Corporate Governance Principles, Frequently Asked Questions about the OECD Principles of Corporate Governance

About Statistics Publications & Documents Information by Country

Corporate governance deals with the rights and responsibilities of a company’s management, its board, shareholders and various stakeholders.  How well companies are run affects market confidence as well as company performance.  Good corporate governance is therefore essential for companies that want access to capital and for countries that want to stimulate private sector investment.  If companies are well run, they will prosper.  This in turn will enable them to attract investors whose support can help to finance faster growth.   Poor corporate governance on the other hand weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud.

The Principles are considered a living document that takes new developments into account.  Recent corporate scandals in a number of countries have highlighted a need for improvements in standards of corporate governance.  Increasingly, the jobs and pensions of people are linked to the performance of stock markets, and both can be endangered by the adverse impact of bad corporate governance.  Ensuring the stability of stock markets requires trust in the integrity of these markets and in the management of the companies whose shares are listed on them. The revised Principles are designed to underpin this integrity. 

The OECD Principles of Corporate Governance cover six main areas.  They call on governments to have in place an effective institutional and legal framework to support good corporate governance practices (Chapter I).  They call for a corporate governance framework that protects and facilitates the exercise of shareholders’ rights (Chapter II).  They also strongly support the equal treatment of all shareholders, including minority and foreign shareholders (Chapter III).  They recognise the importance of the role of stakeholders in corporate governance, while they also look at the importance of timely, accurate and transparent disclosure mechanisms (Chapter IV and V, respectively).  They deal with board structures, responsibilities and procedures (Chapter VI).

To ensure an effective corporate governance framework it is necessary that clearly defined rules and regulations, including voluntary codes, are established.  Without being prescriptive, the Principles recognise that the ideal mix between these regulatory components has to be the result of a country’s specific circumstances, institutions and history.  In developing or improving the corporate governance framework the Principles call on policy makers to give the various authorities that operate in the country the powers and resources for effective implementation and enforcement.  The Principles also seek to minimise the risks of over-regulation and the costs from unintended consequences of policy actions.  As part of this, the Principles recommend policy makers to check from time to time the ability of the different elements of corporate governance to promote good and transparent practices.

All shareholders including institutional investors must be enabled to exercise ownership rights so as to influence the companies in which they own shares. As part of this, the Principles advocate that shareholders rights include participating in the nomination and election of board members, as well as in the removal of board members. They should be able to make their views known about executive and board remuneration policy. Any equity component of remuneration should be subject to their approval.

Restrictions that may exist on consultations between shareholders and obstacles to the exercise of voting rights in jurisdictions other than that in which an institutional investor is based should be eliminated.  The Principles do not mandate institutional investors to vote their shares, but they do call on them to disclose their voting policies.  They should also disclose how they intend to manage any conflicts of interest that may affect the way in which they vote.

The Principles advocate not only full disclosure but also an explanation by parties how they are managing any conflicts of interest. Far from being simply aimed at providing volumes of information, disclosure should be aimed at increased transparency.  Rating agencies, analysts and investment banks should avoid conflicts of interest which could compromise the nature of their advice. The Principles explicitly acknowledge that auditors have duties to respect: they should be accountable to shareholders and exercise due professional care when conducting an audit. Auditors should be wholly independent and not be compromised by other relations with the company.

The Principles acknowledge that stakeholders have rights established both by law and through mutual agreements, and call on companies to respect these rights. The Principles call on boards to draw up a code of ethics and introduce an effective compliance programme to ensure that this code is followed. Regulators should ensure the existence and proper functioning of an insolvency framework that can protect and enforce the rights of creditors. Individuals within companies – so-called whistleblowers – who wish to draw the attention of a company’s board to inappropriate behaviour or activities should be able to do so in full confidence that their complaints are treated confidentially.

The Principles call on company boards to act objectively and independently and to be accountable to shareholders. Importantly, the concept of board independence and objectivity also apply to situations characterised by block and controlling shareholders, and not just referring to independence from management.  Also, the duties and responsibilities of the board are defined as fiduciary in nature, a clarification that is of particular importance in the case of conglomerates, or groups made up of a number of different corporate entities. Boards should monitor and manage potential conflicts of interest. They should also be responsible for corporate ethics, compliance with laws and standards and for overseeing internal control systems, such as accounting and financial reporting.

The Principles are non-binding because their implementation must be adapted to different legal, economic and cultural circumstances. This is a key strength of the Principles, which has made them a useful tool worldwide, in developed as well as emerging markets.  Governments and regulators also need to find a balance between rules and regulations on one hand and flexibility on the other hand.  By agreeing on the Principles, OECD governments have established a benchmark for high standards of corporate governance. The legislation needed to enforce these standards is the responsibility of individual governments.

OECD and its member countries are committed to support an active and inclusive use of the Principles. Among other things, this will include an exchange of information and experiences with successful implementation practices, both at government and corporate level. The work will make sure that also non-member countries have access to the international dialogue and that steps are taken to get the widest possible dissemination of the Principles. In this work, the private sector as well as stakeholder interests and independent experts will also be engaged. It should be recalled that the Principles are a living document. To closely follow developments and detect new challenges in time will therefore be another key task.