On 24 February 2010 the Organisation for Economic Cooperation and Development (OECD) published a report from the OECD Steering Group on corporate governance setting out conclusions and emerging good practices regarding corporate governance. It builds on the report entitled ‘Corporate Governance Lessons from the Financial Crisis’ and its subsequent, preliminary findings that were presented in ‘Corporate Governance and the Financial Crisis: Key Findings and Main Messages’.
The OECD reports that, although various corporate governance weaknesses have played a part in the development of the financial crisis, the OECD’s Principles of Corporate Governance “provide a good basis to adequately address the key concerns” raised in previous reports and so there is no urgent need for them to be revised. Instead, the OECD has decided to issue a set of conclusions and best practice to complement the Principles and encourage enhanced corporate governance which relate to the following:
- The need to improve the corporate governance framework - the OECD reports that the Steering Group’s analysis showed a gap between existing standards and actual implementation. Although it is primarily the responsibility of companies, the board and shareholders to ensure compliance, jurisdictions should also regularly review their supervisory, regulatory and enforcement authorities to ensure effective implementation and timely update.
- The governance of remuneration and incentives - remuneration is an issue for the board. The board must ensure that it aligns remuneration with the longer term interests of the company and this information should be disclosed in the remuneration report. The procedure for setting remuneration should be fully transparent and the roles and responsibilities of those involved should be clearly defined and separated. Remuneration policies and implementation measures should also be submitted to shareholders at the annual general meeting to raise awareness of the remuneration policy and enable shareholders to comment on the policy.
- The governance of risk management - risk management is the responsibility of the board. An effective risk management policy should be implemented and it is good practice for those directors involved in setting such a policy to be independent of profits centres. Risk management and results of risk assessments should be disclosed “in a transparent and understandable fashion”.
- Improving board practices, including board composition, independence and competence - the OECD reports that the boards of many companies which it reviewed were dominated by the chief executive officer (CEO) which “stifled critical enquiry and challenge essential for objective, independent judgement”. The chairman of the board should ensure that the board tackles the most important issues, and adequate measures should be put in place to ensure that the roles of the chairman and CEO are separated to avoid conflicts of interest. To promote board competence, the company should promote regular training evaluation and the results of that evaluation should be disclosed to shareholders.
- The exercise of shareholder rights - the OECD has identified the need to improve the exercise of shareholder rights, especially by institutional investors.