Comparative Corporate Governance
2.2 The OECD core principles
Six principles have emerged from the OECD work. The OECD expects that these principles help enhance the operation of the standards and policies in which businesses in its member countries operate. The OECD welcomes and encourages the widespread use of the principles by gov- ernments, private associations, companies, investors and other parties committed to improving corporate governance practices. Moreover, the OECD looks forward to cooperating with countries within and beyond OECD membership, with international organizations such as the World Bank and the IMF, and with regional organizations and private sector bodies in the collective effort to strengthen the fabric of corporate gov- ernance around the world.
The OECD principles on corporate governance help regain the confi- dence of shareholders by protecting shareholders’ rights so that they can get a return on their investments.
2.2.1 The six OECD principles on corporate governance These six corporate governance principles include:
(i) ensuring the basis for an effective corporate governance framework;
(ii) the rights of shareholders and key ownership functions;
The first principle of the OECD stated that a corporate governance frame- work should protect shareholders’ rights. Shareholders are not responsi- ble for monitoring every move of corporate managers; it is the board’s responsibility to act in the best interests and on behalf of the sharehold- ers. Also, not all shareholders are knowledgeable about how to operate businesses, and cannot easily see mismanagement by those that operate on their behalf. Shareholders need to be confident that their investments are secure and will be profitable to them. The second OECD principle supports shareholders’ rights by: ‘secure methods of ownership registra- tion, convey or transfer shares, obtain relevant and material information on the corporation on a timely and regular basis, participate and vote in general shareholder meetings, elect and remove members of the board, and share in the profits of the corporation’.
(iii) the equitable treatment of shareholders;
The third principle of the OECD stated that ‘the corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights’.
The OECD views on corporate governance support the equal and fair treatment of all shareholders: giving shareholders that belong to the same class equal treatment; giving each shareholder the privilege to have the same voting rights; giving equal opportunity to shareholders, whether they are minority or international: providing shareholders with the nec- essary information so that they can make well-informed decisions.
The principles support the legal rights of shareholders, giving them the opportunity to press charges in cases where there are reasonable grounds to believe that their rights have been violated. The OECD principles help to rebuild the confidence of shareholders who might be afraid of the manager.
(iv) the role of stakeholders in corporate governance;
The fourth OECD principle stated that:
The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
Stakeholders are considered as an individual, or a group that has direct or indirect effect on the organization and can be affected by it decisions . This includes shareholders, creditors, customers, directors, employees, agencies, suppliers, unions, and the community that the business oper- ates. The OECD principle supports the rights of stakeholders in corpo- rate governance by ensuring that those rights protected by the law are respected; supporting the prosecution of rights that are violated on solid proof of stakeholders; providing stakeholders that are involved in the cor- porate governance process with the relevant information so that they can fulfill their responsibilities efficiently and accurately.
Corporations should recognize that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the long-term interest of corporations to foster wealth-creating cooperation among stakeholders. The governance framework should recognize that the interests of the corporation are served by recognizing the interests of stakeholders and their contribution to the long-term success of the corporation.
(v) disclosure and transparency;
The fifth OECD principle stated that ‘the corporate governance framework should ensure that timely and accurate disclosure is made on all mate-
rial matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company’.
This principle supports the disclosure of relevant information to share- holders and to the public at large. Disclosure can be beneficial in terms of influencing the behavior of the company and protecting sharehold- ers. When shareholders are aware and updated in a timely manner of the financial performance of the corporation it will increase their con- fidence. Shareholders should be knowledgeable of the overall status and operation of the corporation so that they will have more confidence in the corporate managers, members of the board and/or the controlling shareholders.
Shareholders should have a clear understanding of their investments, making sure that decisions made by the managing team are in the best interests and profitability of the corporation. Letting stakeholders be knowledgeable of the performance of the corporation will ensure the ethical behaviour of the corporation, which will eventually increase its market capital and share.
(vi) the responsibilities of the board.
The sixth OECD principle stated that ‘the corporate governance frame- work should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders’.
The principles support that the board’s primary responsibility is to monitor the managerial performance of the corporation and act in the best interests of shareholders by achieving an adequate return on invest- ments. The board should be trustworthy, and its objectives should be socially and economically beneficial to the corporation and society. The board’s actions should comply with the law, taking into consideration the interests of the shareholders. The board should enforce the application of the law, making sure that the corporation is operating in accordance with the laws that govern businesses in that society. The board’s overall func- tions include monitoring, implementing, managing the corporation and managers; and being the mediator between shareholders and corporate managers. When looking at the OECD principles in relation to corporate governance, it does not go into detail to define corporate governance, but it mentions that countries’ corporate governance structures in part depend on the legal, regulatory and institutional environment. Also, the principles of OECD note the impact that business ethics, societal, com- munity and environmental interests have on the reputation and long- term success of an enterprise.
Although the principles of the OECD are non-binding, it is ultimately a matter of self-interest for countries and corporations to assess their own corporate governance regimes and to take these principles to heart. In an increasingly integrated world characterized by highly mobile capital, investors’ expectations for more responsive corporate governance practices are something that governments and companies cannot afford to ignore.
This is not simply an issue relevant to foreign investors. Strengthening the confidence of domestic investors in a country’s own corporations and stock markets matters contributes greatly to the long-term competitive- ness of corporations and to the overall health and vitality of national economies.
2.2.2 The inefficiency of the six OECD principles
The OECD corporate governance principles, as amended in 2009, would not prevent futures’ crises. The principles are broadly stated and the comments did not provide sufficient detail to cope with all aspects of corporate governance. Their implementation remains problematic. The OECD would better integrate the core financial accounting and risk management principles as the three constitute a triad of a single reality.
For instance, requiring the board to tailor its remuneration to the cor- porate strategy and risk appetite could incite to a riskier strategy detri- mental to stakeholders. It would be recommendable if the OECD teamed up with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to explicitly link the principles with the funda- mentals of risk management and adequate financial accounting. Unless such an effort is made, the principles remain impressive on paper and illusory in practice.