1. 1 The OECD Principles: Important Issues of the Multilateral Policy Dialogue on Corporate Governance Elena Miteva Economist Corporate Affairs, Directorate for Financial and Enterprise Affairs

2. 2 The OECD Principles: Important Issues of the Multilateral Policy Dialogue on Corporate Governance Improving the function and the role of the boards Ensuring high quality audits How can institutional shareholders become effective owners How should codes and principles respond to the need to keep down the cost of regulation Other topics of concern The role of the OECD

3. 3 The Six Chapters of the Principles (2004) Full text www.oecd.org/daf/corporate/principles www.oecd.org/daf/corporate/principles I. Ensuring the basis for an effective corporate governance framework II. The rights of shareholders and key ownership functions III. The equitable treatment of shareholders IV. The role of stakeholders in corporate governance V. Disclosure and transparency VI. The responsibilities of the board

4. 4 We are now loading the board with more responsibilities…  Prime function Supervise management, oversee strategy and internal control systems. A shift in emphasis in single board systems, where boards have played a role as an advisor to CEO.  In addition Accountability to shareholders and other parties on managerial compensation, overseeing audit of financial statements, conflicts of interest and related party transactions  To fulfil these Boards should be able to exercise an independent objectives objective judgement, independent from management and others in a position to control the firm

5. 5 …although bords have not always proved effective, they are changing  Concern has grown on how boards actually function Rubber stamp boards Boards “captive” of major shareholders, management, a political party Slow to exercise control over or question CEOs  Duties of boards have often been exercised by members compromised by conflicts of interest Ample evidence from the US and Europe  In taking up new duties, board composition and structures are changing Reduced the size of boards Increased number of meetings and preparation time Specialised committees Increased fees Towards professional board members (independence issues)

6. 6 The move to more independent boards  Many countries focus on independent directors to avoid a conflict of interest To deal with related party transactions, audit and remuneration US, UK: at least half of the board Germany: wholly independent Supervisory board  What do we mean by independence of directors? Independence from a major shareholder or absence of business relations with the firm Boards to determine the meaning of independence  A move towards improved checks and balances About compliance, but also About improving performance

7. 7 But this does not mean that all should be independent directors  “Independents” might well lack valuable “insider” information Balance between “independents” and “insiders”  Should the ratio be prescribed by law? US: NYSE listing requirement UK: “apply or explain”

8. 8 Making sure that independent directors don’t become captured  Can be sure that objectivity and independence will continue once directors are serving on the board? Making the directors legally liable: class action law suits But: may result in difficulties of attracting good quality investors And may run counter the principle of collective responsibility of board members  A more fundamental mechanism Empowering shareholders to elect and remove board members European countries: legal penalties of little relevance if board members can be easily removed US: stronger case for legal liability

9. 9 Defining the duties of the board  Collective board responsibility expressed by fiduciary responsibility in many common law countries Duty of loyalty to the company and its shareholders Change needed to reflect the expanding tasks of the board In civil law countries, the concept of fiduciary duty may not be adequately specified – priority for EU action  Company groups, including pyramid structures, raise special policy issues Potential for abuse by « tunelling » from one company to another with a different goup of shareholders Define duty of loyalty to the company and not to the group

10. 10 Ensuring high quality audits: what the firms can do?  Public confidence in audited financial statements is crucial for preserving financial market integrity and trust in boards and management  Concern about how to ensure high quality standrds Audit scandals across the world – Parmalat Business plans of accounting firms may still see management as their client The Revised Principles emphasise that the ultimate responsibility for ensuring an independent audit must lie with the board Audit committee External auditor accountable to shareholders

11. 11 Ensuring high quality audits: what is the role of the authorities  Many countries are now moving to establish independent public audit oversight bodies (advocated also by the International Organisation of Securities Commissions, IOSCO)  According to another approach, countries ban or restrict auditors from providing other services, such as tax advice and consulting: Greater transparency, reduced conflicts of interests EU Accounting Directive May have a negative impact by reducing recruitment opportunities Audit fees will rise  Audit liability as a tool for ensuring professional care and enforce accountability: US, UK: full or penalty liability for auditors Audit certificates Proportional liability (Australia), cap on liabilities (Germany), contractual agreement (Netherlands and Spain)

12. 12 How can institutional investors become effective owners?  Institutional shareholders have become major owners of listed companies  Institutional investors and conflicts of interests Institutions pursuing political agenda, which is not in the interest of their beneficiaries Need for improved transparency: disclosure of voting of stocks (US), call for disclosure of voting policies (Netherlands, Spain, UK) New policies bringing about new concerns: will they contribute to effective ownership?

13. 13 How should codes and principles respond to the need to keep down the costs of regulation?  Rising regulatory costs: Sarbanes Oxley (US) Are costs worthwile – if the end result were improved performance and avoidance of major corporate failures  Codes and Principles Voluntary or Impelmented on a « comply and explain » basis Greater flexibility and cost saving  Attention to be paid to Actual compliance with voluntary codes Quality of explanation for « comply or explain » codes

14. 14 In conclusion  Process of trial and error  Need for a policy dialogue  OECD role

15. 15 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

16. 16 For further information... On OECD activities, regional roundtables and the MENA Working Group on corporate governance www.oecd.org/daf/corporate-affairs