International Corporate Governance Principles

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International Corporate Governance Principles 1

Transcript of International Corporate Governance Principles

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International Corporate Governance Principles

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What is inside?

• OECD Principles• ADB Principles• Basel Committee Principles

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OECD Principles

• Organization of Economic Co-operation and Development (OECD) is the first international institution which introduced principles of corporate governance. Established in 1961, presently 30 member countries, headquarter in Paris.

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Objective of the principlesThe Principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries, and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. The Principles focus on publicly traded companies, both financial and non-financial.

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OECD Principles 1999

• Rights of the Shareholders and Key Ownership functions

• Equitable Treatment of Shareholders• Role of the Stakeholders in Corporate

Governance• Disclosures and Transparency• Responsibilities of the Board of Directors

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OECD Principles 2004

• Ensuring the Basis for an Effective Corporate Governance Framework

• The Rights of Shareholders and Key Ownership Functions

• The Equitable Treatment of Shareholders• The Role of Stakeholders in Corporate

Governance• Disclosure and Transparency• The Responsibilities of the Board

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Ensuring the Basis for an Effective Corporate Governance Framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

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Content under this principle• The corporate governance framework should be developed

with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets.

• The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable.

• The division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served.

• Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.

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The Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

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Basic shareholder rights should include

• Secure methods of ownership registration• Convey or transfer shares• Obtain relevant and material information

on the corporation on a timely and regular basis

• Participate and vote in general shareholder meetings

• Elect and remove members of the board• Share in the profits of the corporation.

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Continued.

Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as:

1) amendments to the statutes, or articles of incorporation or similar governing documents of the company;2) the authorization of additional shares; and 3) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company.

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Shareholders should have the opportunity to participate and vote in AGM

• 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.

• Shareholders should have the opportunity to ask questions to the board, including questions relating to the annual external audit, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations.

• Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Shareholders should be able to make their views known on the remuneration policy for board members and key executives. The equity component of compensation schemes for board members and employees should be subject to shareholder approval.

• 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.

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Other contents of this principle• 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.

• The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.

• Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.

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The Equitable Treatment of Shareholders

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.

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Other contents of this principle• All shareholders of the same series of a class

should be treated equally.• Insider trading and abusive self-dealing should

be prohibited.• Members of the board and key executives

should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.

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The Role of Stakeholders in Corporate Governance

The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

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Other contents of this principle• The rights of stakeholders that are established

by law or through mutual agreements are to be respected.

• Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

• Performance-enhancing mechanisms for employee participation should be permitted to develop.

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Continued.• Where stakeholders participate in the corporate

governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.

• Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

• The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.

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Disclosure and Transparency

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.

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Other contents of this principleDisclosure should include, but not be limited to, material

information on:• The financial and operating results of the company.• Company objectives.• Major share ownership and voting rights.• Remuneration policy for members of the board and key

executives, and information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board.

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Continued.

• Related party transactions.• Foreseeable risk factors.• Issues regarding employees and other

stakeholders.• Governance structures and policies, in

particular, the content of any corporate governance code or policy and the process by which it is implemented.

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Standard and independent• Information should be prepared and disclosed in accordance with high

quality standards of accounting and financial and non-financial disclosure.

• An annual audit should be conducted by an independent, competent and qualified, auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.

• External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit.

• Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users.

• The corporate governance framework should be complemented by an effective approach that addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis or advice.

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The Responsibilities of the Board

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.

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Other contents of this principle• 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 apply high ethical standards. It should take into account the interests of stakeholders.

• The board should fulfill certain key functions.• The board should be able to exercise objective

independent judgment on corporate affairs.• In order to fulfill their responsibilities, board members

should have access to accurate, relevant and timely information.

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Key functions of the board.• Reviewing and guiding corporate strategy, major plans of

action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

• Monitoring the effectiveness of the company’s governance practices and making changes as needed.

• Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

• Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.

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Continued.• Ensuring a formal and transparent board nomination and

election process.• Monitoring and managing potential conflicts of interest of

management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

• Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

• Overseeing the process of disclosure and communications.

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ADB Principles of Corporate Governance

ADB with collaboration with HERMES Pension Fund has developed a list of CG principles to assist:(i) enterprises design and implement their own

corporate governance guidelines by benchmarking their practices against these principles;

(ii) domestic and institutional investors, fund managers, as well as ADB, in their quest for excellence in corporate governance in investee enterprises;

(iii) governments in designing corporate governance regulations.

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ADB Principles of CG IncludePerformance Orientation• The principal objective of business enterprises is to

enhance economic value for all shareholders by making the most efficient use of resources. A company that meets this shareholder value creation objective will have greater internally generated resources, improving its prospects for meeting its environmental, community, and social obligations; pay taxes; reward, train, and retain key staff; and enhance employee satisfaction. A key focus area is a company’s human capital strategy, which is a lead indicator of corporate success.

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Nomination and Compensation Committees

• A nomination committee with a written mandate and terms of reference consistent with good practice may ensure the selection of directors and a chief executive officer (CEO) of the highest caliber. Comprising mainly of independent directors, the committee should have a written definition of independence, inclusive of both subjective and objective criteria.

• A compensation committee should set the compensation policy for directors and senior management, commensurate with performance measured against comparable industry benchmarks and key performance indicators such as economic value added.

