Flexibility and Proportionality in Corporate Governance

Chapter 2. Scope and methodology of the thematic reviews

Abstract

This section presents the methodology and the process for conducting the thematic reviews, including an online questionnaire to take stock of the use of flexibility and proportionality in corporate governance frameworks across jurisdictions. It also addresses some issues with respect to the interpretation and use of the data.

Research design

To conduct the thematic reviews, the OECD Corporate Governance Committee decided to use an online questionnaire. The questionnaire surveyed the criteria and mechanisms that may motivate and allow flexibility and proportionality in the implementation of rules and regulations relating to the seven different areas of regulation that were subject to review.

The survey focused mainly on the mandatory elements of the corporate governance framework; typically company law, securities law and listing requirements. Codes of corporate governance, which are indeed important in many frameworks, are often applied on a voluntary comply-or-explain basis (that in itself is a flexibility and proportionality tool). For this reason, respondents from jurisdictions where following the code is voluntary (including 'comply-or-explain' regimes) were in their responses invited to consider only the flexibility and proportionality features explicitly included in the text of the code recommendations themselves.1 The Committee also opted to exclude any other voluntary source beyond national codes, including any self-regulatory arrangements, voluntary commitments, and business practices.

In order to limit the scope of a potentially extremely extensive data collection exercise covering all aspects of the corporate governance framework, seven areas of regulation were chosen to be reviewed:

• Board composition, board committees and board member qualifications  

• Say on pay and the detail of disclosure on remuneration 

• Related party transactions

• Disclosure of periodic financial information and ad-hoc information 

• Major shareholding disclosure

• Takeovers

• Pre-emptive rights

The questionnaire offered a list of possible criteria that may motivate and allow for flexibility and proportionality with respect to the implementation of rules that relate to the regulatory areas listed above. For some of the criteria, the survey also offered a subcategory of more detailed criteria (for example size can be used in relation to size of market capitalisation, size of equity, size of workforce, etc.) that for the purpose of the survey are referred to as "dimensions" of the different criteria.

Table 2.1. The criteria and dimensions surveyed

Size	Ownership/control structure	Listing/publicly traded	Maturity of the firm	Accounting standards used	Legal form
Size of equity	Controlling shareholder	Listing level
Size of sales	Blockholders	Listing venue
Size of revenues	Free float	Debt only listing
Size of assets	Subsidiaries of listed companies	Cross-listing
Size of debt	Private placements	Trading in alternative trading platforms
Size of work force	Large privately owned firms
Size of market capitalisation

Source: OECD Survey.

For each of the reviewed areas of regulation, the survey asked jurisdictions to identify the criteria (and in some cases also the dimensions within each criterion) that are used to motivate and allow flexibility and proportionality. Respondents could select more than one criterion and if an area of regulation had flexibility and proportionality provisions motivated by other criteria than those listed in the questionnaire, respondents were asked to add it by choosing the answer "other" and explain the criteria. If there were no criteria allowing for flexibility and proportionality in an area of regulation, they were invited to respond "none".

The survey also inquired about the use of "opt-in" and "opt-out" mechanisms in the corporate governance framework. This question aimed at identifying flexibility mechanisms within the laws and regulations that enable companies to "opt-in" or "opt-out" of some practice, right or obligation that in the absence of that option would not be mandatory for them (in the case of the opt-in) or would be the default mandatory rule (in the case of the opt-out). Respondents were invited to identify the use of such mechanisms in the seven areas of regulation and to offer a brief description of its scope.

Respondents were also invited to explain how the criteria and mechanisms allow for flexibility and proportionality when they are applied and a reference to the law, regulation or other rules that contain the relevant provisions.

Finally, the survey included questions regarding the presence of flexibility and proportionality criteria or mechanisms tailored for special sectors of activity (e.g. the financial sector) or for specific types of firms (e.g. state-owned enterprises) in each jurisdiction. The Committee opted to exclude them from the previous more detailed questions as to avoid extending the scope of the exercise too broadly.

