OECD Principles of corporate governance
A consultation document by the Ad Hoc Task Force on Corporate Governance
Comments from ACCA
January 2004
Executive Summary
ACCA is pleased to comment on the draft revision of the OECD Principles of Corporate Governance. ACCA supports the existing Principles, which we believe are relevant to developed as well as developing countries. We agree that it is appropriate to review the Principles following recent corporate scandals.
People have commented that the existing Principles are at too high a level to facilitate local implementation. We note that the Principles are intended to assist governments to improve corporate governance and provide guidance to various other parties, such as stock exchanges and companies. At present no distinction is provided in the text on its application for the different parties. We suggest that the revised draft would be more useful, both for governments and for other parties, including companies, if it set out separately the Principles for governments and regulators to consider and the Principles for companies to apply. This would facilitate implementation of the Principles by governments, regulators and companies and facilitate assessment of companies' corporate governance by investors and other stakeholders.
We note with approval a number of additions to the Principles. However, we are disappointed that the section on disclosure does not provide more guidance on the importance of disclosure of corporate governance practice as well as corporate governance structure and policies. Disclosure of performance, as well as structure, with reference to an accepted governance code, can be an effective tool for enforcement of good governance. The importance of internal control and risk management has been underlined in each of the recent corporate scandals; we were therefore disappointed that little reference is made to this subject.
We recognise the importance of making reference to the role of institutional investors. We consider, however, that this complex subject requires more careful consideration of all the issues than has been given in the revised text.
General Comments
The revised draft follows the structure of the existing Principles and much of the text is identical. However, in many areas the revised draft is significantly expanded and addresses many of the recent well publicised corporate governance concerns.
Providing greater Clarity for addressees
The preamble states that the OECD Principles are intended �to assist governments in 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'.
In many respects, however, much of the text of the Principles reads more like a country's corporate governance code , to be followed by individual companies. The Principles should be useful for such a purpose and many companies could advantageously improve their governance and their organisational effectiveness by applying them. Application of the Principles in Section V on responsibilities of the board, in particular, should be beneficial to companies in both developed and developing countries. We note, sadly, that few companies fully apply these Principles.
The existing Principles have been criticised for being at too high a level. We believe that the revised draft might be more useful, both for governments and for companies, if it set out separately the Principles for governments to consider and the Principles for companies to apply. For example, all of Section V is directly relevant to company boards, whereas most of Sections I and II are more relevant to governments and regulators. Sections III and IV contain sub-sections relevant both to governments, regulators and companies but few sub-sections are relevant to all of these parties.
The changes
We are pleased to note that greater attention is given in the new draft to protection of minority shareholders, related-party transactions, cross - border voting, communication of concerns regarding unethical practice, policy on and disclosure of board remuneration, board ethical standards, and board monitoring of ethical standards.
We are, however, disappointed that the OECD has not taken the opportunity further to develop Principles for disclosure of corporate governance practice. In particular, although disclosure is required on governance structure and policies, it is what companies and boards actually do rather than what they have as policy or structure which is important. The OECD Principles should give guidance on the disclosure of key corporate governance practices, such as how the board meets its responsibilities as set out in Section V, including the steps the board takes to satisfy itself that the accounts and other disclosures give a true and fair view, and on the processes for nominations and setting remuneration.
We are also disappointed that the revised draft does not explicitly address internal control. Weaknesses in internal control have, of course, been a major part of each of the recent highly publicised corporate failures.
Specific Comments on the Text
Ensuring an effective framework
Page 5. We welcome the fact that this introductory section highlights the need to articulate clearly the different responsibilities among different regulatory authorities within a jurisdiction.
Section 1 - The rights of shareholders
Page 6, Sub-section A implies that all shares in issue carry voting rights. Though the extent of the application of the Principles can be clarified in the appendices, we suggest that the Principles should not be misleading and should not imply that all shares carry the fundamental right to vote.
