THE REVISED OECD PRINCIPLES OF CORPORATE GOVERNANCE

1. THE REVISED OECD PRINCIPLES OF CORPORATE GOVERNANCE Daniel Blume – OECD

2. Presentation • What are the major issues and recommendations emerging from the OECD review of its Principles of Corporate Governance? • How do the Principles address information disclosure issues? • How can OECD support further corporate governance improvements in the future?

3. Policy concerns and driving forces Corporate scandals and large failures Problems of Compensation and legitimacy New awareness of links between corporate governance arrangements and growth need for improving Transparency and disclosure Alignment of incentives Monitoring by boards Shareholder rights Implementation and enforcement

4. OECD Ministers at their 2002 Annual Meeting that the integrity of corporations, financial institutions and markets is essential to maintain confidence and economic activity and to protect the interests of stockholders to implement best practices in corporate and financial governance, which entails an appropriate mix of incentives, balance between regulations and self regulation, backed by effective enforcement. to survey recent experience and assess the Principles of Corporate Governance. • Observed • Agreed • Agreed

5. Why “core principles”? Enormous variation in ownership and control structures in the world No single model of good corporate governance but need for a global language Detailed codes, best practices should be established at national and regional levels Objective to identify common elements or core principles underlying good corporate governance across the different systems: a multilateral policy framework

6. FINANCIAL STABILITY FORUM GUIDANCE FOR THE REVIEW Recent improvements in national standards should be reflected in the revised Principles While the Principles themselves should remain general, they should be strengthened Provide more substantial guidance on applicability, implementation and enforcement in different economic and legal contexts

7. The Review Process and Timetable OECD Steering Group on Corporate Governance Ministerial Meeting May 2004 Public Consultation On the Web Survey of CG Developments since 1999 Experiences in non-member countries Consultations with high-level roundtables Consultations with non-OECD countries Consultations with interested parties

8. The major changes to the core elements of the OECD Principles NEW • Implementation and enforcement • Improved rights of shareholders • The equitable treatment of shareholders • Role of stakeholders / whistle blower protection • Improved disclosure and transparency • Tightened responsibility of the boards

9. How do the revised principles tackle major issues ISSUES CHAPTERS • Implementation and Enforcement • The rights of Shareholders • Equitable Treatment of Shareholders • The role of stakeholders • Disclosure and transparency • The responsibility of the boards • Controlling executive and director remuneration • Abuse in company groups • Self dealing and abuse by insider • Improving financial market integrity • Improving enforcement • Better exercise of ownership

10. How do the revised principles tackle major issues Boards to align key executive & board remuneration with the longer terms interests of company and shareholders And establish a remuneration policy Statement that special remuneration committee with independent directors regarded as best practice in more countries The remuneration policy to be disclosed Shareholders to have ability to make their views known on the policy and to approve equity components of the scheme • Controlling executive and director remuneration Chap VI Chap VI Chap V Chap II

11. How do the revised principles tackle major issues • Abuse in company groups Chap VI Clear statement on fiduciary duties of board members to company, not to the group Explicit statement that boards to review related party transactions using independent directors More general statement of board independence to cover those in a position to influence the company and not just management Stronger call for protection of minority shareholders Stronger annotations to disclosure of related party transactions Stronger principle on board and executive disclosure of material interests Chap VI Chap VI Chap III Chap V Chap III

12. How do the revised principles tackle major issues • Self dealing and abuse by insiders Strengthened principle calling for boards to establish ethical guidelines and effective compliance procedures Boards to oversee internal controls and provide confidential access to whistleblowers Tightened disclosure standards to the board and to the market Strengthened criteria for board independence Greater possibilities for shareholders to question boards and to participate Chap VI Chap VI Chap V Chap VI Chap II

13. How do the revised principles tackle major issues Chap I • Improving financial market integrity Chap V Improved Enforcement Better disclosure by the company including related party transactions Those providing analysis and advice to be free of conflicts of interest More emphasis on auditor independence and reference to IOSCO standards Accountability of external auditors to shareholders and duty of professional care to the company Boards to focus on overseeing internal controls and major accounting assumptions through independent audit committee Chap V Chap V Chap V Chap VI

14. How do the revised principles tackle major issues Chap II & V • Improving enforcement Greater role for shareholders and improved transparency Tightening of fiduciary responsibility of boards Improved financial market integrity Clear objectives for policy in establishing a system leading to transparent and efficient markets Supervisory, regulatory and enforcement authorities should have authority, integrity and resources to fulfil duties Clear division of responsibilities between domestic authorities Legal and regulatory instruments to be transparent and enforceable Chap VI Chap V Chap I Chap I Chap I Chap I

