Seiichi Kondo
Corporate governance can be defined in a dual context. On the one hand it is a set of behavioral relationships through which enterprises are directed and controlled. Organizational know-how, managerial talent and personal incentives are important elements in this web. But it can also be described in terms of the public and private rules that specify the distribution of rights and responsibilities among different participants in an enterprise, such as managers, the board, the shareholders, the employees and other stakeholders. I believe that one of the key advantages of the OECD Principles on Corporate Governance is that they address both the behavioral and regulatory aspects of the corporate governance debate.
Why does corporate governance matter?
Why does corporate governance matter and why should policy-makers, regulators and the business community care about the quality of corporate governance in their respective countries?
I would like to summarize the response in a single phrase: Corporate governance is a concern for those who want to make sure that corporations have access to the capital they need for viable investments. The quality of corporate governance will influence how well we will succeed in our ambitions to mobilize capital, to allocate this capital efficiently, and to monitor the use of it in individual companies. That is to say that it influences all stages of the investment process.
At the initial stage, effective rules for property protection, secure methods of ownership registration, and the ability to obtain legal redress are elements that affect the ability to mobilize capital.
Second, reliable, accessible and transparent accounts are essential for making informed decisions about the allocation of these resources.
And at the third stage, the procedures for corporate decision-making, the way we distribute authority among company organs and how we design incentive structures will influence the ability to monitor the use of the resources that flow to corporations and intermediary investors.
From these examples we can easily conclude that the importance of good corporate governance goes far beyond the interests of shareholders in an individual company. A weak corporate governance framework will impede the entire investment process and, ultimately, the private sector’s ability to contribute to social and economic progress. Poor corporate governance will damage the capacity to mobilize savings, it will hinder efficient allocation of capital, and it will prevent proper monitoring of corporate assets. These are the core concerns behind present policy-discussions on corporate governance in OECD countries.
In an international context, good corporate governance is also seen as one building block in the construction of a new international financial architecture aiming to diminish the risk of future financial turmoil. A transparent and effectively monitored market environment for international equity flows enhances the stability of these flows and serves as an early warning system for corporate and financial distress.
To be sure corporate governance will only produce its full results and social benefits if other structural reforms are undertaken. Competition in product and service markets is a key element of improving corporate performance in this respect. Market discipline also comes from the financial market and the banking sector. Insolvency legislation and flexible conditions for market exit are central in this respect.
Corporate governance is extremely important in countries with emerging markets. This is because countries in the former USSR, for example, are in the early stage of building an institutional framework for private enterprise. Such a framework is key if the privatization they have undertaken during the last decade is going to produce growth, through a robust private corporate sector.
Corporate governance at the company level is often the defining factor in the availability of outside, foreign investment. Only companies with high standards can overcome the high-risk premium prevailing in the emerging markets today. Most importantly, improvements in corporate governance are intimately linked to overall development in the rule of law. Ineffective corporate governance is generating corruption and low respect for the law at most levels of private and public life. Indeed, without an effort to improve public governance, any progress in corporate governance will be short-lived.
OECD’s contribution to improving the corporate governance framework
The OECD is an international organization of 29 Member countries – and very soon, 30, with Slovakia recently invited to join – who share the common values of pluralistic democracy and market economy. Sometimes the OECD is perceived as an inward-looking club of developed countries. This perception is very wrong. From a strategic perspective, our policy dialogue with non-member economies has become a central element of the OECD’s raison d’кtre, and one of its most dynamic activities.
Through its work, the OECD has developed a wide range of best practices and policy lessons. Because of its capacity to translate cutting edge analysis into policy action, and its experience with synthesizing different approaches through dialogue, the OECD was asked by the international community to develop a set of Corporate Governance Principles, in the wake of the Asian crisis. Their purpose: to be used as a reference by countries wanting to improve their corporate governance environment. At the same time, it goes without saying that there is no ‘one-size-fits-all’ system of corporate governance. In Eastern European countries corporate governance reform must inevitably take into account the specificity of the country, the legal and cultural traditions, and the underdeveloped market environment in which its companies operate.
In May 1999, the 29 governments of the OECD adopted these Principles, which were prepared by a task force, following wide consultations with many emerging and transition economies. These principles, the first such initiative at an intergovernmental level, cover five main areas:
- the rights of shareholders and their protection;
- the equitable treatment of all categories of shareholders, including minority and foreign shareholders;
- the role of employees and other stakeholders;
- timely disclosure and transparency of financial and non-financial information; and
- the responsibilities of the board towards the company and shareholders.
Following the adoption of the Principles, the G7, the G22 and others have asked the OECD and the World Bank to work together to improve corporate governance globally. Our cooperation today focuses on developing a global dialogue between private and public sectors which will produce agreed reform agendas, help each country set its own priorities, and define its proper institutional path to better governance.
In this context, the OECD and the World Bank have agreed to co-operate in efforts to improve corporate governance in emerging and transition economies. One important outcome of this agreement is the establishment of Regional Corporate Governance Roundtables, in which the OECD has taken the lead. The overarching objective of this activity is to encourage good corporate governance through an international policy dialogue involving both the public and private sectors, using the OECD Principles as a conceptual framework.
Further information regarding the OECD’s work on corporate governance may be found on the OECD website at http://www.oecd.org/daf/corporate-affairs.
Mr. Seiichi Kondo is Deputy Secretary General at OECD.