The Responsibility of the Board according to

the OECD Principles and Patterns of Change

in the aftermath of Recent Corporate Events

Presentation for the Fourth Eurasian Corporate Governance Roundtable

Elena Miteva, Administrator, OECD

Bishkek, October 2003 1

Corporate governance and the OECD Principles

•A set of behavioural patterns:

vis-à-vis shareholders, stakeholders and
CG boards
•A normative framework
Legal and voluntary norms

Address both areas:

• « Best provisions on behaviour »
active ownership by institutions and
OECD intermediaries;
Principles competent boards
LT value increasing behaviour of
companies
•Key normative requirements, e.g.:
Shareholder protection and equitable
treatment under the law.
2
Focus on corporate governance

• Reduces equity risk

 Equity exposure of larger numbers of households
 CG signals information assymetries and probability of
expropriation of shareholder value

• Improves performance
 With good corporate governance, companies can improve
their earnings potential
• Improves institutions
 Lack of properly functioning private institutions and
corporations impacts on growth by limiting access to
equity financing and
 The distribution of income within a society

• Spill-overs into the realm of public governance

 Lack of accountability potentially undermines the rule of
law and
 Effectiveness of government 3
 The OECD  Functions
Principles and the  Structure and profile
Boards
 Accountability
 Qualities of directors

4
 Board functions

 Reducing risk

 Monitoring management to avoid expropriation

 Detecting incompetence in boards

 Improving performance

 Strategic guidance – selecting, compensating and firing

management, reviewing strategy, preparation of strategic
action plans, devising risk policy, overseeing major
transactions, disclosure and compliance with law.

 Monitoring performance – review remuneration, reviewing

conflicts of interest and related party transactions, ensuring the
integrity of reporting systems

 Served as vehicle for reforms and financial innovation

 Supported the involvement of the private sector

5
Board profile and structure

 Monitoring

 Independence: from the ones monitored and from the that

control the company (not in itself substitute of quality of
boards)

 Integrity: capability for resisting pressure and litteracy in

accounting and control systems

 Strategic guidance

 Knowledge of the company (products, functions, management

systems)

 Capacity for strategy design

6
Independent boards

 Normative framework for independence

 Definition of independence

 Two ‘best behaviour’ clauses

 Separation of Chair and CEO

 Resources of the board and its independent

members

 Cumulative voting

7
Board Committees

●Exercise functions focused on specific

issues

●Particular importance of audit, nomination

and remuneration committees

8
Board accountability to the company and its
shareholders

 Companies elect and fire boards

 Boards are accountable to all shareholders

 Boards are elected regularly

 Boards take into account other stakeholders’ interests,

such as employees and creditors

9
 Director duties

•Potential for misinterpretation

•Might limit risk-taking behaviour
Duty of care Rationale behind US “business judgement rule”

•Important in the transition context, where the level

of shareholder expropriation is higher
Duty of loyalty •Envisage criminal consequences

•Duty of compliance
Other duties •Duty to act in good faith
•Duty of oversight

10
Quality of directors

 Education

 Integrity and Ethics

 Professional associations of directors

 Voluntary codes

 Compensation

 Availability

 Limit multiple directorships

 Scarcity factor

 Access to information 11
A few points of relevance for Eurasia

 Some trade-off between monitoring and strategy

formation functions

 Scope for voluntary rules

 Importance of individual company behaviour

 Boards are not substitutes of management

 Management accountability to boards

12
Recent corporate events and boards of directors

 Trust as a fundamental ingredient of the financial

market

 “A corporate governance bear market, at least in part”

 Increasing responsibilities for boards and independent

directors
 Failures of boards in current cases of corporate
distress and scandals
 Response to the crisis impacts boards
 Enhanced liability and tougher rules
 Higher requirements for director professionalism
and ethics
13
Implications for boards

 Integrity

 More responsibility for compensation and incentives

 Careful assessment of conflicts of interests

 Monitor risk

 Warning signals

 Timely response to problems

 Transparency

 Monitor disclosure practices

 Implementation and evaluation of management

14
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

Co-operation programmes (49)

Co-operation programmes and participation in OECD bodies* (16)
OECD Members (31)

* Non-Members not participating in OECD bodies take part in OECD meetings and activities
upon ad hoc invitations. 15
For More Information on Corporate Governance

www.oecd.org

elena.miteva@oecd.org

16