The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.
Effective corporate governance requires a sound legal, regulatory and institutional framework that market participants can rely on when establishing their private contractual relations. By promoting transparent and fair markets, this framework also plays an important role in fostering the trust in markets that is necessary to underpin the achievement of broader economic objectives. The corporate governance framework typically comprises elements of legislation, regulation, listing rules, self-regulatory arrangements, contractual undertakings, voluntary commitments and business practices that are the result of a country’s specific circumstances, history and tradition. The desirable mix between these elements will therefore vary from country to country.
The legislative and regulatory elements of the corporate governance framework can usefully be complemented by soft law elements such as corporate governance codes which are often based on a “comply or explain” principle in order to allow for flexibility and to address specificities of individual companies. What works well in one company, for one investor or a particular stakeholder may not necessarily be applicable to corporations, investors and stakeholders that operate in another context and under different circumstances. Thus, any particular element of a specific corporate governance framework may not be effective in addressing a particular governance issue in all situations. Rather, the methods for encouraging or requiring good corporate governance practices should aim to achieve desired outcomes by adapting approaches to fit particular circumstances. For example, the desired outcome of ensuring effective implementation of certain corporate governance practices may be achieved more efficiently in markets where institutional investors play a strong role in improving such practices in line with soft law code recommendations, while in markets where investors adopt a more passive role, the regulator may choose to require and enforce the implementation of certain corporate governance standards. As new experiences accrue and business circumstances change, the various provisions of the corporate governance framework should be reviewed and, when necessary, adjusted.
Jurisdictions seeking to implement the Principles should monitor their corporate governance framework with the objective of maintaining and strengthening its contribution to market integrity, access to capital markets, economic performance, and transparent and well-functioning markets. As part of this, it is important to consider the interactions and complementarity between different elements of the corporate governance framework and its overall ability to promote ethical, responsible and transparent corporate governance practices. Such analysis is an important tool in the process of developing an effective corporate governance framework. To this end, effective and timely consultation with the public is an essential element. In some jurisdictions, this may need to be complemented by initiatives to inform companies and their stakeholders about the benefits of implementing sound corporate governance practices.
Moreover, in developing a corporate governance framework, national legislators and regulators should consider the need for, and the results of, effective international dialogue and co-operation. If these conditions are met, the corporate governance framework is more likely to avoid over-regulation, support the exercise of entrepreneurship, and limit the risks of damaging conflicts of interest in both the private sector and in public institutions.
I.A. The corporate governance framework should be developed with a view to its impact on corporate access to finance, overall economic performance and financial stability, the sustainability and resilience of corporations, market integrity, and the incentives it creates for market participants and the promotion of transparent and well functioning markets.
Capital markets play a key role in providing companies with funds that allow them to innovate and support economic growth, as well as efficiently diversify their financing sources. Equity and bond financing also support companies’ resilience to overcome temporary downturns while meeting their obligations to the workforce, creditors and suppliers. Policy makers and regulators need to consider how the corporate governance framework may encourage and impact corporate access to market-based financing.
The corporate form of organisation of economic activity serves as a powerful force for growth. The regulatory and legal environment within which corporations operate is therefore of key importance to overall economic outcomes. Policy makers also have a responsibility to put in place a framework that is capable of meeting the needs of corporations operating in widely different circumstances, facilitating their development of new opportunities to create value, and to determine the most efficient deployment of resources. Where appropriate, corporate governance frameworks should therefore allow for proportionality, in particular with respect to the size of publicly traded companies. Other factors that may call for flexibility include the company’s ownership and control structure, geographical presence, sectors of activity, and the company’s development stage. Policy makers should remain focused on ultimate economic outcomes, and when considering policy options they will need to undertake an analysis of the impact on key variables that affect the functioning of markets, for example in terms of incentive structures, the efficiency of self-regulatory systems, and dealing with systemic conflicts of interest. Transparent and well-functioning markets serve to discipline market participants and promote accountability.
I.B. The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent and enforceable. Corporate governance codes may offer a complementary mechanism to support the development and evolution of companies’ best practices, provided that their status is duly defined.
If new laws and regulations are needed, such as to deal with clear cases of market imperfections, they should be designed in a way that makes it possible to implement and enforce them in an efficient and even-handed manner covering all parties. Consultation by government and other regulatory authorities with corporations, their representative organisations, shareholders, and stakeholders, is an effective way of doing this. Mechanisms should also be established for parties to protect their rights. In order to avoid over-regulation, unenforceable rules, and unintended consequences that may impede or distort business dynamics, policy measures should be designed with a view to their overall costs and benefits.
