle a broad set of relevant issues common to all, such as the need for transparent reporting, informed shareholders and accountable boards. Regional roundtables on corporate governance set up in partnership with the World Bank have allowed the OECD Principles to become a widely accepted global benchmark that is adaptable to varying social, legal and economic contexts in individual countries. They have helped to spur reforms in regions as diverse as Asia, Latin America, Eurasia, Southeast Europe and Russia.

Yet, the recent spate of scandals highlighted corporate governance weaknesses and naturally led to the question of whether the Principles had been on the mark or missed something important – or indeed to what extent companies, boards and investors may have simply failed to follow good practice. The OECD ministers called in 2002 for an assessment of the OECD Principles by 2004 to take such questions into account. A steering group was set up and intensive consultations were begun with leading business and labour representatives. In addition, comprehensive and transparent consultations with civil society were also organised, culminating in January 2004 in a draft of the revised Principles posted on the Internet for public comment.

The Steering Group also conducted a Survey of Corporate Governance Developments in OECD Countries to identify lessons learned from experience and possible implications for the assessment of the Principles. This survey and a separate review of Experiences from the Regional Corporate Governance Roundtables further informed the review.

It has become clear from these consultations and research that the benefits of good corporate governance are now widely understood. Good corporate governance is not simply about minimising the risk of corporate failure and dealing with those guilty of fraud. It is also a fundamental prerequisite for improving economic performance, facilitating corporate access to capital, decreasing volatility in retirement savings and improving the general investment climate. These links to investment, public savings, market confidence and integrity make good corporate governance a central policy concern of importance to long-term economic growth and financial market stability.

The Principles already called for boards capable of independent judgement, yet the absence of such independence proved fatal.

Indeed, the review found that the original Principles represented the requirements for good corporate governance reasonably well. The difficulties arose largely in ensuring their effective implementation. The Principles already called for boards capable of independent judgement, yet in case after case the absence of such independence proved fatal. Shareholder rights to appoint board members were supposed to lead to accountable boards, but one question repeatedly raised in the consultations was: where were the informed owners? The Principles called for independent audits which in all too many instances proved a mirage. They called for transparency of ownership structures, but these structures remain opaque in many countries.

On the other hand, the Principles did not address issues of public concern in some countries, such as executive compensation, and the rise of institutional investors was only dealt with tangentially.

The 1999 Principles have now been strengthened to respond to the new challenges and concerns highlighted in the consultations. These revisions cover four main areas: ensuring the basis for an effective corporate governance framework including effective regulatory and enforcement mechanisms; improving possibilities for the exercise of informed ownership by shareholders; a strengthening of board oversight of management; and increasing attention to conflicts of interest through enhanced disclosure and transparency. The non-binding principles-based approach, which recognises the need to adapt implementation to a wide range of legal, economic and cultural circumstances, was applauded as a key strength of the Principles, and has been retained. And while the revised annotations avoid excessive prescription, they also respond to many requests for more guidance as to how the Principles could be implemented and enforced through references to evolving practices.

To improve implementation, a new chapter has been added specifying principles for governments to follow in developing the regulatory framework which underpins good corporate governance. Broad principles have been developed covering implementation and enforcement, along with mechanisms that should be established for parties to protect their rights. However, the Principles seek to minimise the risk of over-regulation and the costs from unintended consequences of policy action, both of which have been raised by business groups as potential dangers.

At the end of the day, good corporate governance comes down to effective and informed owners. These have all too often been absent. The chapter on shareholders has now been strengthened with the aim of lowering the cost and raising the returns from the informed use of ownership rights. New principles call on institutional investors to disclose their corporate governance policies, including how they decide on the use of their voting rights and how they manage conflicts of interest that may compromise their voting. Restrictions on consultations between shareholders about their voting intentions should be eased, thereby reducing the cost of informed ownership.

The rights of investors have also been strengthened. Shareholders should be able to remove board members and participate in the nomination and election processes. Shareholders should also be able to make their views known about the executive and board remuneration policy of the company, and any equity component should be subject to their approval.

Greater attention is paid to ensuring auditor independence.

As to the board, its responsibilities have been more clearly specified to address corporate ethics, compliance with laws and standards and oversight of internal control systems covering financial reporting, all of which have at one time or another appeared weak. The principle covering board independence and objectivity has been extended to apply to situations characterised by block and controlling shareholders, and not just referring to independence from management, though this remains critical. However, the Principles do not advocate independence for the sake of it, and lay as much stress on the capabilities of board members. Quality should be ensured not just by more careful selection from a wider group of candidates but also, if necessary, through continued training.

