Principles of Corporate Governance

Good corporate governance is not an end in itself. It is a means to support economic efficiency, sustainable growth and financial stability. It facilitates companies' access to capital for long-term investment and helps ensure that shareholders and other stakeholders who contribute to the success of the corporation are treated fairly. During the last decade, corporate governance rules and practices have improved in many countries and companies. But much remains to be done. And today, policy makers and regulators are faced with the important challenge to adapt corporate governance frameworks to rapid changes in both the corporate and financial landscape.

Examples of such challenges include the increasing complexity of the investment chain, the changing role of stock exchanges and the emergence of new investors, investment strategies and trading practices.

Originally developed by the OECD in 1999, then updated in 2004, the 2015 revision of the Principles of Corporate Governance addresses these and other emerging issues that are increasingly relevant. Building on the expertise and experience of policy makers, regulators, business and other stakeholders from around the world, the Principles provide an indispensable and globally recognised benchmark for assessing and improving corporate governance. The Principles have been adopted as one of the Financial Stability Board's key standards for sound financial systems, and have been used by the World Bank Group in more than 60 country reviews worldwide. They also serve as the basis for the guidelines on corporate governance of banks issued by the Basel Committee on Banking Supervision.

Methodology for assessing the implementation of the Principles

17/03/2017 - This methodology underpins an assessment of the implementation of the Principles in a jurisdiction and provides a framework for policy discussions. The ultimate purpose of an assessment is to identify the nature and extent of specific strengths and weaknesses in corporate governance, and thereby underpin policy dialogue that will identify reform priorities leading to the improvement of corporate governance and economic performance. The G20/OECD Principles of Corporate Governance help policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to supporting economic efficiency, sustainable growth and financial stability. They are one of the Key Standards for Sound Financial Systems adopted by the Financial Stability Board (FSB).

The associated Methodology for Assessing the Implementation of the G20/OECD Principles of Corporate Governance was developed by the OECD Corporate Governance Committee, with the participation of the World Bank, to underpin an assessment of the implementation of the Principles in a jurisdiction and to provide a framework for policy discussions, for example in the context of the Reviews of Observance of Standards and Codes (ROSCs) or other country assessments. This latest version incorporates changes that were made to the Principles during the 2015 review as well as a number of additional clarifications.

The G20/OECD Principles of Corporate Governance help policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to supporting economic efficiency, sustainable growth and financial stability. First published in 1999, the Principles have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have also been adopted as one of the Financial Stability Board’s Key Standards for Sound Financial Systems and form the basis for the World Bank Reports on the Observance of Standards and Codes (ROSC) in the area of corporate governance. This edition contains the results of the second review of the Principles, conducted in 2014/15.

The basis for the review was the 2004 version of the Principles, which embrace the shared understanding that a high level of transparency, accountability, board oversight, and respect for the rights of shareholders and role of key stakeholders is part of the foundation of a well-functioning corporate governance system. These core values have been maintained and strengthened to reflect experiences since 2004 and ensure the continuing high quality, relevance and usefulness of the Principles. The second review was conducted under the responsibility of the OECD Corporate Governance Committee chaired by Mr. Marcello Bianchi. All non-OECD G20 countries were invited to participate on an equal footing. Experts from relevant international organisations, notably the Basel Committee on Banking Supervision, the Financial Stability Board and the World Bank Group, also participated actively in the review.

Significant contributions were received from the OECD’s regional corporate governance roundtables in Latin America, Asia and the Middle East and North Africa, experts, an online public consultation and the OECD’s official advisory bodies, the Business and Industry Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC). A draft of the Principles was discussed by the G20/OECD Corporate Governance Forum in April 2015. Following that meeting, the OECD Council adopted the Principles on 8 July 2015. The Principles were then submitted to the G20 Leaders Summit on 15-16 November 2015 in Antalya, where they were endorsed as the G20/OECD Principles of Corporate Governance. In order to ensure their continuing relevance and accuracy, the review of the Principles was supported and informed by extensive empirical and analytical work addressing relevant changes in both the corporate and financial sectors.

In this work, the OECD Secretariat and the Corporate Governance Committee reached out to a large number of experts, organisations and research institutions. Support for research was also received from relevant academic institutions, including Bo aziçi University. The next step for the OECD working with the G20 and stakeholders is to promote and monitor effective implementation of the revised Principles. This will include a comprehensive review of the Methodology for Assessing the Implementation of the Principles of Corporate Governance.

