Institutional EYE

Commentary on Corporate Governance Issues

OECD Principles: Are there more regulatory changes ahead?

February 19, 2016

From the time they were first rolled out in 1999, the OECD Principles of Corporate Governance (CG) have influenced global corporate governance regulations and practices. They have been updated twice, first in 2004 and then last year. The 2015 Principles were launched at a G20 meeting of finance ministers in Ankara in September 2015 and later endorsed by the G20 leaders in Antalya, also in Turkey, in November 2015. As a consequence, they are now referred to as the G20/OECD Principles of Corporate Governance.

 

 

Why should these Principles matter and how do they affect Indian companies?

 

When introducing the updated Principles, Angel Gurria, the Secretary General of OECD said that “today, half of the world’s 50,000 publicly traded companies are listed in emerging markets. And since 2008, companies from emerging markets have attracted more than half (51%) of all equity capital raised in the world. This is a sea change compared to the 1990s, when non-financial companies from emerging markets only raised 14% of all equity capital.” He then went on to add that “the future prosperity of (US) retirees will to a large extent depend on the performance and integrity of corporations who are operated and traded in a great number of countries worldwide.”

The Indian market is witness to this change. A brokerage recently estimated that foreign institutional investors own 23% of the top 500 companies through investments aggregating US$ 335 billion. Indian companies will continue to need capital to grow. Increasing investor trust in our regulatory regime and in our companies will ensure that global long-term capital continues to flow. Adhering to these principles will matter.

 

There are six G20/OECD Principles, each dealt with as a chapter, comprise:

  • Supervisory framework

  • Shareholder rights

  • Institutional investors and markets

  • Stakeholders and CG

  • Transparency and disclosure

  • Board of directors

The chapters talk about the need for the principle, the best practices and finally OECD’s take on the principle and its message to the regulators. A bit more colour is provided below.

The first Principle highlights the need for a CG Framework and stresses its role in promoting fair and transparent markets. It asks that the framework be consistent with the rule of law and that the division of responsibilities among different supervisory, regulatory and enforcement authorities. It talks about empowering regulators through a fixed tenure – independent of the political cycle.

 

The second Principle deals with shareholder rights. Basic shareholder rights should include secure methods of ownership registration and their transfer, access to relevant and material information on the corporation on a timely and regular basis; and the right to vote in shareholder meetings. Regulation regarding voting on related party transactions that found a way in the Companies Act 2013 are dealt with in this chapter.

 

The third, an addition to 2004 Principles, deals with the role of institutional investors in fostering good corporate governance and their fiduciary duties. It calls on all shareholders of the same class of shares being treated equally and urges that insider trading be prohibited. Highlighting the role of proxy advisors, this chapter avers that proxy advisors are among the most relevant from a direct corporate governance perspective.

 

Corporates need to recognize that not just investors but lenders, employees, suppliers and customers play vital role in its success. The fourth principle urges the CG framework to recognize the role and primacy of the various stakeholders.

 

The fifth Principle deals with issues of transparency. The best way to increase public trust is through adequate and timely disclosure. This is the area which has the most dramatic changes. The focus also changes from periodic to ongoing disclosures. This chapter urges companies disclose not just their financial results but material developments that impact its operations. It further urges the board to disclose the estimates used in preparing the financial and operating results and talk more openly about inherent risks, in order to give investors a clear understanding of the board and management’s business judgment.

 

The sixth and final Principle emphasize the roles and responsibilities of the company’s board. It expands the role of then board from monitoring to guidance and from risk management to providing strategic guidance. It highlights the need of various management committees by listing their advantages.

 

Since these are principles, they provide the required flexibility to regulators, who can take into account a company’s size, ownership structure, geographical spread and stage. They also gives regulators the leeway to roll these out as codes rather than hard regulations.

 

Indian regulations have imbibed a large part of these principles and diffused these into the system over time. India was the first Asian economy to put forward a comprehensive code of corporate governance when in 1995 the Confederation of Indian Industry (CII) appointed a task force to draw up a voluntary code of corporate governance. Since then there have been six committees under the aegis of the Ministry of Corporate Affairs or SEBI, recommendations from most of which found place first in the listing guidelines, then in 2014 in the Companies Act 2013 and in the recently notified SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

 

While India has been an early adopter of the OECD principles, it has also been proactive in setting new standards. Regulations relating to contribution of profits to CSR and mandating women to be on boards, are unique to Indian regulations. As OECD and other markets progress on setting benchmarks for good governance practices, India will likely keep up. But regulations are just one step in the right direction. Implementation is key. For that, Indian companies must commit themselves to adopting a strong governance framework. Without that, India will soon lose its sheen as an investment destination.

 

A modified version of this article written by Amit Tandon was published in Business Standard on 18 Feb 2016. Read the article “Putting Principles to Practice”.

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