Corporate Governance Guidelines
Corporate governance refers to the structures and processes for the direction and control of companies that align the interests of a wide range of different stakeholders such as management, employees, shareholders and creditors. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside sources of capital. Although, the role of each of these stakeholders and their interactions widely vary among countries, a good corporate governance regime helps to assure that companies use their capital efficiently. Corporate governance ultimately is a matter of self-interest for companies. Good corporate governance will enhance a client’s access to capital markets and improve corporate performance.
Access to capital markets. Strengthening investors’ confidence will trigger investors’ appetite to invest. Furthermore, in an increasingly integrated world characterized by highly mobile capital, investors’ expectations for more responsive corporate governance practices are something that companies cannot afford to ignore. International flows of capital enable companies to access financing from a much larger pool of investors and attracts more «patient» long-term capital. Finally, improved corporate governance practices will reduce uncertainty and risks for investors as transparency and predictability increases. This could yield higher business valuations. Adherence to good corporate governance practices: (i) will help improve the confidence of both foreign and domestic investors, (ii) may reduce the cost of capital, and (iii) ultimately will induce more stable sources of financing.
Corporate performance. Good corporate governance helps to ensure that companies take into account the interests of a wide range of constituencies, as well as of the communities within which they operate, and that their boards are accountable to the company and the shareholders. Better governance structures and processes improve decision-making within companies and reduce the occurrence of conflicts between different stakeholders. The best-run companies also recognize that business ethics and corporate awareness of the environmental and societal interest of the communities in which they operate can have an impact on their reputation and long-term.
The importance of good corporate governance to foreign investors
In addition to the benefits to individual client companies, good corporate governance will help foreign investors to reduce risks and will make a positive contribution to the development of international capital markets.
Reducing risks. Foreign Investors face not only investment risk, but poor governance or, in the worst cases, corporate scandals also involve a reputational risk. Increased transparency regarding structures, processes and financial results will reduce the likelihood of conflicts among a client’s constituencies.
Development of international capital markets. Improving corporate governance has an impact that goes well beyond the level of individual companies. Strengthening the confidence of investors in a country’s companies and capital markets matters greatly to the long-term competitiveness, overall health and vitality of national economies.
The OECD Principles of Corporate Governance provide the framework for the work of PSCB in this area, identifying the key practical issues: the rights and equitable treatment of shareholders, the role of stakeholders, disclosure and transparency, and the responsibilities of the board of directors. The OECD principles form part of a broader international effort to promote increased transparency, integrity and the rule of law. The Principles are non-binding, but merely serve as a reference point. The principles focus on publicly traded companies, but are also a useful tool to improve corporate governance in non-traded companies. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. Furthermore it should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
The rights of shareholders
PRINCIPLE: The corporate governance framework should protect shareholders’ rights. Basic shareholder rights include the right to: (i) secure methods of ownership registration; convey or transfer shares; (iii) obtain relevant information on the company on a timely and regular basis; (iv) participate and vote in general shareholder meetings; (v) elect members of the board; and (vi) share in the profits of the corporation.
Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: (i) amendments to the statutes, or articles of incorporation or similar governing documents of the company; (ii) the authorization of additional shares; and (iii) extraordinary transactions that in effect result in the sale of the company.
Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings: (i) shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting, (ii) opportunity should be provided for shareholders to ask questions of the board and to place items on the agenda at general meetings, subject to reasonable limitations, and (iii) shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia.
Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.
Markets for corporate control should be allowed to function in an efficient and transparent manner: (i) the rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class, and (ii) anti-take-over devices should not be used to shield management from accountability.
Shareholders, including institutional investors, should consider the costs and benefits of exercising their voting rights.
The equitable treatment of shareholders
PRINCIPLE: The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. All shareholders of the same class should be treated equally: (i) within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the voting rights attached to all classes of shares before they purchase. Any changes in voting rights should be subject to shareholder vote, (ii) votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares, and (iii) processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Borrower procedures should not make it unduly difficult or expensive to cast votes. Insider trading and abusive self-dealing should be prohibited. Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the company.
The role of shareholders in corporate governance
PRINCIPLE: The corporate governance framework should recognize the rights of shareholders as established by law and encourage active co-operation between companies and shareholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
The corporate governance framework should assure that the rights of shareholders that are protected by law are respected. Where shareholder interests are protected by law, shareholders should have the opportunity to obtain effective redress for violation of their rights.
The corporate governance framework should permit performance-enhancing mechanisms for shareholder participation. Where shareholders participate in the corporate governance process, they should have access to relevant information.
Disclosure and transparency
PRINCIPLE: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the company, including the financial situation, performance, ownership, and governance of the Borrower. Disclosure should include, but not be limited to, material information on: (i) the financial and operating results of the company, (ii) company objectives, (iii) major share ownership and voting rights, (iv) members of the board and key executives, and their remuneration, (v) material foreseeable risk factors, (vi) material issues regarding employees and shareholders, and (vii) governance structures and policies.
Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit.
An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented.
Channels for disseminating information should provide for fair, timely and cost efficient access to relevant information by users.
The responsibilities of the board
PRINCIPLE: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.
Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. The board should ensure compliance with applicable law and take into account the interests of shareholders.
The board should fulfill certain key functions, including: (i) reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, overseeing major capital expenditures, acquisitions and divestitures, (ii) selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning, (iii) reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process, (iv) monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions, (v) ensuring the integrity of the company’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law, (vi) monitoring the effectiveness of the governance practices under which it operates and making changes as needed, and (vii) overseeing the process of disclosure and communications.
The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management: (i) boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration, (ii) board members should devote sufficient time to their responsibilities. In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information.