15. How do the revised principles tackle major issues • Better exercise of ownership Chap II Improved possibilities for shareholders to consult with each other on key governance issues Inst. Inv. acting in a fiduciary capacity to declare voting policies and how they are handling conflict of interests Eliminating impediments to cross border voting More detailed annotations covering use of proxy voting and conduct of shareholder meetings Call for effective shareholder participation in key decisions such as the nomination and election of board members, proposing resolutions and making views known on compensation policy Chap II Chap III Chap II Chap II

16. The OECD Principles chapter on Disclosure and Transparency • The corporate governance framework should ensure timely and accurate disclosure on all material matters, including financial situation, performance, ownership and governance of the company. • At minimum annually, or even semi-annually or quarterly; or more frequently for material developments. • Material info is that information whose omission or misstatement could influence economic decisions taken by users of information. • Should be simultaneous to all shareholders. • Requirements should not create unreasonable administrative or cost burdens.

17. Why is transparency and disclosure important? • Strong transparent disclosure regime is pivotal for market-based monitoring of companies and central to shareholder ability to exercise ownership rights. • Can be powerful tool for influencing companies and protecting investors. • Can help to attract capital and maintain confidence in the markets. • Weak disclosure can contribute to unethical behaviour and loss of market integrity, costing not only company but economy as a whole. • Insufficient or unclear information may hamper ability of markets to function, increase cost of capital and result in poor resource allocation.

18. What information should be disclosed? • Financial and operating results of the company. • Company objectives. • Major share ownership and voting rights. • Remuneration policy for board members and key executives, and info about board member qualifications, selection process, other company directorships and whether they are independent. • Related party transactions. • Foreseeable risk factors. • Issues regarding employees and other stakeholders. • Corporate governance codes and policies, and how they are implemented.

19. Other key disclosure issues • Financial, non-financial and accounting information should be prepared and disclosed consistent with high quality, internationally accepted standards. • Annual audit should be prepared by independent, competent qualified auditor to provide assurance that statements fairly represent company financial position and performance. • External auditor should be accountable to shareholders and owes duty to the company to exercise due professional care.

20. Other key disclosure issues, continued • Channels for disseminating information should provide for equal, timely and cost-efficient access to the relevant information by users. • The corporate governance framework should be complemented by an effective approach for addressing and promoting the provision of analysis and advice by analysts, brokers, rating agencies and others that is free from material conflicts of interest that might compromise the integrity of their analysis and advice.

21. Supporting guidance on disclosure • IOSCO: • Principles of Auditor Oversight • Principles of Auditor Independence and the Role of Corporate Governance in Monitoring Auditor Independence • Statement of Principles for Addressing Sell-Side Securities Analyst Conflicts of Interest • Statement of Principles Regarding the Activities of Credit Rating Agencies • OECD: • Guidelines for Multinational Enterprises (ethics); • Options for Obtaining Beneficial Ownership and Control Information

22. Encouraging active use of the Principles • OECD Ministers adopted revised Principles in May and “encouraged the wide dissemination and active use of the Principles, and a sustained policy dialogue among governments and other concerned parties.” • The World Bank will take into account changes and update its framework for reviewing corporate governance performance in developing countries as part of the ROSC financial review process. • OECD will develop own process for reviewing OECD country progress. • Regional Roundtables on Corporate Governance – organized by OECD in partnership with World Bank Group (and supported by GCGF and CIPE) – will continue to promote reforms. • Roundtables in Asia, Eurasia, Southeast Europe, Russia and Latin America. • GCGF also supports Forums in MENA, Africa and Caribbean regions.

23. How can OECD support future efforts in the region? • OECD MENA Initiative on Investment and Governance for Development • Building on previous meetings addressing governance and investment issues in Beiruit and Istanbul, meeting in Amman planned June 30-July 1. • Five investment-related sub-topics to be addressed: • Transparent and open investment policies (integrity); • Encouraging investment promotion agencies to act as driving forces for reform; • Providing a Tax Framework for Investment; • Investment strategies in support of diversification; • Improving Corporate Governance

24. OECD MENA Initiative on Investment • It is proposed to create an overall steering group on investment and one regional working group for each sub-topic. • Regional dialogue on corporate governance has already been launched through separate process with GCGF, CIPE. This process should continue and be enlarged. • As a MENA Roundtable on Corporate Governance, it would be oriented toward providing fuller access to international expertise and dialogue on corporate governance, and development of regional and possibly country-specific recommendations.

25. Next Steps • Conclusions of this meeting to be reported to Amman meeting, June 30-July 1, 2004, and follow-up plans to be considered. • Propose to launch three year Roundtable programme from late 2004 to late 2007: • Phase 1: Updating of assessments of current state of corporate governance (country visits, meetings). • Phase 2: Completion of action plans (White Paper). • Phase 3: Review, monitoring and co-ordination to promote progress. • Your feedback welcome – will report to my Director and co-ordinate follow-up with you on participation from the region.