1. 1 CORPORATE GOVERNANCE: THE OECD PRINCIPLES AND THEIR RELEVANCE TO SOUTHEAST EUROPE 16 April 2003, Podgorica David.Robinett@OECD.org

2. 2 Corporate Governance and its Relevance to SEE OECD Principles for Corporate Governance SEE Corporate Governance Roundtable Future Work

3. 3 What is corporate governance? The relationships between the managers, the board, the shareholders, and other stakeholders. The structure for setting objectives and monitoring performance Main responsibility lies with private sector But governments shape legal and regulatory framework

4. 4 Why should policy makers care? Financial crises and recent corporate failures demonstrated the dangers of weak governance Distorted governance structures lead to inefficient decision- making and misallocation of capital Mobilisation of both domestic and international capital by corporations

5. 5 Decision to Develop Core Principles 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 The objective: to identify common elements or core principles underlying good corporate governance across the different systems: a multilateral policy framework

6. 6 Intended Uses of the Principles Primarily aimed at governments Guidance also for stock exchanges, investors, corporations, commissions: View primarily listed companies

7. 7 I. Rights of Shareholders: Protection of shareholders’ rights and the capability of shareholders to influence behaviour of the corporation are pillars of good corporate governance 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

8. 8 II. Equitable Treatment of Shareholders All shareholders - including foreign shareholders - should be treated fairly by controlling shareholders, boards and management 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

9. 9 III. The Role of Stakeholders 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.

10. 10 IV. Disclosure and Transparency A strong financial and non financial disclosure regime is the heart of corporate governance 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

11. 11 V. The Role of the Board The Board is the main mechanism for monitoring management and developing strategy 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

12. 12 OECD Principles of Corporate Governance as a global benchmark for policy dialogue Governmental 30 OECD member countries Numerous Security and Exchange Commissions International Organisations G7 International Financial Stability Forum/principles The World Bank/ROSC assessment International Organisation of Securities Commissions The Global Corporate Governance Forum Private Sector International Corporate Governance Network (network of institutional investors with aggregate of $11 trillion under management)

13. 13 Promoting Reform OECD-World Bank Co-operation, together with IFC, EU, bilateral donors such as the USAID and the government of Japan, as well as regional development banks Regional Corporate Governance Roundtables for Russia, Asia, Latin America, Southeast European, Eurasian and African Roundtables are operational

14. 14 SEE CG Roundtable OECD / WORLD BANK corporate governance co-operation framework: Global Corporate Governance Forum Stability Pact Investment Compact

15. 15 The Global Corporate Governance Forum The GCGF was officially launched in Monterrey, Mexico at the UN meeting on Finance for Development on April 20, 2002. To support developing and emerging economies to promote corporate governance reform.

16. 16 Who is GCGF? Founders : WBG - OECD Donors: Luxembourg, Netherlands, Norway, Sweden, Switzerland,United Kingdom, United States Staff: Secretariat & IFC support Volunteers: Private Sector Advisory Group Partners: CERES, ICFTU, TI, Commonwealth, etc

17. 17 Investment Compact

18. 18 Objectivesof the SEE Corporate Governance Roundtable Enhance CG in SEE Assist policy design Promote dialogue between public and private sectors Assess and monitor CG trends Identify needs for technical assistance

19. 19 Policy Meetings Agendas reflecting the main chapters of the OECD principles Discussion of empirical studies and policy papers Conclusions and recommendations International expertise

20. 20 Participants & Partners From SEE Partners: securities commissions, self-regulatory and shareholders associations Participants: officials and experts from securities commissions, stock exchanges, other securities markets institutions, corporate sector and stakeholders

21. 21 Participants & Partners International Partners OECD, WB, IFC, EU, USAID and other multilateral and bilateral institutions WB/OECD Private Sector Advisory Group provides leaders and experts from the private sector

22. 22 White Paper A basis for policy dialogue where the OECD and its SEE partners identify concrete steps for improving their corporate-governance framework Identify gaps Provide recommendations Help focus reform efforts Build consensus Channel technical assistance

23. 23 Examples of SEE White Paper Recommendations* OECD Principles of Corporate Governance Regional Corporate Governance Roundtables White Papers on Corporate Governance Law reforms Tighten the rules governing related-party transactions Adopt international financial reporting standards Private Sector Improve training of directors Companies should communicate with employees and stakeholders Changes in Administrative Practice Improve enforcement Improve disclosure regulations * Information on the SEE Roundtable is available on line at: www.oecd.org/daf/corporate-affairs

24. 24 FUTURE OF THE ROUNDTABLES: Moving from awareness raising to policy design, implementation and enforcement of reform priorities Regions Russia, Eurasia, Asia, South-eastern Europe, Latin America Format Workshops on specific issues for exchange of experience and in-depth analysis The topics should be tied to ongoing or planned initiatives. Outputs Proceedings and conclusions from the workshops will provide both background analysis and options for viable policy solutions. A review of corporate governance developments, with participation of OECD member countries. Objective Provide Regional policy-makers, regulators and practitioners with a forum for international dialogue on current corporate governance developments.

25. 25 Improving corporate governance remains a priority for OECD member countries Need for policy response to issues arising after spectacular corporate scandals Governments are being either (i) reactive to systemic weaknesses, (ii) pro-active to prevent failures, or (3) just realise that standards are rising. Governments not only expect recovery from the depressed financial markets but improved growth and stability.

26. 26 Review of the OECD Principles To remain relevant to new developments 30 countries agree that the integrity of corporations, financial institutions and markets is essential to maintain confidence. They agree to implement best practices, introduce incentives with a mix of regulation and self-regulation backed by enforcement The OECD Steering Group on Corporate Governance will survey developments and assess the Principles by 2004

27. 27 Priorities of the review Balance between regulation and incentives Resist restricting entrepreneurial activity and competitiveness Stay away from box-ticking and artificial compliance Introduce strong principles-based element

28. 28 For More Information www.oecd.org/daf/corporate-affairs www.gcgf.org www.worldbank.org/html/fpd/privatesector/cg

29. 29 Conclusions Assume there are no borders Public and corporate governance go hand in hand