ENFORCEMENT OF CORPORATE GOVERNANCE CODES LEO GOLDSCHMIDT Director, ECGI (EUROPEAN CORPORATE GOVERNANCE INSTITUTE) OECD ROUNDTABLE MOSCOW, 2 JUNE 2005

2 LEGAL BASIS FOR CG CODES LawSOX, some listing rules Contractslisting rules, AGM Recommendationsmajority

3 CODES’ AUTHORS –[Legislator] –[Regulator] –Stock Exchange –Professional organisations –Institutional investors –Ad hoc –Self

4 ENFORCEMENT Monitoring Investigating Sanctioning –Admonishing –Ordering (recommending) change –Publicising : name and shame –Fines –Cancelling privileges –Delisting

5 ENFORCEMENT : WHAT Formbox ticking –Comply or explain : scope Substancenature, extent –Vagueness : difficulty to circumscribe

6 ENFORCEMENT : WHO BY Courts RegulatorFSA, CBFA Stock ExchangeLSE, Euronext Special committeePublic> < Private Professional body Auditors Self (board) Shareholders Public, media

7 ATTITUDES (1) Stock exchanges –Reluctant to police –Commercial considerations > < Public good –Surveillance function, but –Shift to shareholders (or auditors) for monitoring –Shift to regulator for investigation and sanction –Inflict minor sanctions (rather than delisting)

8 ATTITUDES (2) Regulator –If no legal base, reluctance to be proactive –Prudence in investigating and sanctioning –Shift to courts for contracts

9 CONSEQUENCES Authorities show reluctance Enforcement tends to be weak Fosters non compliance Induces legislator to intervene – reactive, hasty, excessive, late, insensitive, rigid Small minority causes majority to suffer costs and constraints hampering enterprise

10 CONCLUSION Equilibrium is delicate Questions (generally & for emerging markets) –Do comply and explain “pros” outweigh “cons”? Yes –Is legislative threat a sufficient deterrent ? No –Should rules be given more teeth (AGM, listing requirements = firm grounds for complaints) ? –Should auditors be given a greater monitoring role ? –Should there not be more research (e.g. a comparative study) on enforcement regimes ?