This section presents an overview of the results of the survey that was conducted to take stock of the use of flexibility and proportionality in corporate governance frameworks across jurisdictions.
Flexibility and Proportionality in Corporate Governance
Corporate Governance
Chapter 3. Overview of survey results
Abstract
Flexibility and proportionality across jurisdictions
The survey shows that for all the areas of regulation that were reviewed, a vast majority of jurisdictions had at least one criterion or mechanism that allowed for flexibility and proportionality (Figure 3.1.). In the area of regulation of board composition, board committees and board member qualifications all of the 39 jurisdictions reported that they had criteria and mechanisms that allowed for flexibility and proportionality. In the remaining areas of regulation more than 75% of the jurisdictions reported that they had proportionality and flexibility criteria in place, with major shareholding disclosure being the regulatory area where the lowest number of jurisdictions reported that they had criteria that allowed for flexibility and proportionality.
Figure 3.1. Number of jurisdictions with at least one criterion or optional mechanism in the areas of regulation
Source: OECD Survey.
Half of the jurisdictions reported that there was room for flexibility and proportionality in all the seven areas of regulation that were surveyed (Table 3.1.). This includes jurisdictions with a common law tradition, such as the United States and the United Kingdom as well as jurisdictions with a civil law tradition, such as Germany and France.
Table 3.1. Jurisdictions that reported at least one flexibility mechanism in each of the seven areas of corporate governance regulation surveyed
Source: OECD Survey.
Flexibility and proportionality by area of regulation
Pre-emptive rights
In the area of pre-emptive rights, 31 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. The most frequent criteria were the ownership/control structure and the listing/publicly trading and legal form, which accounted for about 75% of the responses (Figure 3.2.). Ownership/control structure is mentioned as a criterion in about half of the responses within the OECD area and in none of the jurisdictions outside of the OECD area, where instead listing/publicly trading is the most reported criterion for flexibility and proportionality with respect to pre-emptive rights.
Figure 3.2. Total number of reported criteria for pre-emptive rights
Source: OECD Survey.
As seen in Figure 3.2., jurisdictions also reported the use of 9 “other” criteria (or other dimensions of certain criteria) than those that were provided as options in the survey questionnaire. Examples include the UK that reports that the articles of association of a company or shareholders' agreements may adopt specific pre-emptive regimes for a company. In Germany, the application of the rules may depend on the price of the newly issued shares. In Hong Kong, China, a general or specific mandate needs to be obtained from shareholders pursuant to listing rules, while in Ireland those listing rules allow for exceptions with respect to certain rights issues. In Portugal, a flexible treatment may be conditional on the type of share capital increase while in the Netherlands it may depend on the share class.
Board composition, board committees and board member qualifications
With respect to board composition, board committees and board member qualifications, 39 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. By far the most frequently reported used criteria were size (size of workforce) and listing/publicly trading (listing level), followed by legal form and ownership/control structure (Figure 3.3.).
Examples of the 10 “other” reported criteria for flexibility and proportionality with respect to board composition, board committees and board member qualification include the number of shareholders (Belgium), the independence of the board's chairman (Singapore), the size of a company's board (the Netherlands and France); the size of its balance sheet (Portugal and the Netherlands); the size of its net turnover (Latvia and the Netherlands); the type or nature of the company's activity (Lithuania and France); whether it has its operations mainly abroad (Israel); and the rank of the company relative to the rest of the listed market segment (the UK and Australia), among others.
Figure 3.3. Total number of reported criteria for board composition
Source: OECD Survey.
Say on pay and the detail of disclosure on remuneration
In the area of say on pay and the detail of disclosure on remuneration, 31 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. Two third of the jurisdictions reported that they used listing/publicly traded (listing level and listing venue) as criteria for flexibility and proportionality, followed by size (size of revenues and size of assets) and legal form (Figure 3.4). Outside of the OECD area, the listing/publicly traded criterion was reported by more than half of the jurisdictions.
Figure 3.4. Total number of reported criteria for say on pay
Source: OECD Survey.
Examples of among the 8 “other” criteria that are used to allow flexibility and proportionality with respect to say on pay and disclosure on remuneration include the adoption of a shareholders resolution (UK); options available at the time of listing or registration and issuer status, such as emerging growth company, smaller reporting company, or foreign private issuer (U.S.); the company's net turnover and balance sheet total (Germany); the existence of a takeover bid (Ireland); the number of shareholders; the amount of stated capital (Japan); and the qualification of the company as a public interest entity (Portugal).
Related party transactions
In the regulatory area of related party transactions, 33 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. The most frequently reported criteria were listing/publicly trading (listing venue and listing level) and size (size of assets and size of revenues) (Figure 3.5.).
