Transcript No Slide Title

Session I. International Reference Points
The 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 75100 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 company’s 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

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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
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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
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Non-binding. General advice to governments to improve
the performance of SOEs

Based on, and complementary to the OECD Principles
(fully compatible)
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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)
–
–
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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
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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
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Banking supervisors (or related institutions), in
conjunction with capital market authorities, should
develop national codes of CG of banks (i.e.
template)
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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
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OECD/BIS Joint Seminar on CG of Banks in Asia
(Hong Kong, June 19-20)
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Inviting banking supervisors in Asia from 26
jurisdictions including Pakistan.
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Not an event, it is a process
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Thank you. For more information,
www.oecd.org/daf/corporate-affairs
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