Transcript The Responsibility of the Board according to the OECD Principles and Patterns of Change in the aftermath of Recent Corporate Events Presentation for.

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
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Corporate governance and the OECD Principles
CG
OECD
Principles
•A set of behavioural patterns:
vis-à-vis shareholders, stakeholders and
boards
•A normative framework
Legal and voluntary norms
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.
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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
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The OECD
Principles and the
Boards
 Functions
 Structure and profile
 Accountability
 Qualities of directors
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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
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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
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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
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Board Committees
●Exercise functions focused on specific
issues
●Particular importance of audit, nomination
and remuneration committees
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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
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Director duties
Duty of care
Duty of loyalty
•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 compliance
Other duties
•Duty to act in good faith
•Duty of oversight
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Quality of directors
 Education
 Integrity and Ethics
 Professional associations of directors
 Voluntary codes
 Compensation
 Availability
 Limit multiple directorships
 Scarcity factor
 Access to information
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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
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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
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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
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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
Co-operation programmes
Co-operation programmes and participation in OECD bodies*
OECD Members
(49)
(16)
(31)
* Non-Members not participating in OECD bodies take part in OECD meetings and activities
upon ad hoc invitations.
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For More Information on Corporate Governance
www.oecd.org
[email protected]
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