Ten “other” criteria were reported including the size of any given transaction (Brazil; Hong Kong, China; Singapore; and the US), the character of the transaction (Singapore); the number of shareholders and the amount of stated capital (Japan). Regulatory exceptions depending on the nature of the offering (U.S. and UK) are also among the “other” criteria for flexibility and proportionality with respect to related party transactions.
Figure 3.5. Total number of reported criteria for related party transactions
Source: OECD Survey.
Disclosure of periodic financial information and ad-hoc information
Regarding disclosure of periodic financial information and ad-hoc information, 32 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. The most frequently reported criteria for flexibility and proportionality were listing/publicly trading (listing level and listing venue) and size (size of assets and size or revenues) (Figure 3.6.).
Examples among the 6 “other” criteria that jurisdictions reported in this area include the net turnover and balance sheet total of the company (Germany); the number of shareholders (Russia), and a choice by the company made at the time of an offering or registration, as well as size of the offering (U.S.).
Figure 3.6. Total number of reported criteria for disclosure of financial information
Source: OECD Survey.
Major shareholding disclosure
Within the regulatory area of major shareholding disclosure, 30 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. The most frequently reported criteria for flexibility and proportionality with respect to major shareholding disclosure were listing/publicly trading (listing level and listing venue), size and ownership/control structure. (Figure 2.7.).
Figure 3.7. Total number of reported criteria for major shareholding disclosure
Source: OECD Survey.
Examples among the 9 “other” criteria that were reported include the nature of the investor, including if they are asset managers, private equity and venture capitalist (Italy and Spain); both the number of shareholders and the amount of stated capital (Japan); the number of shareholders combined with the size of the company's assets, the voting rights and some available exemptions and regulatory options upon making an offering (U.S.).
Takeovers
With respect to takeovers 32 out of the 39 jurisdictions reported that they had criteria that allowed for flexibility and proportionality. Some of the jurisdictions reported more than one criterion. The two criteria listing/publicly trading (listing venue and listing level) and ownership/control structure (controlling shareholder, blockholders, privately owned) are each reported as criteria for flexibility and proportionality in about one quarter of the responses, followed by size (Figure 3.8.).
Figure 3.8. Total number of reported criteria for takeovers
Source: OECD Survey.
Examples among the 9 “other” criteria that jurisdictions reported include the number of shareholders (Singapore and Australia); the size, objective and potential impact of the acquisition (Brazil); the rules in the articles of incorporation (France); the number of participants in a non-publicly traded entity, such as cooperative (Italy); the application of exemptions or voting caps (Portugal); the type of consideration offered, the structure of the transaction, and the amount of the equity being sought by the acquirer (U.S.).
Flexibility and proportionality by sectors
An analysis of the responses regarding the use of flexibility and proportionality with respect to different sectors of activity shows that, in line with expectations, most jurisdictions apply flexible and proportional rules for the financial sector (Figure 3.9.). The State-owned sector is also subject to special rules in several jurisdictions. Ireland, Latvia and the United States are the countries that report the most frequent use of criteria for flexibility and proportionality with respect to sectors of activity.
Figure 3.9. Overall use of criteria per sector
Source: OECD Survey.
Flexibility and proportionality by criteria
As mentioned above, several jurisdictions have reported more than one criteria for flexibility and proportionality with respect to each of the different areas of regulation that has been surveyed. Jurisdictions have also been asked to report how the different criteria, for example size, are defined. This section provides an overview of how the total number of criteria are defined and how frequently they are used in the different areas of regulation.
Size
Size is the second most frequently reported criterion for flexibility and proportionality. As shown in the left hand panel of Figure 3.10., the most common definitions of size are size of revenues, size of assets and size of workforce, followed by size of market capitalisation.
Figure 3.10. Applications of the size criterion and the distribution of the total number of reported size criteria between the different areas of regulation
Source: OECD Survey.
Jurisdictions that share EU membership form a group where the use of size of revenues and size of market capitalisation are about 10 percentage points more commonly used than in the other jurisdictions, most likely because of EU Directives that are implemented in national their regulations. Beyond the EU area other dimensions are more frequently reported, particularly size of equity.
The panel on the right hand side in Figure 3.10. shows how the total number of reported size criteria are distributed between the different areas of regulation. It reveals that the size criterion for flexibility and proportionality is most frequently applied with respect to board composition, board committees and board member qualifications and to the area of disclosure of periodic and ad-hoc information, while it is rather ignored in the area of pre-emptive rights.
