Building global corporate governance

Is corporate governance a theory that seeks to impose Western rules on developing economies? Or as the OECD prefers, is it a set of principles that local companies can adapt to national circumstances and still please international investors? Stilpon Nestor responds.

Some two years back, the OECD adopted its principles on Corporate Governance, the product of a taskforce comprising all 29 member governments and the European Commission, private parties, the World Bank, IMF, and other international organisations. From the start, this work benefited from broad exposure to public commentary on successive drafts, internet included. Some important non-OECD countries provided written comments on the working drafts. The Principles could be described as the first multilateral effort to produce a common language of corporate governance. Even though they have been called "standards" by many international institutions, the Principles are primarily a framework for policy makers, companies, investors and others to address corporate governance in terms commonly understood around the world. They do put forward some key requirements for an adequate corporate governance environment, irrespective of national backgrounds. But this does not imply forced harmonisation of the substantive norms - the Principles leave ample room for country differences. It does mean, though, that all differences become transparent. Transparency in its turn facilitates the forces of convergence, mostly market driven. but also driven by the world's increasing cultural and legal proximity.

The OECD Principles cover five main areas: Protection of the rights of shareholders is a pillar of any effective corporate governance system. The ability to participate in basic decisions concerning the company, chiefly by participation in general shareholder meetings is an important right. The Principles call for full ex ante disclosure of arrangements that redistribute control over the company in ways that deviate from proportionality to equity ownership. Equitable treatment of all shareholders. But corporate governance frameworks should also ensure equitable treatment of all shareholders, including minority and foreign shareholders. Insider trading and self-dealing should be prohibited; the latter is really the scourge of most emerging markets. Personal material interests of the board and management members in matters affecting the corporation should be disclosed. Stakeholders. As already mentioned, the Principles recognise it is in the long-term self-interest of firms to encourage active participation in the governance process by stakeholders (i.e. employees, creditors, long- term suppliers and customers among others). Legal rights of stakeholders should be effectively respected. Furthermore, factors such as business ethics and corporate awareness of environmental and societal interests of the communities in which it operates can have an impact on the reputation and long-term success of the corporation.

Strong disclosure regime. The Principles call for a strong disclosure regime, acknowledging transparency as a key element of an effective corporate governance system. They call for timely and accurate information to be disclosed on matters such as the company's financial and operating results, its objectives, major share ownership and voting rights, remuneration of key executives, and material foreseeable risk factors. This information should be prepared and audited in accordance with high quality standards. The application of such standards for accounting and audit, including codes of ethics for auditors, is one of the most effective ways of preserving and enhancing the quality and credibility of capital markets. In addition to their commercial objectives, companies are encouraged to disclose policies relating to business ethics, the environment and other public policy commitments. Such information may be important to better evaluate the relationship between companies and the communities in which they operate and the steps that companies have taken to implement their objectives.

The board. Finally, the board should be the main mechanism for effective monitoring of the management and for providing strategic guidance to the corporation. The Principles make it clear that the duty of the board to act fairly with respect to all groups of shareholders and with stakeholders, and to assure compliance with applicable laws. Board members should be able to exercise objective judgment on corporate affairs, independent of management. The Principles would have remained a dead letter if the international community that helped produce them did not take steps for their implementation. To be sure, a lot of "bottom- up" work has been occurring among companies and sometimes investors in the form of voluntary codes. But this was clearly not enough, given the pressure for change and the urgency of the task, especially from the perspective of emerging financial markets. The advocates for better governance in countries and companies need co-ordinated international support. There was also a clear need for a well-structured, sustainable policy dialogue that would use the newfound common language of the Principles to bring the different national players together.

In order to address these pressing needs the OECD and the World Bank put together a far-reaching global co-operation framework. On June 16, 1999, the OECD Secretary-General and the President of the World Bank signed a memorandum of understanding to this effect. The OECD Principles of Corporate Governance are the starting point and reference of this partnership. Its purpose is to broaden policy dialogue and co-operation on corporate governance reform and to respond to the need of individual countries to improve corporate governance. The co-operation between the World Bank and the OECD is structured along two major initiatives: a Global Corporate Governance Forum and a series of Regional Policy Dialogue Roundtables. 1.

The Forum is donor-driven mechanism being set up in order to:

• provide a framework for international co-operation and create synergies for the design and implementation of joint or individual assistance projects
• raise global awareness for the need to promote better corporate governance, increase visibility for reform efforts and provide a vantage point for progress assessment
• co-finance a number of local and regional initiatives in the private and public sectors that aim at promoting corporate governance
• promote comparative empirical and analytical work to advance our understanding of governance and its impact on economic performance

The steering committee of the Forum consisting of the World Bank, OECD and all participating bilateral and multilateral donors will develop the program of work of this ambitious exercise. In this, it will be benefit from yearly consultations with key recipients, whether private or public. It is expected that the forum will support a number of projects in developing and transition economies at national and local level. Projects will include the development and strengthening of private institutions such as institutes of directors, investor associations and self-regulatory organisations in the areas of accounting and auditing, the training of directors in corporate governance issues, training of independent analysts and financial journalists and work with groups of corporations to improve their transparency and accountability standards.

