Transcript THE OECD PRINCIPLES OF CORPORATE GOVERNANCE Stilpon NESTOR OECD What is corporate governance?  A set of behavioural patterns A normative framework  OECD Principles address both areas 

THE OECD PRINCIPLES OF
CORPORATE
GOVERNANCE
Stilpon NESTOR
OECD
What is corporate
governance?
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A set of behavioural patterns
A normative framework
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OECD Principles address both areas
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Why corporate governance
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Mobilisation of capital by corporations
Allocation of capital
Monitoring of the use of capital
WHY IS CORPORATE GOVERNANCE IMPORTANT
FOR POLICY?
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The limited liability corporation
The public corporation and the agency problem
The growth of the private corporate sector
The growth of equity markets and their institutions
The new economy
The growth of international private capital flows
The limited liability company
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More than a century- old debate: continuity
and limited liability
Still relevant: Company law reform in UK,
Sweden, France, Japan, Germany
The Agency problem
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The public corporation: markets instead of
monitors: market for corporate control,
market for managers
Securities regulation: focus on market
integrity the state intervenes when there
are big information asymmetries to enhance
credibility
In the past, largely an Anglo
“problem”most countries have adopted
The growth of the private sector: privatisation
totals more than $700 billion since 1990-- more
than one trillion since 1980
200,000
150,000
$ Millions
100,000
50,000
1990 1991 1992 1993 1994 1995 1996 1997 1998
Total OECD
Other countries
Privatisation’s Impact on Stock
Market Capitalisation
– Market Cap Of Privatised Enterprises (PEs)Rose From
<$50 Billion To $2.44 Trillion
– PEs Are 10% Of Total, 21% Of Non-US Market Cap
– About 30% of total equity issuance during the last 5
years. More than 50% of total issuance in Europe.
– Market indices: 28% in UK and Germany, 30% in
France, 48% in Spain, 46% in Italy
– Five Largest--And 7 Of 8 Largest--Firms of the 200
largest firms in emerging markets are PEs
Over The Past Two Decades Institutional
Investors Have Grown Steadily In Size and
Importance
Financial Assets of Institutional Investors In OECD As a Proportion of GDP
128
140
90
120
100
80
38
Per Cent
60
40
20
0
1981
1991
1998 (p)
Trends In Financial Assets of Institutional Investors
100%
80%
60%
40%
20%
0%
1990
1991
1992
1993
Shares
1994
Bonds
1995
Loans
1996
Other
1997
1998
The new economy
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high risk requires special financial structure
and dynamics; few fixed assets; little debt;
equity finance and the need of venture
capital to exit: they all require a vibrant
equity market
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The private, market-based investment process,
underpinned by better corporate governance is
now much more important for most economies,
then it used to be 10-15 years ago. The state has a
clear interest in developing a domestic capital
market if it wants to capture the benefits of
increased investment both on the supply and
demand side: otherwise flight towards the Nasdaq
FDI and Portfolio Investment Have Increased Their
Share of International Investment Flows.
International Outflow of Investment
2,021
2,500
2,000
1,500
384
Billions of Dollars
1,000
500
0
1980
Direct Investment
Portfolio Investment
1998
Other Investment
Direct Investment includes equity capital, reinvested earnings and intercompany loans.
Portfolio Investment includes equity securities, bonds, notes and money
market instruments.
Other Investment includes loans and other financial assets and liabilities
(both short term and long term), such as trade credits and currency
deposits.
Decision to Develop Core
Principles
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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
Task Force objective: to identify common
elements or core principles underlying good
corporate governance across the different
Intended Uses of the Principles
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Primarily aimed at governments
Guidance also for stock exchanges,
investors, corporations, commissions:
Views primarily listed companies
I. Rights of Shareholders
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Protection of shareholders’ rights and the
capability of shareholders to influence behaviour
of the corporation are pillars of good corporate
governance
I. Rights of Shareholders
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Secure ownership and registration,
Participation in basic decisions (pre-emption and appraisal),
general shareholder meetings: accountability procedures, in
absentia voting, proxy rules: the IT impact
disclosure of capital and control structures: corporate groups and
block-holders
fair and transparent transfers of control: transparency and fair
treatment of all
Institutional voting: pointing to the trend
II. Equitable Treatment of
Shareholders
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All shareholders - including foreign shareholders should be treated fairly by controlling
shareholders, boards and management
II. Equitable Treatment of
Shareholders
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Insider trading prohibition: a cornerstone of market
integrity in developed economies
Self -dealing and the disclosure of potential conflicting
interests: the curse of emerging markets
Effective redress: the possibility to seek remedies in courts
for all shareholder: a key implementation aspect
Ex ante transparency with respect to distribution of
voting rights and ways voting rights exercised
Beneficial ownership and the role of custodians: OECD
trends and ADR issue
III. The Role of Stakeholders
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most stakeholders’ rights are protected by other laws
(labour law, environmental law, etc.)
In some countries, the Board is also accountable to some
stakeholders, particularly the employees (but not only)
The Principles are agnostic on formal stakeholder
participation,
The Principles urge transparency, including to
stakeholders
They urge incentives for stakeholder participation as a
value enhancing mechanism driven by the corporations
themselves: i.e. encourage firm specific- investment.
IV. Disclosure and
Transparency
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A strong financial and non financial disclosure
regime is the heart of corporate governance:
IV. Disclosure and
Transparency
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Financial and operating results
Company objectives
Ownership and control structure
Board and executive information and recommendation
Foreseeable risk factors
Stakeholder information
Governance information
Independent audit and high quality dissemination channels
V. The Role of the Board
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The Board is the main mechanism for
monitoring management and developing
strategy
V. The Role of the Board
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The key issue:independence from management
Target : non -executive participation (but “the boards should
consider..”) with specific tasks: audit , remuneration,
nomination
Act fairly with respect to various groups of shareholders, deal
fairly with stakeholders, assure compliance with laws
Review strategy and planning, manage potential conflicts of
interest, assure integrity of accounting, reporting and
communications
Board members need to spend time and have good information
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Often there is a tension between markets vs.. the
law. The Principles do not address this issue. They
provide a conceptual framework of issues. These
are taken up in the OECD/World Bank Round
tables and discussed in all the regions of the
world. So these regions can provide their own
agenda for reform and improvement of corporate
governance.