OECD approves tougher corporate governance code

22 April 2004

The OECD has published a new and tougher set of corporate governance guidelines after a massive worldwide consultation exercise which has reflected a determination among the corporate sector and regulatory organisations to restore public confidence in listed companies. Amongst the changes are proposed protection for whistleblowers.

Governments of the 30 OECD countries approved the revised version of what is now called the 'Principles of Corporate Governance' with a view to what the official statement states as "rebuilding and maintaining public trust in companies and stock markets".

The OECD says: "The revised principles respond to a number of issues that have undermined the confidence of investors in company management in recent years.

"They call on governments to ensure genuinely effective regulatory frameworks, and on companies themselves to be truly accountable. They advocate an increased awareness among institutional investors and an effective role for shareholders in executive compensation. They also urge strengthened transparency and disclosure to counter conflicts of interest."

If countries adopt the new guidelines then it will become easier for shareholders to remove board members, and to involve them in board selection and election processes.

The guidelines also recommend shareholders should have a greater influence on board and senior executive remuneration. Other major points include:

• Institutional investors should disclose their corporate governance policies, how they decide on the use of their voting rights and how they manage conflicts of interest that may compromise their voting
• Ratings agencies. A new principle calls for rating agencies and analysts to avoid conflicts of interest, which could compromise their advice. An example of this occurs when an agency is paid by a big company to rate it, and not all the details are published.
  
• Auditors should be wholly independent and not be compromised by other relations with the company. "The duties of the auditor must be strengthened and include accountability to shareholders and a duty to the company to exercise due professional care when conducting an audit"
  
• Protection for whistleblowers. A new principle advocates protection for whistleblowers, including institutions through which their complaints or allegations can be addressed and provides for confidential access to a board member.
  
• Board responsibility. The duties and responsibilities of the board have been clarified as fiduciary in nature, particularly important where company groups are concerned. The principle covering board independence and objectivity has been extended to avoid conflicts of interest and to cover situations characterised by block and controlling shareholders, as well as the board's responsibility for oversight of internal control systems covering financial reporting.

The OECD first published draft corporate governance guidelines in 1999. And these have formed the foundation of many national codes and regulations. Working closely with organisations like the World Bank, the International Chamber of Commerce and other bodies, the Paris-based organisation has enjoyed a pivotal role.

In 2002 it decided to look again at the guidelines in the wake of several corporate scandals and pressures for more regulation. The revised text, just published, is a result of a huge consultation exercise involving both OECD and non-OECD governments, as well as representatives of businesses and professional bodies, trades unions and international institutions.

Full new OECD code click here.