Responses and interpretation of results

Respondents were invited to respond to the survey during the month of July 2017 and submitted their answers via the internet (see the annex for the full questionnaire). The response rate was high, with the following 39 jurisdictions responding to the questionnaire: Argentina; Australia; Austria; Belgium; Brazil; Chile; Colombia; Czech Republic; Denmark; Egypt; Finland; France; Germany; Hong Kong, China; Hungary; Ireland; Israel; Italy; Japan; Korea; Latvia; Lithuania; Malaysia; Mexico; Netherlands; Norway; Poland; Portugal; Russia; Saudi Arabia; Singapore; Slovenia; South Africa; Spain; Sweden; Switzerland; Turkey; United Kingdom, and United States.

A detailed analysis of the responses showed that there was room to improve the comparability and quality of some of the data collected, as jurisdictions with quite similar rules and settings sometimes responded to questions in different manners. This is of course an inherent problem of interpretation which the research design could not fully overcome. The Committee delegates were therefore invited to review their answers during December 2017 when some jurisdictions did modify their responses.

Despite the attempts to improve the comparability of the data, the interpretation of the findings presented in this report entails some challenging aspects that the Committee agreed should be presented clearly in this section of the report. This aims to prevent that the results are read in ways that could lead to wrong conclusions about the relative strength or weakness of the frameworks of different jurisdictions, or to how flexible or proportionate their rules are, which was not the point of the exercise.

First, national delegates responding the survey at times interpreted the scope of the exercise in different manners. Some of them narrowed the scope of the flexibility and proportionality rules and practices they reported to those mostly applied to listed companies, while others also included rules and practices relevant to all companies.2 This means that in some instances it may be that some jurisdictions may have the same degree of flexibility, but the answers provided may differ in scope causing the appearance that their frameworks has more or less flexibility or proportionality provisions.

Second, the survey listed a number of criteria and dimensions to assess the use of flexibility and proportionality, and also asked jurisdictions to name and describe any other relevant criteria the may use but were not included in the survey list. Many responses included these under "other criteria" and they are presented in the report data, but due to their heterogeneity, this report may not fully capture the full range of flexible and proportionate practices available in some jurisdictions.

Third, the fact that any given jurisdiction uses more or less interventions to introduce flexibility and proportionality may also have to do with the design of the regulatory framework. Within a framework of extensive use of hard law to set mandatory rules for everyone, it would be expected to find more evidence of interventions to introduce flexibility and proportionality than in a framework where the principles are inverse, and only a few rules are made mandatory for specific subjects under a set of given circumstances, and everything else is subject to contractual freedom.3 This means that a country that does not use any of the criteria listed in the report can nonetheless allow for a great degree of flexibility and proportionality.

For these reasons, the Committee encourages the reader of this report to make use of these findings in line with the ultimate objective of the research, which is to map actual practices and facilitate the implementation of better corporate governance rules and practices in line with the recommendations of the G20/OECD Principles. The expectation is that the findings presented here will enable policymakers, stakeholders and businesses to gain insight into the corporate governance rules and arrangements of a wide range of jurisdictions that use flexibility and proportionality as an approach to functional and outcome oriented regulation

Notes

← 1.  This means that respondents were asked to avoid offering responses related to the myriad of existing or hypothetical "explanations" that companies under unique circumstances may provide for deviations from the code by applying higher or alternative practices. For example, if the code says that companies with boards comprised of more than five directors should have a remuneration committee, respondents were invited to select only the criteria "Size", and then to add the dimension "Size of the board". Of course, there may be an unlimited number of explanations why a specific company at a specific point in time chooses to "explain" a deviation from the code. But this follows logically from the nature of the "comply or explain" code as a "flexibility" instrument in its own right, so delegates were not asked to provide information about such "explanations".

← 2.  For example, delegates from the Netherlands interpreted the questionnaire to deal with listed companies only. This means that, in the responses from the Netherlands to the questionnaire, no distinction was made between listed and non-listed companies.

← 3.  The Delegates from Norway expressed this view about their framework.