Public authorities should have effective enforcement and sanctioning powers to deter dishonest behaviour and provide for sound corporate governance practices. In addition, enforcement can also be pursued through private action, and the effective balance between public and private enforcement will vary depending upon the specific features of each jurisdiction.
Corporate governance objectives are also formulated in codes and standards that do not generally have the status of law or regulation. Good practices recommended in such codes are usually encouraged through “comply or explain” disclosure mechanisms or other variations such as “apply and/or explain”. While such codes can play an important role in improving corporate governance arrangements and practices, they might leave shareholders and stakeholders with uncertainty concerning their status and implementation. When codes and principles are used as a national standard or as a complement to legal or regulatory provisions, market credibility requires that their status in terms of coverage, implementation, compliance and sanctions is clearly specified.
I.C. The division of responsibilities among different authorities and self-regulatory bodies should be clearly articulated and designed to serve the public interest.
Corporate governance requirements and practices are typically influenced by an array of legal domains, such as company law, securities regulation, accounting and auditing standards, listing rules, insolvency law, contract law, labour law, tax law, as well as potentially international law. Corporate governance practices of individual companies are also often influenced by human rights and environmental laws, and increasingly laws related to digital security, data privacy and personal data protection. Under these circumstances, there is a risk that the variety of legal influences may cause unintentional overlaps and even conflicts, which may frustrate the ability to pursue key corporate governance objectives. It is important that policy makers are aware of this risk and take measures to ensure a coherent and stable institutional and regulatory framework. Effective enforcement also requires that the allocation of responsibilities for supervision, implementation and enforcement among different authorities is clearly defined and formalised so that the competencies of complementary bodies and agencies are respected and used most effectively. Potentially conflicting objectives, for example where the same institution is charged with attracting business and sanctioning violations, should be avoided or managed through clear governance provisions. Overlapping and perhaps contradictory regulations between jurisdictions is also an issue that should be monitored to avoid regulatory arbitrage and so that no regulatory vacuum is allowed to develop (i.e. issues slipping through for which no authority has explicit responsibility) as well as to minimise the cost of compliance with multiple systems.
When regulatory responsibilities or oversight are delegated to non-public bodies, notably stock exchanges, it is desirable to explicitly assess why, and under what circumstances, such delegation is desirable. In addition, the public authority should maintain effective safeguards to ensure that the delegated authority is applied fairly, consistently, and in accordance with the law. It is also essential that the governance structure of any such delegated institution be transparent and encompass the public interest, including appropriate safeguards to address potential conflicts of interest.
I.D. Stock market regulation should support effective corporate governance.
Stock markets can play a meaningful role in enhancing corporate governance by establishing and enforcing requirements that promote effective corporate governance by their listed issuers. Also, stock markets provide facilities by which investors can express interest or disinterest in a particular issuer’s governance by allowing them to buy or sell the issuer’s securities, as appropriate. The quality of stock exchanges’ rules for listing and for governing trading on their facilities is therefore an important element of the corporate governance framework.
What traditionally were called “stock exchanges” today come in a variety of shapes and forms. Most of the large stock exchanges are now profit maximising and themselves publicly traded joint stock companies that operate in competition with other profit maximising stock exchanges and trading venues. Regardless of the particular structure of the stock market, policy makers and regulators should assess the proper role of stock exchanges and trading venues in terms of standard setting, supervision and enforcement of corporate governance rules. This requires an analysis of how the particular business models of stock exchanges affect the incentives and ability to carry out these functions.
I.E. Supervisory, regulatory and enforcement authorities should have the authority, autonomy, integrity, resources and capacity to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.
Supervisory, regulatory and enforcement responsibilities should be vested with bodies that are operationally independent and accountable in the exercise of their functions and responsibilities, have adequate powers, proper resources, and the capacity to perform their functions and exercise their powers, including with respect to corporate governance. Many jurisdictions have addressed the issue of political independence of the securities supervisor through the creation of a formal governing body (a board, council or commission) whose members are given fixed terms of appointment. Some jurisdictions also stagger appointments and make them independent from the political calendar to further enhance independence. Some jurisdictions have sought to reduce potential conflicts of interest by introducing policies to restrict post-employment movement to industry through mandatory time gaps or cooling-off periods. Such restrictions should take into consideration the regulators’ ability to attract senior staff with relevant experience. These bodies should be able to pursue their functions without conflicts of interest and their decisions should be subject to judicial or administrative review. At the same time, supervisory staff should be adequately protected against the costs related to defending their actions and/or omissions made while discharging their duties in good faith.
