The 9 PFI questions on Corporate Governance relate to:
These questions provide a brief introduction to some of the key corporate governance issues that policymakers and others should address to promote a sounder environment for investment. For a more complete assessment, policymakers should turn to the OECD Principles for Corporate Governance and its assessment methodology, or visit www.oecd.org/daf/corporateaffairs.
Corporate governance reform is an important aspect of broader reforms aimed at securing an environment attractive to both domestic and foreign investors and that enhances the benefits of investment to society. As the Preamble to the OECD Principles of Corporate Governance states, “The degree to which corporations observe basic principles of good corporate governance is an increasingly important factor for investment decisions. Of particular relevance is the relation between corporate governance practices and the increasingly international character of investment. International flows of capital enable companies to access financing from a much larger pool of investors. If countries are to reap the full benefits of the global capital market, and if they are to attract long-term ‘patient’ capital, corporate governance arrangements must be credible, well understood across borders and adhere to internationally accepted principles. Even if corporations do not rely primarily on foreign sources of capital, adhering to good corporate governance practices will help improve the confidence of domestic investors, reduce the cost of capital, underpin the good functioning of financial markets, and ultimately induce more stable sources of financing.”
It is not only the absolute amount of available capital that will determine the ability to increase economic welfare through capital formation. Equally important is the effectiveness with which it is allocated among alternative investment opportunities and, not least, how well the corporation’s final use of it is actually monitored. If household savings and available corporate funds do not reach their best possible use, society will forgo opportunities that would have generated additional economic welfare. Under such circumstances, entrepreneurs will not find appropriate funding for profitable projects, existing companies will not be able to expand their operations, and potentially profitable innovations will never be commercialised. Moreover, necessary re-structuring of individual companies and entire industries will be impaired, and productive assets will be locked into underperforming activities.