Financial Sector Assessment

OECD Principles of Corporate Governance

In response to a call by the OECD council meeting at the ministerial level on April 27-28, 1998, to develop a set of corporate governance standards and guidelines, the OECD issued in 1999 the OECD Principles of Corporate Governance after extensive consultations. Since then, the principles have formed the basis for corporate governance initiatives in both OECD and non-OECD countries alike. Hence, they represent the minimum standard that countries with different traditions could agree on, without being unduly prescriptive. In particular, they are equally applicable to countries with a civil and common-law tradi­tion, different levels of ownership concentration, and models of board representation. Moreover, they have been adopted as one of the 12 key standards for sound financial systems by the Financial Stability Forum. They have been endorsed by the Bank and the Fund executive boards, and they form the basis of the corporate governance component of the World Bank-IMF ROSCs.

The OECD principles were reviewed and revised by the OECD Steering Group on Corporate Governance under a mandate from OECD ministers in 2002. This review and the subsequent revisions were supported by a comprehensive survey of corporate gover­nance practices and by information on practices outside the OECD area derived from regional corporate governance round tables. The revised OECD principles were issued in April 2004.

The OECD principles have been devised with four fundamental concepts in mind: responsibility, accountability, fairness, and transparency. The OECD principles allow for diversity of rules and regulations and are primarily concerned with listed companies. A set of 32 principles is organized into six sections that ensure the following: (a) the basis for an effective corporate governance framework, (b) the rights of shareholders, (c) the

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Note: Information in this box is based on OECD (2004).

equitable treatment of shareholders, (d) the role of stakeholders in corporate governance, (e) the disclosure and transparency, and (f) the responsibilities of the board. The scope of the OECD principles is summarized in box 10.8.

The recent revisions to the principles covered four main areas: (a) a new set of prin­ciples on the development of regulatory framework to underpin corporate governance framework and mechanisms for implementation and enforcements; (b) additional prin­ciples to strengthen the exercise of informed ownership by shareholders, particularly those calling on institutional investors to disclose their corporate governance policies and those strengthening the rights of shareholders to choose Board members; (c) strengthened principles to reinforce Board oversight and enhance Board members’ independent judg­ment; and (d) new and strengthened principles to contain conflicts of interest through enhanced disclosure and transparency (e. g., on related party transactions), thus making auditors more accountable to shareholders and promoting auditors’ independence.

The principles have been framed to keep in mind primarily non-financial firms, but the core principles apply equally well to financial firms. However, additional safeguards and controls apply to financial institutions’ governance as reflected in various financial supervisory standards. The key issues in financial sector governance are highlighted in Annex 10.C.