Page 7, Sub-section F says that the governance rights of institutional investors should be facilitated. If the guide wished to become stronger, it could say something like 'institutional investors should be encouraged to assume responsibility to exercise their ownership rights on behalf of the beneficial owners of the shares they hold'.
Section 2 - Equitable treatment of shareholders
Page 8, Section II C. The logic behind the changes regarding conflict of interests is not clear to us. There is now no need to disclose indirect interests of directors in transactions. This would appear to offer too wide a �get out' for board members wishing to avoid disclosure.
Section 3 - the role of stakeholders
Page 9. The text implies that only stakeholders whose rights are established by law need to be taken into account by companies. This seems to be an overly narrow approach.
Section 4 - Disclosure and transparency
Page 10, Section IV A 4. We consider that the revised draft could better address the role and responsibility of independent directors. This issue is important in all countries but the nature and function of independent directors will vary significantly in different countries, depending upon share ownership structures and cultural factors.
A 10. As stated in our general comments above, the details in the text regarding A 4 (governance structure and policies) are weak. We suggest that Section A require companies to disclose how they have applied the OECD Principles as they apply to companies. We also therefore recommend that the sections applicable to companies be presented separately from those sections more applicable to governments or regulators.
In Sub-section C, we note that auditors should now be independent, competent and qualified. However, more should be said about the role of the board in ensuring an effective audit. This Sub-section also says that the audit exists to provide an assurance to the board [and shareholders]. Although we would agree that, in practice, the audit can be a valuable tool for management, technically, the assurance is given to the shareholders only, since it is they who appoint the auditor and it is they who are the addressees of the report. Unless the text contains some particular significance for the two-tier board, we suggest that the reference to the board be deleted.
Sub-section D is similar - auditors are not (certainly in the unitary board context) accountable to the board.
An additional point to make in this section might be that boards should be expected to co-operate with the auditor and do nothing to obstruct the exercise of his or her functions.
Section 5 - Responsibility of the board
Page 12, C. Nothing is said to define high ethical standards. This is a difficult area as there are many ways of assessing ethical behaviour and few principles which are globally applicable. Guidance in this area would be useful. Section C no longer requires compliance with applicable law, commitment alone is not enough, and we suggest that this is still relevant.
In Sub-section D7, the word 'including' should be deleted and replaced with 'and'. As drafted it suggests, wrongly, that the audit is part of the accounting and financial reporting system.
Sub-section E says that the board should be able to exercise objective judgement on corporate affairs independent of management and others. This point seems to have been drafted from the specific perspective of the supervisory board and should be redrafted so as to encompass both the unitary and two-tier systems. A possible wording would be 'the board should be able to exercise its decision-making powers independently of management, controlling shareholders and others who may be in a special position to influence the company'.
Page 13, E3. Commitment alone is not enough; board members should also be required to devote sufficient time. There is nothing which addresses specifically the need for board members to have the experience and competence to fulfil their responsibilities to their company.
Annotations
Page 15, paragraph 4 implies that it is a bad thing for regulatory responsibilities to be delegated to non-public bodies. In the UK we have found that a system where non-public bodies, such as the Stock Exchange and now the Financial Reporting Council, are custodians of a voluntary code has worked well as an alternative or complement to regulation.
Page 18, D. The text should give a clear picture of the disclosure required where capital structures allow certain shareholders to have disproportionate control.
Page 19, F. We prefer the word �involvement' after shareholder rather than �activism'. This Section raises the issue of institutional investment. However, there are many important governance issues regarding institutional investors which are not mentioned. As this Section is applicable more to regulators rather than companies, we suggest that clearer guidance be given on how institutional investors should discharge their fiduciary responsibilities and in what way they should be accountable to their own investors. What protection should investors in institutions enjoy? The recent revelations regarding the mutual fund industry in the US have highlighted the importance of addressing these issues.
Page 38, E. The text, which is about independent board members, does not fit the heading about the board exercising objective judgement. All board members should be objective.