A cardinal piece of the forum's institutional set up is the creation of advisory groups that will provide for a continuous input of key corporate governance constituencies in the process. The first of these groups, the Private Sector Advisory Group has been set up and is chaired by Ira Millstein, one of the most well-known corporate governance gurus in the US. It has already managed to establish a task force between key institutional investors and Brazilian companies to promote better corporate governance. Millstein and his group also went to Russia in November, where they started a much needed investor-to-corporation dialogue with the Russia so-called "blue chips", that have been plagued by poor governance in the past. 2. The OECD/World Bank Regional Roundtables on Corporate Governance are the second leg of our global partnership. They are organised by the OECD and the World Bank Group in close co-operation with various regional partners who play an active role in their preparation and in setting the agenda.

In our ambition to advance the quality of corporate governance world-wide, we want to make the roundtables an inclusive platform for policy-dialogue, where senior policy-makers, regulators, corporations, investors, labour organisations and others can raise concerns, exchange experiences and find solutions. We also seek to encourage contacts and build bridges between the increasing number of voluntary initiatives that are now emerging - I mentioned some of them earlier. And we want to provide expertise, also from outside the region, giving their perspectives and views on various developments and initiatives.

In short, the objectives of the roundtables are:

• To improve the understanding of corporate governance practices in specific regions and inform the international community about national and regional reform initiatives.
• To identify key areas for improvement, both in the regulatory domain and in standard business practices and formulate an agenda for reform.
• To facilitate full participation by the region in the ongoing international dialogue on corporate governance.
• Finally, the roundtables should also serve as an instrument to identify the needs, and facilitate the provision, of technical assistance in the area of corporate governance -assistance that can be provided by the Global Forum and others

It is important to note that the corporate governance roundtables are not one-off events. Rather, they consist of a cycle of meetings taking place over a 30-36 month period. We believe that such a long-term presence is necessary in order to make a real difference, in order to develop and sustain a momentum for needed reforms and to cover all those issues and aspects that need to be addressed. The structure and agenda of the different roundtables are always adapted to the specific national and regional circumstances. But their respective work-plans also have some fundamental steps in common. The first step is to map the landscape. In many countries there is still insufficient information about important background elements, such as ownership structures, board practices, accounting standards and practices, and so on. The roundtables, therefore, have made quite an effort to bring such empirical material to the public.

These findings can then be compared with the situation in other countries and also can be used to provide a foundation for further and more detailed analysis. Following this initial stage, the roundtables focus on particular aspects of corporate governance that participants agree deserve special attention. For example, the Russian roundtable quickly turned to issues related to minority shareholders while the Asian roundtable recently held a meeting focussing on disclosure. The conclusions from these discussions on individual aspects will eventually be reflected in what we call a Regional White Paper on Corporate Governance. This report will be adopted by the members of each roundtable, which will contain an agenda for action and practical recommendations for reform, based on knowledge generated by roundtable discussions. It is important that these white papers are products of the roundtables with a real sense of regional ownership. As of today this process has been initiated in three different regions where corporate governance roundtables are up and running: Asia, Russia and Latin America. These roundtables are all at slightly different stages of their work, but it can already be concluded that all of them have been very successful.

They have all come to attract high-level participants, both from the public and the private side. And they have all, as we hoped at the outset, become a natural point of reference in their respective regions. As an example of their presence, I would like to quote from the APEC joint ministerial statement of September 2000; it reads: "Sound corporate governance will encourage the return of capital to the region. We welcome the efforts of the OECD and the World Bank to raise the awareness of, and the commitment to, corporate governance reforms in the region through roundtable discussions". Of central importance to the success of the roundtables is the strong regional and local involvement. We have very active co-sponsors in all the regions typically the main stock exchanges, governments, the securities regulators, business organisations and investor groupings. The Asian roundtable has the Asian Development Bank as a core co-organiser, along with the World Bank and the OECD. In the coming 12 months all three roundtables will be reviewing the first drafts of their respective white papers. In the case of Latin America, the first draft will be submitted in April to the Western Hemisphere Finance Ministers Forum as their key background on a corporate governance initiative they are undertaking.

A Eurasian roundtable, comprising mainly of former Soviet Union countries (except Russia) is been launched in October. Looking even further ahead we are also investigating the possibilities of establishing an African corporate governance roundtable, possibly in co-operation with some regional partners, such as the Commonwealth Association for Corporate Governance.

In conclusion, international co-operation is intensifying to achieve a number of goals:

• the formulation of certain basic rules of the game to address the lack of a global normative framework - in spite of rapid globalisation in product and financial markets.
• the development of a continuing international dialogue to facilitate the emergence of a culture among corporations and investors that views corporate governance as a value enhancing mechanism-not a burden imposed by outsiders.
• the marshalling of resources to help private and public efforts bear fruit.

We have barely begun this undertaking and it is urgent that we proceed rapidly. Seattle, Washington and Prague indicate a growing concern among many that an unchecked globalisation might create disparities in the allocation of resources, disparities that will be hard to remedy. The world risks rejecting the enormous benefits of international investment and deeper capital markets if its main conduits and recipients, the corporations, are not perceived as efficient, transparent, accountable and fair institutions.

Stilpon Nester is head of the OECD's corporate affairs division. Further information about the roundtables and related corporate governance activities on the websites of the OECD (www.oecd.org/daf/corporate-affairs) the Global Forum (www.gcgf.org) and the World Bank (www.worldbank.org/html/fpd/ privatesector/cg)

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