The Principles of Corporate Governance (“the Principles”) are intended to help policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to supporting economic efficiency, sustainable growth and financial stability. This is primarily achieved by providing shareholders, board members and executives, the workforce and relevant stakeholders, as well as financial intermediaries and service providers with the right information and incentives to perform their roles and help to ensure accountability within a framework of checks and balances.
Corporate governance involves a set of relationships between a company’s management, board, shareholders and stakeholders. Corporate governance also provides the structure and systems through which the company is directed and its objectives are set, and the means of attaining those objectives and monitoring performance are determined.
The Principles are non-binding and do not aim to provide detailed prescriptions for national legislation. The Principles are not a substitute for nor should they be considered to override domestic law and regulation. Rather, they seek to identify objectives and suggest various means for achieving them, typically involving elements of legislation, regulation, listing rules, self-regulatory arrangements, contractual undertakings, voluntary commitments and business practices. A jurisdiction’s implementation of the Principles will depend on its national legal and regulatory context. The Principles aim to provide a robust but flexible reference for policy makers and market participants to develop their own frameworks for corporate governance. To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices to meet new demands and grasp new opportunities. Taking into account the costs and benefits of regulation, governments have an important responsibility for shaping an effective regulatory framework that provides for sufficient flexibility to allow markets to function effectively and to respond to new expectations of shareholders and stakeholders. The Principles themselves are evolutionary in nature and are reviewed in light of significant changes in circumstances in order to maintain their role as the leading international standard to assist policy makers in the area of corporate governance.
Well-designed corporate governance policies can play an important role in contributing to the achievement of broader economic objectives and three major public policy benefits. First, they help companies to access financing, particularly from capital markets. By doing so, they promote innovation, productivity and entrepreneurship, and foster economic dynamism more broadly. For those who provide capital, either directly or indirectly, good corporate governance serves as an assurance that they can participate and share in the company’s value creation on fair and equitable terms. It therefore affects the cost at which corporations can access capital for growth.
This is of significant importance in today’s globalised capital markets. International flows of capital enable companies to access financing from a much larger pool of investors. If companies and countries are to reap the full benefits of global capital markets and attract long-term “patient” capital, corporate governance frameworks must be credible, well understood both domestically and across borders, and aligned with internationally accepted principles.
Second, well-designed corporate governance policies provide a framework to protect investors, which include households with invested savings. A formal structure of procedures that promotes the transparency and accountability of board members and executives to shareholders helps to build trust in markets, thereby supporting corporations’ access to finance. A substantial part of the general public invests in public equity markets, either directly as retail investors or indirectly through pension and investment funds. Providing them with a system in which they can share in corporate value creation, knowing their rights are protected, will give households access to investment opportunities that may help them to achieve higher returns for their savings and retirement. Given that institutional investors increasingly allocate a large share of their portfolios to foreign markets, policies to protect investors should also cover cross-border investments.
Third, well-designed corporate governance policies also support the sustainability and resilience of corporations and in turn, may contribute to the sustainability and resilience of the broader economy. Investors have increasingly expanded their focus on companies’ financial performance to include the financial risks and opportunities posed by broader economic, environmental and societal challenges, and companies’ resilience to and management of those risks. In some jurisdictions, policy makers also focus on how companies’ operations may contribute to addressing such challenges. A sound framework for corporate governance with respect to sustainability matters can help companies recognise and respond to the interests of shareholders and different stakeholders, as well as contribute to their own long term success. Such a framework should include the disclosure of material sustainability-related information that is reliable, consistent and comparable, including related to climate change. In some cases, jurisdictions may interpret concepts of sustainability-related disclosure and materiality in terms of applicable standards articulating information that a reasonable shareholder needs in order to make investment or voting decisions.
The Principles are intended to be concise, understandable, and accessible to all actors with a role in developing and implementing good corporate governance globally. On the basis of the Principles, it is the role of government, semi-government or private sector initiatives to assess the quality of the corporate governance framework and develop more detailed mandatory or voluntary provisions that can take into account country-specific economic, legal, and cultural differences.
The Principles focus on publicly traded companies, both financial and non-financial. To the extent they are deemed applicable, the Principles may also be a useful tool to improve corporate governance in companies whose shares are not publicly traded. While some of the Principles may be more appropriate for larger companies than for smaller ones, policy makers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies as well as those that issue debt securities. The OECD Guidelines on Corporate Governance of State-Owned Enterprises complement the Principles. Other factors relevant to a company’s decision-making processes, such as environmental, anti-corruption or ethical concerns, are considered not only in the Principles but also in a number of other international standards including the OECD Guidelines for Multinational Enterprises, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the UN Guiding Principles on Business and Human Rights, and the ILO Declaration on Fundamental Principles and Rights at Work, which are referenced in the Principles.
The Principles do not intend to prejudice or second-guess the business judgement of market participants, board members and management. What works in one or more companies or for one or more investors may not necessarily be generally applicable. Companies vary in maturity, size and complexity. There is therefore no single model of good corporate governance. However, the Principles follow an outcome-oriented approach, suggesting some common elements that underlie good corporate governance. The Principles build on these common elements and are formulated to embrace the different models that exist.
For example, they do not advocate any particular board structure and the term “board” as used in the Principles is intended to embrace the different national models of board structures. In the typical two-tier system, found in some jurisdictions, “board” as used in the Principles refers to the “supervisory board” while “key executives” refers to the “management board”. In systems where the unitary board is overseen by an internal auditor’s body, the Principles applicable to the board are also, mutatis mutandis, applicable. As the definition of the term “key executive” may vary among jurisdictions and depending on context, for example concerning remuneration or related party transactions, the Principles leave it to individual jurisdictions to define this term in a functional manner that meets the intended outcome of the Principles. The terms “corporation” and “company” are used interchangeably in the text. Throughout the Principles, the term “stakeholders” refers to non-shareholder stakeholders and includes, among others, the workforce, creditors, customers, suppliers and affected communities.
The Principles are widely used as a benchmark by individual jurisdictions around the world. They are also one of the Financial Stability Board’s Key Standards for Sound Financial Systems and provide the basis for assessment of the corporate governance component of the Reports on the Observance of Standards and Codes (ROSC) of the World Bank. The Principles are also used as a benchmark in developing sectoral corporate governance guidance by other international standard-setting bodies, including the Basel Committee on Banking Supervision. Implementation of the Principles is monitored and supported through the OECD Corporate Governance Factbook, peer reviews on thematic issues that compare practices across jurisdictions and corporate governance regional and country reviews.
The Principles are presented in six chapters: I) Ensuring the basis for an effective corporate governance framework; II) The rights and equitable treatment of shareholders and key ownership functions; III) Institutional investors, stock markets, and other intermediaries; IV) Disclosure and transparency; V) The responsibilities of the board; and VI) Sustainability and resilience.
Each chapter is headed by a single Principle that appears in bold italics and is followed by a number of supporting Principles and their sub-Principles in bold. The Principles are supplemented by annotations that contain commentary on the Principles and sub-Principles and are intended to help readers understand their rationale. The annotations may also contain descriptions of dominant or emerging trends and offer alternative implementation methods and examples that may be useful in making the Principles operational.