the oecd principles of corporate governance stilpon nestor oecd
TRANSCRIPT
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THE OECD PRINCIPLES OF CORPORATE
GOVERNANCEStilpon NESTOR
OECD
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What is corporate governance?
A set of behavioural patterns A normative framework
OECD Principles address both areas
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Why corporate governance
Mobilisation of capital by corporations Allocation of capital Monitoring of the use of capital
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WHY IS CORPORATE GOVERNANCE IMPORTANT FOR POLICY?
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
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The limited liability company
More than a century- old debate: continuity and limited liability
Still relevant: Company law reform in UK, Sweden, France, Japan, Germany
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The Agency problem
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 Anglo solutions regulatory convergence
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The growth of the private sector: privatisation totals more than $700 billion since 1990-- more
than one trillion since 1980
-
50,000
100,000
150,000
200,000
$ Millions
1990 1991 1992 1993 1994 1995 1996 1997 1998
Total OECD Other countries
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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
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Over The Past Two Decades Institutional Investors Have Grown Steadily In Size and
Importance
38
90
128
0
20
40
60
80
100
120
140
Per Cent
1981 1991 1998 (p)
Financial Assets of Institutional Investors In OECD As a Proportion of GDP
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Trends In Financial Assets of Institutional Investors
0%
20%
40%
60%
80%
100%
1990 1991 1992 1993 1994 1995 1996 1997 1998
Shares Bonds Loans Other
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The new economy
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
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FDI and Portfolio Investment Have Increased Their Share of International Investment Flows.
0
500
1,000
1,500
2,000
2,500
Billions of Dollars
1980 1998
International Outflow of Investment
Direct Investment Portfolio Investment Other Investment
384
2,021
Direct Investment includes equity capital, reinvested earnings and inter-company 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.
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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 Task Force objective: to identify common
elements or core principles underlying good corporate governance across the different systems: a multilateral policy framework
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Intended Uses of the Principles Primarily aimed at governments Guidance also for stock exchanges,
investors, corporations, commissions: Views primarily listed companies
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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
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I. Rights of Shareholders
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
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II. Equitable Treatment of Shareholders
All shareholders - including foreign shareholders - should be treated fairly by controlling shareholders, boards and management
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II. Equitable Treatment of Shareholders
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
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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.
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IV. Disclosure and Transparency
A strong financial and non financial disclosure regime is the heart of corporate governance:
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IV. Disclosure and Transparency
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
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V. The Role of the Board
The Board is the main mechanism for monitoring management and developing strategy
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V. The Role of the Board
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.