The Organisation for Economic Co-operation and Development (OECD) has taken the initiative to improve corporate governance worldwide following the series of financial crises in Asia and elsewhere, as Joanna Shelton explains.

Corporate governance in Russia

A number of recent corporate governance abuses in Russia have generated intense discussion about the future shape of Russian enterprises in the coming years. Investors have often seen their shares diluted by insiders and majority shareholders. Enterprises have been stripped of their assets by various means of transfer pricing and other related transactions. The interests of creditors have not been adequately protected.

Poor corporate governance practices have hampered the mobilisation of outside capital and cultivated conflicts of interest. These weaknesses have been compounded by serious deficiencies in the tax and accounting system as well as institutional structures.

As the first practical implementation of the OECD-World Bank co-operation agreement to promote corporate governance reform around the world, a permanent dialogue structure is being established in Russia with the authorities, the OECD and the World Bank. This corporate governance roundtable for Russia will help raise and maintain momentum for corporate governance reforms and ensure high quality advice for the Russian public and private sector decision makers involved in this effort.

This initiative is a result of an OECD meeting held in Moscow in June 1998, which aimed to assess the corporate governance framework in Russia and introduce the OECD corporate governance principles to Russian decision makers. Improving corporate governance is a key to raising much needed investment in Russian enterprises. The way enterprises treat their shareholders and other stakeholders directly affects their capacity to survive and prosper in the long term, in their ability to generate profits as well as promote better quality jobs.

A transparent and accountable corporate sector is also an important prerequisite for a more open economy and society with accountability at all levels. The Russian market suffers from a considerable opacity of financial, ownership and corporate governance structures, especially in corporate groups. Experience in countries with large and active equity markets shows that disclosure has been a powerful tool both for influencing the behaviour of companies and for protecting investors.

The roundtable will bring together once or twice a year the leadership of local securities regulators, stock exchanges, financial market institutions, legal experts and corporations, as well as representatives of stakeholders and civil society. Senior international experts from equivalent institutions in selected OECD countries and representatives of international organisations working in this area are expected to participate. The next meeting of the roundtable is expected to take place in February 2000.

The roundtable aims to promote good corporate governance by using as a starting point the OECD principles of corporate governance and further develop them to address Russian concerns. It seeks to generate dialogue on these issues, disseminating international experience and best practice.

The roundtable will identify areas for further work at policy level and help identify technical assistance needs in the private and public sectors, make recommendations for policy implementation, regularly review progress and take stock of corporate governance developments.

Commercial endeavour, by its very nature, implies the taking of risks. The ultimate responsibility within a company for managing such risks lies with the board of directors. That is why the effectiveness of a company's board is such a vital component of good corporate governance. In May 1998, ministers representing the 29 governments of the Organisation for Economic Co-operation and Development (OECD) adopted a set of principles of corporate governance, in which recommendations for the management and disclosure of risks play a fundamental part.

These principles, the first such initiative at an inter-governmental level, cover 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 corporate structures and operations; and the responsibilities of the board towards the company and shareholders.

The application of these principles should contribute to reducing systemic risk by improving the management of all the risks that have an impact on company performance.

Financial crises
The OECD principles grew out of a growing awareness of the importance of good corporate governance. A series of financial crises in Asia and elsewhere in recent years had made amply clear why shortcomings in corporate governance mechanisms can be so harmful to national economic performance and, ultimately, to global financial stability. In many of the countries affected by these crises, interest groups linked to large financial institutions or to the state ran vast conglomerates under conditions that prevented effective external scrutiny.

This lack of transparency and accountability contributed in turn to distorted incentive structures, leading to over-investment and dangerously high levels of corporate indebtedness. Poor disclosure and lack of independent and good quality audit prevented early warning of the deteriorating financial conditions of corporations. To be sure, foreign financial institutions showed imprudence in lending large amounts of funds without analysing sufficiently the risks that they were taking. When the imbalance became too large to be ignored, it prompted a rout in financial markets, setting back the development efforts of entire countries and regions.

But the challenge of improving corporate governance frameworks is not limited to emerging economies. European countries face mounting calls for better treatment of minority shareholders and greater transparency in mergers and acquisitions. In Japan, efforts to re-launch economic dynamism clearly require improvements in corporate governance in areas such as information disclosure and the structure of company boards. Even in the United States, where issues of corporate governance have been at the forefront of public attention for the longest, institutional investors in particular have expressed concern that in companies with dispersed ownership, management could be pursuing other than shareholders' long term interests.

The OECD's principles of corporate governance highlight the need for recognition of the right of shareholders, including minority and foreign shareholders, to participate in basic decisions concerning the company. They call for a ban on insider trading and self-dealing, and for the disclosure of personal interests on the part of members of boards and management in matters affecting the corporation. In the long term self-interest of firms, they recommend that the corporate governance framework should encourage active co-operation between corporations and stakeholders (such as employees, creditors, long term suppliers and customers among others) in creating wealth and jobs, and in preserving financially sound enterprises. They also call for the legal rights of stakeholders to be effectively respected.

Shareholders and potential investors require access to regular, reliable and comparable information in sufficient detail for them to make informed decisions. Insufficient or unclear information may hamper the ability of the markets to function, increase the cost of capital and result in a poor allocation of resources.

The OECD principles 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, the remuneration of key executives, and material foreseeable risk factors. This information should be prepared and audited in accordance with high quality standards. The principles support the development of high quality, internationally recognised standards.

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 evaluate better the relationship between companies and the communities in which they operate and the steps that businesses have taken to implement their objectives.

Finally, the principles identify the board of directors as the most appropriate principal mechanism for effective monitoring of the management, including the reviewing and guiding of risk policy, and for providing strategic guidance to the corporation. They make it clear that it is 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 judgement on corporate affairs, independent of management.

The OECD principles are not intended to substitute for any private sector initiatives to develop more detailed “best practices.” This is best left to private parties and individual countries. However, they will provide guidance and direction for stock exchanges, national securitiescommissions, investors, corporations and other private parties as they elaborate best practices, listing requirements and codes of conduct.In response to a mandate from OECD and G7 ministers, the OECD and the World Bank have signed an agreement to co-operate more closely to promote improved corporate governance on a global scale. For this purpose, we have set up a global corporate governance forum bringing together developing, transition and donor countries, regional development banks and international organisations, along with private sector participants.

The OECD and the World Bank have agreed to use the OECD principles as an important point of reference in this co-operation, and to develop initiatives to promote dialogue on the principles. A senior private sector advisory group is being set up to assist the forum in developing thisdialogue and in providing advice to private parties in their own reform efforts. The two organisations welcome suggestions on the work programme of the forum. These can be submitted through their respective web sites: and sector/cg.

Joanna Shelton is deputy secretary-general of the OECD from 1995 to 1999 and chairman of the OECD ad hoc task force on corporate governance.