Ownership/control structure
The ownership/control structure is the third most frequently reported criterion for flexibility and proportionality. Figure 3.11. shows that in about half of the responses, it relates to the presence of a controlling shareholder and when the firm is privately owned. Ownership criteria related to blockholders and free float were not reported by any non-OECD jurisdictions, while the EU-area jurisdictions use the controlling shareholder dimension about 10% more often than other jurisdictions.
The right hand panel of Figure 3.11. shows that the ownership/control structure criterion is most often used with respect to takeover regulation and for board composition, board committees and board member qualifications. Its use for regulation of say on pay and the detail of disclosure of remuneration and disclosure of periodic financial information and ad-hoc information is rather limited.
Figure 3.11. Applications of the ownership/control criterion and the distribution of the total number of ownership/control criteria between the different areas of regulation
Source: OECD Survey.
Listing/public trading
As mentioned above, the listing/public trading is the most commonly reported criterion for flexibility and proportionality. The left side panel in Figure 3.12. shows that it is most frequently used in relation to the listing level and the listing venue of the firm. The results also show that trading in ATPs is an almost irrelevant criterion outside the OECD area. Within the EU area, listing level is reported by half of the jurisdictions, while outside the EU area it is reported by one third of the jurisdictions. The frequency with which the listing/public trading criteria relates to listing venue is basically the same in all areas.
It should be noted that a more detailed analysis of the responses shows that in many instances the listing/publicly traded criterion was selected by respondents to indicate that the regulations were applicable only to listed companies. The questionnaire design failed to fully capture this in the default dimensions for the listing/publicly traded criterion that were provided (see also Chapter 2). A few respondents took the opportunity to report this distinction as "other" while most respondents opted to select the listing level or listing venue dimensions instead, even if it was not necessarily the most relevant answer.
Per area of regulation, the listing/public trading criterion is most frequently used with respect to disclosure of periodic and ad-hoc information and with respect to requirements for board composition, board committees and board member qualifications, closely followed by say on pay and the detail of disclosure of remuneration (Figure 3.12.).
Figure 3.12. Applications of the listing/public trading criterion and the distribution of the total number of reported listing/public trading criteria between the different areas of regulation
Source: OECD Survey.
Maturity of the firm
The maturity of the firm is one of the criteria included in the review that seem to be less used across the different areas of regulation and across jurisdictions with a total of only 14 criteria being reported (Figure 3.13.A.). Only France, Hungary, Israel, Italy, Korea, Latvia, and the United States reported the use of this criterion. Mostly with respect to related party transactions and board composition, board committees and board member qualifications, but also for some aspects of disclosure. It should be noted that the maturity of the firm criterion to some extent may overlap and serve similar purposes as some of the flexibility and proportionality criteria that are reported with respect to listing/public trading.
Accounting standards
Accounting standards as a criterion for flexibility and proportionality received the least responses in the survey, with Denmark, Germany, Lithuania, Portugal, South Africa, the Netherlands, the United Kingdom, and the United States reporting it. In most cases, the criterion was used to provide flexibility and proportionality with respect to related party transactions and for some of the regulatory areas related to disclosure (Figure 3.13.B.).
Figure 3.13. The distribution of the total number of reported criteria with respect to maturity of the firm, accounting standards, legal form and “other” between the different areas of regulation
Source: OECD Survey.
Legal form
The legal form of the firm as a criterion for flexibility and proportionality is reported to be used more often than the maturity of the firm and accounting standards, but less than all the other criteria. It is reported to be used with respect to all areas of regulation, but is most often associated with flexibility and proportionality in the areas of board composition, board committees and board member qualifications (Figure 3.13.C.).
"Other" criteria
Overall the reporting of “other” criteria that were not explicitly listed in the survey questionnaire is not negligible. The responses also present a significant variation when it comes to their application and the regulatory areas to which they are applicable. This makes it less meaningful to interpret the aggregated results (Figure 3.13.D.). A more extensive and detailed overview of these additional criteria is therefore provided in respective thematic chapters.
Opt-in and opt-out
The availability of opt-in and opt-out mechanisms that allow for flexibility and proportionality in the implementation of national corporate governance frameworks is reported for about 40% of the areas of regulation that were surveyed and across almost all 39 jurisdictions. The two possibilities of opt-in and opt-out were used in similar proportions (Figure 3.14.). EU-area jurisdictions use these mechanisms the most.
Figure 3.14. The overall availability of opt-in and/or opt-out mechanisms and their distribution between the different areas of regulation
Source: OECD Survey.
The use of opt-in and opt-out mechanisms is evenly distributed among the different areas of regulation, with the exception of disclosure of major shareholdings, where it is almost not used at all, and the area of pre-emptive rights, where it is most common to find opt-out mechanisms