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Session I. International Reference Points

The OECD Principles of Corporate Governance and the OECD Efforts on Promoting Corporate

Governance Reform

Motoyuki YUFU

Principal Administrator, OECD

Karachi, Pakistan

29 May 2006

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Before we start; the OECD as global standard-setter

OECD (Organisation for Economic Co-operation and Development) is a group of 30 developed countries sharing a commitment to the market economy.

Consultation and co-operative programmes with 75-100 countries (non members) in nearly all regions of world.

Corporate governance work is a good example: five regional roundtables (e.g. Asia, Latin America, Eurasia, Russia and Southeast Europe).

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Outline presentation

1. The OECD Principles of Corporate Governance (revised in 2004)

2. The OECD Guidelines on CG of State-Owned Enterprises (2005)

3. The Asian Roundtable on CG and the White Paper (2003)

4. The Policy Brief on CG of Banks in Asia (2006)

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1. The OECD Principles of Corporate Governance (OECD Principles)

Originally drafted in 1999, among others in reaction to the Asian financial crisis

Revised in 2004 following high-profile cases of CG failure

One of the 12 Key Standards of the Financial Stability Forum (FSF)

Provide basis for multinational efforts on improving CG– The World Bank; country review on CG (ROSC) – The Basel Committee on Banking Supervision; Enhancing

Corporate Governance for Banking Organisations

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Represent common basis that OECD countries consider essential for the development of good CG practices (“best practices”)

Principles and annotations

Non-binding. Intended to assist OECD and non-OECD governments, and to provide guidance for stock exchanges, investors, corporations and others related to CG

Mainly focus on publicly traded (listed) companies, both financial and non-financial

Also useful to non-listed companies (e.g. family owned or state-owned companies)

1.1 What is the OECD Principles?

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1.2 A working definition of corporate governance

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.CG also provides the structure through which the objectives (i.e. strategies) of the company are set, and the means of obtaining those objectives and monitoring performance are determined

Moreover:Good CG should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently

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1.3 Core elements of the OECD Principles

Six chapters

Ensuring the basis for an effective CG framework The rights of shareholders The equitable treatment of shareholders The role of stakeholders including creditors Disclosure and transparency The responsibilities of the boards

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1.4 What are the major new issues addressed by the revised Principles?

New chapter for ensuring effective enforcement

Stronger role of shareholders

Controlling conflicts of interest and self dealing

Preventing abuse of related companies

…and others…

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(Principles I.B); The legal and regulatory requirements that affect CG practice should be consistent with the rule of law, transparent and enforceable

(I.C); The division of responsibilities among different authorities should be clearly articulated and ensure that public interest is served

(I.D); Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner

1.5 New chapter for ensuring effective enforcement

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1.6 Controlling conflicts of interest (of external bodies)

(II.F.2); Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights

(V.F); The provision of analysis or advice by analysts, brokers, rating agencies and others should be free from material conflicts of interest that might compromise the integrity of their analysis or advice

(V.C); An annual report should be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance that the financial statements fairy represent the financial position and performance of the company

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1.7 Controlling conflicts of interest (of boards, mgt. & shareholders)

(VI.C, VI.D.7); The board should apply high ethical standards. It should also ensure that appropriate system of control are in place (e.g. systems for compliance with the law and relevant standards)

(VI.D.6); The board should monitor and manage potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions

Contd….

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(III.C); Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interests in any transaction or mater directly affecting the corporation

(VI.E.1); The board should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest.

(II.C.3); Effective shareholder participation in key decisions (e.g. nomination & election of board members) should be facilitated.

1.7-1 Controlling conflicts of interest (of boards, mgt. & shareholders)

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1.8 Preventing abuse between related companies

(V.A.3 annotation); Public disclosure should include material information on major share ownership (i.e. ownership structure). It should also extend to information about the structure of a group of companies and intra-group relations. In cases where major shareholdings are held through intermediary structures or arrangements, information about beneficial owners (i.e. real owners) should be obtainable.

(V.A.5); Public disclosure should include material information on related party transactions

Contd….

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1.8-1 Preventing abuse between related companies

(VI.A); Board members should act, in good faith, with due diligence and care, in the best interests of the company and the shareholders (not to the controlling company of the group)

(VI.E annotation); Board independence from controlling shareholders and other controlling body will need to be emphasized. Some jurisdictions calls for some board members to be independent of dominant shareholders (not only of management

(VI.E.1); Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks such as review of related party transactions

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2. The OECD Guidelines on CG of State Owned Enterprises (SOE Guidelines)

Dveloped in 2005. Do not preclude privatization policies

Non-binding. General advice to governments to improve the performance of SOEs

Based on, and complementary to the OECD Principles

(fully compatible)

Specific challenges of SOEs:

- Relationship with owners

- Dilution of accountability

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2.1 Scope of the SOE Guidelines

Primary target; SOEs – using a distinct legal form– having a commercial activity (i.e. with a bulk of income

from sales and fees), either non-financial or financial – may/may not pursue a public policy objective as well (except

those mainly pursue these objectives)– either in competitive or non-competitive markets– The state has significant control through full, majority or

even significant minority ownership– owned by central government

Also useful to SOEs other than above

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2.2 One of the suggestions by the SOE Guidelines

The state as an owner should clearly set policy objectives of the SOEs according to the law, refrain from intervening in their day-to-day management, and instead, fully utilize company structure of the SOEs;

for this purpose, Empower the SOE board

Independent external audit in addition to the state audit

The state should act as an active owner

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3. The Asian Roundtable on Corporate Governance

The OECD and the World Bank Group promotes policy dialogue on CG and established the Asian Roundtable in 1999.

The Roundtable comprises policy-makers, regulators,

academics and business leaders from 13 Asian jurisdictions including Pakistan.

In 2003, Roundtable participants agreed on the White Paper on Corporate Governance in Asia

Please see http://www.oecd.org/dataoecd/48/55/25778905.pdf

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4. The Policy Brief on Corporate Governance of Banks in Asia

One of the six priorities of the White Paper;“Governments should intensify their efforts to improve the regulation and corporate governance of banks.”

The Roundtable established a Task Force (2004)– Both banking supervisors and capital market authority– Both Asian and OECD countries

The Task Force developed the Policy Brief on CG of Banks in Asia (2006)– Non binding– Based on, and fully compatible with the guidance of the Basel

Committee (“Enhancing Corporate Governance for Banking Organisations”)

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4.1 What is the Policy Brief ?

Main chapters

The responsibilities of the board and board members The composition and committees of the board Preventing abusive related party transactions Banking groups Banks’ autonomy in relation to the state Banks’ monitoring of the CG structure of their

corporate borrowers

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4.2 One suggestion of the Policy Brief

Banking supervisors (or related institutions), in conjunction with capital market authorities, should develop national codes of CG of banks (i.e. template)

Banking supervisors should provide incentives for banks to improve their CG (e.g. the rating of CG of banks)

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4.3 Further discussion in Asia

OECD/BIS Joint Seminar on CG of Banks in Asia (Hong Kong, June 19-20)

Inviting banking supervisors in Asia from 26 jurisdictions including Pakistan.

Not an event, it is a process

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Thank you. For more information,

www.oecd.org/daf/corporate-affairs