Principles of Corporate Governance

The Principles are aimed at improving the legal, institutional, and regulatory framework for corporate governance in OECD and non-OECD countries (May 1999).

The Principles are organised under five headings:

• the rights of shareholders;
• the equitable treatment of shareholders;
• the role of stakeholders;
• disclosure and transparency; and
• the responsibilities of the board.

They are preceded by a Preamble, which provides the rationale for their development and are accompanied by annotations, which include descriptions of dominant trends in governance, and offer alternatives and examples that may be useful in making the Principles operational. The first chapter concerns the protection of shareholder rights and the ability of shareholders to influence the behaviour of the corporation. Basic rights are listed including those to: secure ownership and registration, convey and transfer shares, obtain relevant information, share in residual profits, participate in basic decisions and at general shareholder meetings, and fair and transparent transfers of control. The second chapter on the equitable treatment of shareholders emphasises that all shareholders, including foreign shareholders, should be treated equitably by controlling shareholders, boards, and management. Insider trading and abusive self-dealing are to be prohibited. The Principles call for disclosure of material interests that board members and management might have in transactions that affect the corporation. The stakeholder chapter deals states that the competitiveness and success of a company is the result of a teamwork that embodies contributions from a range of different resource providers, including employees. The Principles recognise the rights of stakeholders that are established by law. They encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises. The disclosure and transparency chapter calls for timely and accurate disclosure on all material matters regarding the corporation including its financial situation, performance, ownership, and governance. A list of basic disclosures is included. High quality standards of accounting, disclosure, and audit should be followed and there is support for the development of high quality internationally recognised accounting and audit standards. They indicate that an annual independent audit is required. Channels for disseminating information should provide for fair, timely, and cost-efficient access to information by users. The final chapter calls for the effective monitoring of management by the board and the board's accountability to the company and the shareholders. Accordingly, board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interests of the company and shareholders. The Principles state that they should also take into account the interests of other stakeholders. Other responsibilities of board members include: reviewing strategy and planning, managing potential conflicts of interest, ensuring compliance with the law, and assuring the integrity of the company's accounting, reporting and communications. The Board should be able to exercise objective judgement independent of management, and requires access to accurate, relevant and timely information to fulfil its responsibilities.