The Responsibility of the Board according to

the OECD Principles and Patterns of Change

in the aftermath of Recent Corporate Events

Presentation
Presentation for
for the
the Fourth
Fourth Eurasian
Eurasian Corporate
Corporate Governance
Governance Roundtable
Roundtable
Elena
Elena Miteva,
Miteva, Administrator,
Administrator, OECD
OECD

Bishkek, October 2003 1

Corporate
Corporate governance
governance and
and the
the OECD
OECD Principles
Principles

••A
A set
set of
of behavioural
behavioural patterns:
patterns:

vis-à-vis
vis-à-vis shareholders,
shareholders, stakeholders
stakeholders and
and
CG boards
boards
••A
A normative
normative framework
framework

Legal
Legal and
and voluntary
voluntary norms
norms

Address
Address both
both areas:
areas:
•• «« Best
Best provisions
provisions on
on behaviour
behaviour »»
active
active ownership
ownership byby institutions
institutions and
and
OECD intermediaries;
intermediaries;
Principles competent
competent boards
boards
LT
LT value
value increasing
increasing behaviour
behaviour of
of
companies
companies
••Key
Key normative
normative requirements,
requirements, e.g.:
e.g.:
Shareholder
Shareholder protection
protection and
and equitable
equitable
treatment
treatment under
under the
the law.
law.
2
Focus
Focus on
on corporate
corporate governance
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
  Functions
The OECD
Principles and the  Structure and profile
Boards
 Accountability
 Qualities of directors

4
 Board
Board functions
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
Board profile
profile and
and structure
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
Independent boards
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
Board Committees
Committees

●●Exercise
Exercisefunctions
functionsfocused
focusedon
onspecific
specific
issues
issues

●●Particular
Particularimportance
importanceof
ofaudit,
audit, nomination
nomination
and
andremuneration
remunerationcommittees
committees

8
Board
Board accountability
accountability to
to the
the company
company and
and its
its
shareholders
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
Potential for
for misinterpretation
misinterpretation
••Might
Might limit
limit risk-taking
risk-taking behaviour
behaviour
Duty
Duty of
of care
care 
Rationale
Rationale behind
behind US
US “business
“business judgement
judgement rule”
rule”

••Important
Important in
in the
the transition
transition context,
context, where
where the
the level
level
of
of shareholder
shareholder expropriation
expropriation isis higher
higher
Duty
Duty of
of loyalty
loyalty ••Envisage
Envisage criminal
criminal consequences
consequences

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

10
Quality
Quality of
of directors
directors

 Education

 Integrity and Ethics

 Professional associations of directors

 Voluntary codes

 Compensation

 Availability

 Limit multiple directorships

 Scarcity factor

 Access to information 11
A
A few
few points
points of
of relevance
relevance for
for Eurasia
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
Recent corporate
corporate events
events and
and boards
boards of
of directors
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
Implications for
for boards
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
Founded inin 1961
1961 as
as aa follow
follow on
on to
to the
the Marshall
Marshall Plan,
Plan, the
the Organisation
Organisation for
for
Economic
Economic Co-operation
Co-operation and and Development
Development promotes
promotes international
international codes,
codes,
guidelines
guidelines and
and principles
principles by by which
which countries
countries can
can make
make their
their economic
economic systems
systems
compatible.
compatible.
OECD Member Countries and Co-operating Countries

Co-operation programmes (49)

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

* Non-Members not participating in OECDbodies take part in OECDmeetings and activities

upon ad hoc invitations. 15
For
For More
More Information
Information on
on Corporate
Corporate Governance
Governance

www.oecd.org

elena.miteva@oecd.org

16