The Principles are intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability. This is primarily achieved by providing shareholders, board members and executives as well as financial intermediaries and service providers with the right incentives to perform their roles within a framework of checks and balances. The Principles are intended to be concise, understandable and accessible to the international community. On the basis of the Principles, it is the role of government, semi-government or private sector initiatives to assess the quality of the corporate governance framework and develop more detailed mandatory or voluntary provisions that can take into account country-specific economic, legal, and cultural differences. The Principles focus on publicly traded companies, both financial and non-financial.

To the extent they are deemed applicable, they might also be a useful tool to improve corporate governance in companies whose shares are not publicly traded. While some of the Principles may be more appropriate for larger than for smaller companies, policymakers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. The Principles do not intend to prejudice or second-guess the business judgment of individual market participants, board members and company officials.

What works in one company or for one group of investors may not necessarily be generally applicable to all of business or of systemic economic importance. The Principles recognise the interests of employees and other stakeholders and their important role in contributing to the long-term success and performance of the company. Other factors relevant to a company’s decision-making processes, such as environmental, anti-corruption or ethical concerns, are considered in the Principles but are treated more explicitly in a number of other instruments including the OECD Guidelines for Multinational Enterprises, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the UN Guiding Principles on Business and Human Rights, and the ILO Declaration on Fundamental Principles and Rights at Work, which are referenced in the Principles.

The Principles are developed with an understanding that corporate governance policies have an important role to play in achieving broader economic objectives with respect to investor confidence, capital formation and allocation. The quality of corporate governance affects the cost for corporations to access capital for growth and the confidence with which those that provide capital – directly or indirectly – can participate and share in their value-creation on fair and equitable terms. Together, the body of corporate governance rules and practices therefore provides a framework that helps to bridge the gap between household savings and investment in the real economy. As a consequence, good corporate governance will reassure shareholders and other stakeholders that their rights are protected and make it possible for corporations to decrease the cost of capital and to facilitate their access to the capital market.

This is of significant importance in today’s globalised capital markets. International flows of capital enable companies to access financing from a much larger pool of investors. If companies and countries are to reap the full benefits of the global capital market, and if they are to attract long-term “patient” capital, corporate governance arrangements must be credible, well understood across borders and adhere to internationally accepted principles. Even if corporations do not rely primarily on foreign sources of capital, a credible corporate governance framework, supported by effective supervision and enforcement mechanisms, will help improve the confidence of domestic investors, reduce the cost of capital, underpin the good functioning of financial markets, and ultimately induce more stable sources of financing. There is no single model of good corporate governance. However, some common elements underlie good corporate governance.

The Principles build on these common elements and are formulated to embrace the different models that exist. For example, they do not advocate any particular board structure and the term “board” as used in the Principles is meant to embrace the different national models of board structures. In the typical two-tier system, found in some countries, “board” as used in the Principles refers to the “supervisory board” while “key executives” refers to the “management board”. In systems where the unitary board is overseen by an internal auditor’s body, the principles applicable to the board are also, mutatis mutandis, applicable. As the definition of the term “key executive” may vary among jurisdictions and depending on context, for example remuneration or related party transactions, the Principles leave it to individual jurisdictions to define this term in a functional manner that meets the intended outcome of the Principles.

The terms “corporation” and “company” are used interchangeably in the text. The Principles are non-binding and do not aim at detailed prescriptions for national legislation. Rather, they seek to identify objectives and suggest various means for achieving them. The Principles aim to provide a robust but flexible reference for policy makers and market participants to develop their own frameworks for corporate governance. To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities. Taking into account the costs and benefits of regulation, governments have an important responsibility for shaping an effective regulatory framework that provides for sufficient flexibility to allow markets to function effectively and to respond to new expectations of shareholders and other stakeholders. The Principles are widely used as a benchmark by individual jurisdictions around the world.

They are also one of the Financial Stability Board’s Key Standards for Sound Financial Systems and provide the basis for assessment of the corporate governance component of the Reports on the Observance of Standards and Codes of the World Bank. The Principles themselves are evolutionary in nature and are reviewed in light of significant changes in circumstances in order to maintain their role as a leading instrument for policy making in the area of corporate governance. The Principles are presented in six different chapters:

  1. Ensuring the basis for an effective corporate governance framework;
  2. The rights and equitable treatment of shareholders and key ownership functions;
  3. Institutional investors, stock markets, and other intermediaries;
  4. The role of stakeholders; V) Disclosure and transparency;
  5. The responsibilities of the board. Each chapter is headed by a single principle that appears in bold italics and is followed by a number of supporting sub-principles.

The Principles are supplemented by annotations that contain commentary on the Principles and are intended to help readers understand their rationale. The annotations may also contain descriptions of dominant or emerging trends and offer alternative implementation methods and examples that may be useful in making the Principles operational.

The OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies.

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