Corporate Governance Assessments
The state of corporate governance can have an important effect on the availability and cost of capital for all firms, and good corporate governance of financial firms plays a key role in fostering financial stability. Corporate governance constitutes a set of relationships among a company’s management, its board, its shareholders, and other stakeholders. Those relationships define, among other things, the property rights of shareholders, the mechanisms of exercising and protecting those rights, and the way of ensuring a fair return. Corporate governance also provides the structure through which it sets the objectives of the company, as well as determines the means of attaining those objectives and monitoring performance. Good corporate governance (a) should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and (b) should facilitate effective monitoring. This section first discusses the rationale and the role of corporate governance issues in financial sector assessments and then outlines the principles of corporate governance developed by the OECD, which is the international standard for practices in this area. Finally, this section also summarizes the corporate governance assessments by the World Bank under the ROSC initiative and the main lessons of assessment experience so far.
Detailed assessments of corporate governance standards are typically undertaken on a stand-alone basis as part of World Bank’s ROSC Program. They are not normally undertaken as a component of FSAP, except occasionally when the related issues have been given priority in financial sector policies.15 Nevertheless, all financial sector assessments look at certain core corporate governance issues as part of the review of preconditions for effective supervision and as part of assessing the observance of IOSCO objectives and principles of securities regulation. For example, IOSCO principles for issuers are, in effect, a requirement that issuers pursue good corporate governance policies in terms of transparency, disclosure, and fair and equitable treatment of holders of securities. This requirement is typically enforced both through corporate governance clauses in listing requirements and through provisions of company laws. Moreover, all financial sector supervisory standards include principles and criteria of varying depth that seek to ensure adequate governance of supervised entities. In addition, the institutions of financial markets and individual financial institutions themselves together play a critical role in fostering good governance of non-financial firms through the monitoring by financial institutions of their counterparties as part of risk management and through investment guidelines that reward good governance of issuers.16