To guard against conflicts of interest (including the potential for political or business interference in supervisory and enforcement processes), operational independence may be reinforced by autonomy over budgetary and human resource management decisions. Such autonomy should be coupled with high ethical standards and accountability mechanisms, including timely, transparent and fully explained decisions that are open to public and judicial scrutiny. When the number of corporate events and the volume of disclosures increase, the resources of supervisory, regulatory and enforcement authorities may come under strain. As a result, they will have a significant demand for fully qualified staff to provide effective oversight and investigative capacity which will require adequate funding. Many jurisdictions impose levies on supervised entities in combination with, or as an alternative to, government funding. This may support greater financial autonomy from governments to carry out their mandates, while structuring such fees to avoid impeding supervisory independence from regulated industry participants and providing adequate transparency on the criteria adopted to set the fees. The ability to attract staff on competitive terms is also important to enhance the quality and independence of supervision and enforcement.
I.F. Digital technologies can enhance the supervision and implementation of corporate governance requirements, but supervisory and regulatory authorities should give due attention to the management of associated risks.
Many jurisdictions use digital technologies to enhance the efficiency and effectiveness of supervisory and enforcement processes related to corporate governance, with benefits, for example, for market integrity. They can also alleviate the regulatory burden on regulated entities, which can themselves use digital tools to lower compliance costs and enhance risk management capabilities. Digital technologies may also be leveraged to make regulatory compliance less onerous for companies, with a view to maintaining the rigour and scope of corporate governance regulation and corporate disclosure through improvements in the functioning of the existing framework.
Adopting digital solutions in regulatory and supervisory processes also comes with challenges and risks. Important considerations include ensuring the quality of data; ensuring that staff have proper technical competence; considering interoperability between systems in the development of reporting formats; and managing third-party dependencies and digital security risks. When artificial intelligence and algorithmic decision-making are used in supervisory processes, it is critical to maintain a human element in place to mitigate against risks of incorporating existing biases in algorithmic models and the risks from an over- reliance on models and digital technologies.
At the same time, regulators in most jurisdictions espouse the value of a technology neutral approach that does not discourage innovation and the adoption of alternative technological solutions. As technologies evolve and may serve to strengthen corporate governance practices, the regulatory framework may require review and adjustments to facilitate their use.
I.G. Cross-border co-operation should be enhanced, including through bilateral and multilateral arrangements for exchange of information.
High levels of cross-border ownership and trading require strong international co-operation among regulators, including through bilateral and multilateral arrangements for exchange of information or joint supervisory actions. International co-operation is becoming increasingly relevant for corporate governance, notably when companies or company groups are active in many jurisdictions through both listed and unlisted entities, and seek multiple stock market listings on exchanges in different jurisdictions.
I.H. Clear regulatory frameworks should ensure the effective oversight of publicly traded companies within company groups.
Well-managed company groups that operate under adequate corporate governance frameworks can help to achieve benefits based on economies of scale, synergies and other efficiencies. Nevertheless, company groups in some cases may be associated with risks of inequitable treatment of shareholders and stakeholders. The prevalence of company groups in many jurisdictions has therefore heightened the need for regulators to ensure that the corporate governance framework provides means to effectively monitor them. If not, the extensive and complex structures of company groups may pose risks to shareholders and stakeholders of publicly traded parent or subsidiary companies within group structures, including through abusive related party transactions. Some group companies may also be used to shift funds within the group as part of the group’s tax planning strategies, or may use the funds for board/executive remuneration or dividend payments.
Company groups operating in different sectors and across borders call for co-operation between domestic regulators and across jurisdictions to strengthen the effectiveness and consistency of regulatory oversight. Such efforts may include information sharing on the activities of company groups for supervisory and enforcement purposes. To this end, jurisdictions are encouraged to develop a practical definition and criteria for the oversight of company groups focusing on aspects such as the controlling relationship of group companies and their parent, companies’ domicile, and appropriateness of inclusion in consolidated financial reporting, among other aspects. In some jurisdictions, companies have adopted protocols and governance guidelines at group level as a tool to self-regulate group activity.