One of the most striking features of corporate governance practices in recent years is that conflicts of interest appear to be widespread and can be quite pernicious. The principles covering disclosure have been strengthened, particularly with respect to those conflicts of interest and transactions between related parties, which in addition to being approved by the board, also need to be disclosed. A new principle recognises the role of various providers of corporate information, such as rating agencies and analysts, whose advice should not be compromised by conflicts of interest. The Principles aim to make auditors more accountable to shareholders, for example, by exercising due professional care in the conduct of the audit. Greater attention is paid to ensuring auditor independence.

Prognosis

Being principles-based and non-prescriptive, the success of the Principles will rely upon how they are actually applied in a given situation by companies, shareholders, stakeholders and governments. There will always be a question of whether the balance of soft and hard law is appropriate and why the behaviour of companies, shareholders and stakeholders might not be responding in ways considered conducive to good corporate governance. Sharing of experiences on implementation strategies and “good practice” interpretation will, therefore, be crucial and will need to extend to a wide range of people, not just the authorities. OECD endorsement of the revised Principles should reassure market players and non-OECD partners that member countries are committed to just such a sustained dialogue. The support of such dialogue will be at the core of the OECD’s mandate. By working together in this principled way, our companies and our economies should be able to look forward to a cleaner bill of health.

References

The revised Principles of Corporate Governance are available at: http://www.oecd.org/daf/corporate/principles

OECD (2004), Corporate Governance: A Survey of OECD Countries, Paris. This title can be purchased at http://www.oecd.org/bookshop

OECD (2003), Experiences from the Regional Corporate Governance Roundtables can be found on the OECD corporate governance web site: http://www.oecd.org/daf/corporate-affairs/

OECD (2003), “Roundtables on Boardrooms”, OECD Observer No 238 July, 2003.

See also special section on corporate governance, OECD Observer No 234, October 2002. http://www.oecdobserver.org/governance

©OECD Observer No 243, May 2004




Economic data

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly


Online edition
Previous editions

Don't miss

  • “Nizip” refugee camp visit
    July 2016: OECD Secretary-General Angel Gurría visits the “Nizip” refugee camp, situated between Gaziantep and the Turkish-Syrian border, accompanied by Turkey’s Deputy Prime Minister Mehmet Şimşek. The camp accommodates a small number of the 2.75 million Syrians currently registered in Turkey, mostly outside the camps. In his tour of the camp, Mr Gurría visits a school, speaks with refugees and gives a short interview.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • Queen Maxima of the Netherlands gives a speech next to Mexico's President Enrique Pena Nieto (not pictured) during the International Forum of Financial Inclusion at the National Palace in Mexico City, Mexico June 21, 2016.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • OECD Environment Director Simon Upton presented a talk at Imperial College London on 21 April 2016. With the world awash in surplus oil and prices languishing around US$40 per barrel, how can governments step up efforts to transform the world’s energy systems in line with the Paris Agreement?
  • Happy 10th birthday to Twitter. This 2008 OECD Observer interview with Henry Copeland said you’d do well.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Once migrants reach Europe, countries face integration challenge: OECD's Thomas Liebig speaks to NPR's Audie Cornish.

  • Message from the International Space Station to COP21

  • COP21 Will Get Agreement With Teeth: OECD Secretary-General Angel Gurría on Bloomberg

  • The carbon clock is ticking: OECD’s Gurría on CNBC

  • If we want to reach zero net emissions by the end of the century, we must align our policies for a low-carbon economy, put a price on carbon everywhere, spend less subsidising fossil fuels and invest more in clean energy. OECD at #COP21 – OECD statement for #COP21
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa. blogs.worldbank.org
  • Pole to Paris Project
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • How can cities fight climate change?
    Discover projects in Denmark, Canada, Australia, Japan and Mexico.
  • Climate: What's changed, what hasn't, what we can do about it.
    Lecture by OECD Secretary-General Angel Gurría, hosted by the London School of Economics and Aviva Investors in association with ClimateWise, London, UK, 3 July 2015.

  • Climate change: “We should not disagree when scientists tell us we have a window of opportunity–10-15 years–to turn this thing around” argues Senator Bernie Sanders.

  • In the long-run, the EU benefits from migration, says OECD Head of International Migration Division Jean-Christophe Dumont.
  • Is technological progress slowing down? Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on www.ft.com.
  • Catherine Mann, OECD Chief Economist, explains on Bloomberg why "too much bank lending can slow economic growth".
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

Poll

What issue are you most concerned about in 2016?

Unemployment
Euro crisis
International conflict
Global warming
Other

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2016