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DisclosureTo ensure transparency, companies’ annual reports should

disclose true and fair accounting information prepared in accordance with applicable standards; consider substance over form in the presentation of accounts; disclose and discuss all material risks; disclose and explain the rationale for all material estimates; show manner of compliance, or explain deviations, if any, with applicable corporate governance codes; discuss goals, plans, and progress; and provide access to the register of shareholders showing beneficial ownership. In addition to annual disclosures, enterprises should comply with applicable continuous disclosure requirements. Disclosures should be timely and adequate to enable investors, third party analysts, or rating agencies to assess the quality of corporate governance and the true financial condition of the enterprise.

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Audit CommitteeAudit committees with the following attributes are more

effective:• Composed solely of independent directors, at least two of

whom should have the requisite knowledge of accountancy, financial analysis, and financial reporting;

• At least one member should have a good understanding of the business of the enterprise;

• Have a written mandate and terms of reference;• Engage only independent external auditors who should be

answerable to the committee;• Require that a suitable system of internal control and risk

management is embedded into the fabric of the company;• Focus on the substance of underlying transactions.

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Code of Conduct

All enterprises must have a written code of business conduct and establish systems to ensure that it and all applicable laws are followed in letter and spirit.

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Conflict of Interest• Directors owe a fiduciary duty to the company

that requires them to act in the best interest of the company. Actual and potential conflicts of interest should be identified, disclosed, and explained in sufficient detail to enable valid judgments to be made on their adverse impact. The persons who are conflicted should not participate in discussion and decision of the issue in question, nor be entitled to vote on any resolution where they are conflicted. Related party contracts should be disclosed in the annual report.

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Environmental and SocialCommitment

There is an inextricable relationship among the objectives of corporate performance, social development, and environmental protection. Enterprises, to be sustainable, will need to recognize and effectively deal with this triad of concerns, which, at times, may conflict with each other.

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Conduct of the Board of Directors

Directors are expected to preserve and enhance shareholder value. Their effectiveness can be enhanced if they are legally empowered, have the requisite qualifications for the board committees on which they sit, make the needed time commitment, given the appropriate directorship training, are suitably compensated, receive proper notice of meetings, have the right to propose agenda items, consult each other privately in the absence of management and executive directors, and provided with appropriate information to enable them to perform their monitoring role and evaluate the performance of directors. They should be proactive and diligent.

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Responsibility of InvestorsThe pursuit of good corporate governance in investee enterprises is a risk management tool. Institutional investors, general partners, and fund managers have a fiduciary duty to actively monitor and vote on issues vital to the success of enterprises in which they invest as guardians of the savings entrusted to them. Enterprises will find it helpful to communicate with them, deliver in a timely manner true and fair disclosure reports, and remove impediments from voting by all shareholders by taking advantage of modern communications and follow a one-vote for one-share policy. The fair treatment of minority shareholders must be ensured and large institutional investors should lead the pursuit of shareholder rights.

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Enhancing Corporate Governance for Banking Organizations

The Committee is publishing this paper to reinforce the importance for banks of the OECD principles, to draw attention to corporate governance issues addressed in previous Committee papers, and to present some new topics related to corporate governance for banks and their supervisors to consider.

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Continued.According to Basel Committee, from a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their boards of directors and senior management, affecting how banks:– Set corporate objectives;– Run the day-to-day operations of the business;– Consider the interests of recognized stakeholders;– Align corporate activities and behaviors with the expectation that

banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations;

– Protect the interests of depositors.

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SOUND CORPORATE GOVERNANCE PRACTICES

• Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organization

• Setting and enforcing clear lines of responsibility and accountability throughout the organization.

• Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns.

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Continued.• Ensuring that there is appropriate oversight by

senior management• Effectively utilizing the work conducted by

internal and external auditors, in recognition of the important control function they provide

• Ensuring that compensation approaches are consistent with the bank’s ethical values, objectives, strategy and control environment.

• Conducting corporate governance in a transparent manner

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Ensuring an Environment Supportive of Sound CG

Committee recognizes that primary responsibility for good corporate governance rests with boards of directors and senior management of banks; however, there are many other ways that corporate governance can be promoted, including by:– Governments – through laws;– Securities regulators, stock exchanges – through disclosure and

listing requirements;– Auditors – through audit standards on communications to boards

of directors, senior management and supervisors; and– Banking industry associations – through initiatives related to

voluntary industry principles and agreement on and publication of sound practices.

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The Role of Supervisor• Supervisors should be aware of the importance

of corporate governance and its impact on corporate performance. They should expect banks to implement organizational structures that include the appropriate checks and balances.

• Regulatory safeguards must emphasise accountability and transparency. Supervisors should determine that the boards and senior management of individual institutions have in place processes that ensure they are fulfilling all of their duties and responsibilities.

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Continued.• A bank’s board of directors and senior management are ultimately

responsible for the performance of the bank. As such, supervisors typically check to ensure that a bank is being properly governed and bring to management’s attention any problems that they detect through their supervisory efforts.

• When the bank takes risks that it cannot measure or control, supervisors must hold the board of directors accountable and require that corrective measures be taken in a timely manner.

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Continued.• Supervisors should be attentive to any warning signs of

deterioration in the management of the bank’s activities. They should consider issuing guidance to banks on sound corporate governance and the pro-active practices that need to be in place. They should also take account of corporate governance issues in issuing guidance on other topics.

• Sound corporate governance considers the interests of all stakeholders, including depositors, whose interests may not always be recognised. Therefore, it is necessary for supervisors to determine that individual banks are conducting their business in such a way as not to harm depositors.

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Thank You !

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