Report on OECD Principles

(Report Analysis)

Submitted to
Prof. Anish
Faculty of Corporate Governance

Submitted by
Chethan Kumar
BBA LLB (Hons) Semester VII (2020)
Roll No: 17BBLB012

Date of Submission: 18.11.2020

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INTRODUCTION
The Organization of Economic Cooperation and Development released its first set of
corporate governance principles in 1999. A revised version was then released in 2004.
The principles were developed and endorsed by the ministers of OECD member countries in
order to help OECD and Non-OECD governments in their efforts to create legal and
regulatory frameworks for corporate governance in their countries.

The Six OECD Principles are:

● Ensuring the basis of an effective corporate governance framework

● The rights of shareholders and key ownership functions
● The equitable treatment of shareholders
● The role of stakeholders in corporate governance
● Disclosure and transparency
● The responsibilities of the board

1. Ensure the basis of an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.

2. The rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights.
Basic shareholder rights should include the right to:
a. Secure methods of ownership registration;
b. Convey or transfer shares;
c. Obtain relevant and material information on the corporation on a timely and regular
basis;
d. Participate and vote in general shareholder meetings;
e. Elect and remove members of the board; and
f. Share in the profits of the corporation.

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 3. The equitable treatment of shareholders
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 principles also state
that:

All shareholders of the same series of a class should be treated equally

Insider trading and abusive self-dealing should be prohibited
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 interest in any
transaction or matter directly affecting the corporation.

4. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between
corporations and stakeholders in creating wealth, jobs, and the sustainability of financially
sound enterprises.
The rights of stakeholders that are established by law or through mutual agreements are to be
respected.
a. Where stakeholder interests are protected by law, stakeholders should have the
opportunity to obtain effective redress for violation of their rights.
b. Mechanisms for employee participation should be permitted to develop.
c. Where stakeholders participate in the corporate governance process, they should have
access to relevant, sufficient and reliable information on a timely and regular basis.
d. Stakeholders, including individual employees and their representative bodies, should
be able to freely communicate their concerns about illegal or unethical practices to the
board and to the competent public authorities and their rights should not be
compromised for doing this.
e. The corporate governance framework should be complemented by an effective,
efficient insolvency framework and by effective enforcement of creditor rights.

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 5. Disclosure and transparency
Disclosure and transparency should be the cornerstone of corporate governance laws and
codes. Business organizations should disclose their financial and operating results, ensuring
that their shareholders and other stakeholders understand the nature of the organization’s
operations, current state of affairs and future direction in terms of developments.
For financial reporting, most countries now require that listed companies use the International
Financial Reporting Standards (IFRS) as a reporting framework/ guideline.
The board of directors should also disclose the inherent risks and estimates used in preparing
the financial and operating results in order to give investors a clear understanding of the
board and management’s business judgment.

 Benefits of Disclosure
By disclosing and making transparent corporate governance policies and structures, the
company gives stakeholders, the regulators and the public at large a glimpse of how the
company operates and the state of its finances. This increases public trust in the organization
and improves its credibility.

 Public Disclosure
Most countries require, by law, that listed companies disclose their financial and operational
results on an annual, semi-annual or quarterly basis.
In case there is a material development that affects the operation of a company, this has to be
disclosed immediately so that stakeholders are given full information on the same.
Content of Disclosures
The OECD Principles of Corporate Governance recommend that disclosures include, but
should not be limited to, material information on the following:
The financial and operating results of the company
Audited financial statements showing the financial performance and the financial situation of
the company should usually include:
 The balance sheet,
 Profit and loss statement,
 Cash flow statement,
 Notes to the financial statement.

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6. The responsibilities of the board

The corporate governance framework 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.
 Board members should act on a fully informed basis, in good faith, with due diligence
and care, and in the best interest of the company and the shareholders.
 Where board decisions may affect different shareholder groups differently, the board
should treat all shareholders fairly.
 The board should apply high ethical standards. It should take into account the interests
of stakeholders.
 The board should fulfil certain key functions.
 The board should be able to exercise objective independent judgement on corporate
affairs.