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“For a potentially dry subject the session was very enjoyable”
Director, Sagicor at Lloyd's
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OECD Review
OECD Corporate Governance and the Financial Crisis: Key Findings and Main Messages
General
The OECD report published in June 2009 concluded:
| “The Steering Group’s analysis of corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights concludes that, at this stage, there is no immediate call of the OECD Principles... A more urgent challenge for the Steering Group is to encourage and support effective implementation of already agreed standards.” |
Governance of the remuneration process
The report stated nine key findings, which are summarised below:
- The governance of remuneration/incentive systems has often failed because negotiations and decisions are not carried out at arms length…
- … the link between performance and remuneration is very weak or difficult to establish…
- Remuneration schemes are often overly complicated or obscure…
- Transparency needs to be improved…
- The goal needs to be remuneration/incentive systems that encourage long term performance…
- Defining the structure of remuneration/incentive schemes is a key aspect of corporate governance and companies need flexibility to adjust systems to their own circumstances…
- Steps must be taken to ensure that remuneration is established through an explicit governance process…
- …it should be considered good practice that remuneration policies are submitted to the AGM…
- …follow the Principles for Sound Compensation Practices issued by the Financial Stability Forum…
CTP Global runs courses on Remuneration Committees, their establishment and best practice.
Effective implementation of risk management
On risk management the Steering Group had eight key findings:
- ...widespread failure of risk management…Most important of all, boards were in a number of cases ignorant of the risk facing the company.
- Both financial and non-financial companies face a similar range of risks that need to be managed including operational, strategic and market risks…
- …The aim is to ensure that risks are understood, managed and, when appropriate, communicated.
- …It should be considered good practice to involve the board in both establishing and overseeing the risk management structure.
- The board should also review and provide guidance about the alignment of corporate strategy with risk-appetite and the internal risk management structure.
- …it should also be considered good practice that risk management and control functions be independent of profit centres and the “chief risk officer” or equivalent should report directly to the board…
- The process of risk management and the results of risk assessments should be appropriately disclosed… the board should make sure that the firm communicates to the market material risk factors in a transparent and understandable fashion…
- With few exceptions, risk management is typically not covered, or is insufficiently covered, by existing corporate governance standards or codes…
CTP Global offers courses on establishing risk committees, regulation, risk and compliance, and systems and controls.More here...
Board Practices
The eight key findings and messages for board practices follow:
- ... [companies have] an important responsibility to improve board practices through, inter alia, implementing voluntary standards.
- The objective should be to facilitate the creation of competent boards that are capable of objective and independent judgement…formal independence should sometimes be a necessary, but never a sufficient, condition for board membership. A board evaluation process, conducted with the support of independent experts on a regular basis, should be used as a structural tool for monitoring board effectiveness and efficiency.
- The shareholders’ role in nominating board members and in their appointment should be enhanced…
- …good practice that the functions of CEO and Chairman in unitary boards are separated. When a dual board structure exists the head of the management board should not become chair of the supervisory board on retirement…
- Board member liability and how their duties are specified and disclosed should remain on the policy agenda…
- …good practice that boards develop specific policy for the identification of the best skill composition of the board, possibly indicating the professional qualities…some form of continuing training is required.
- …where “fit and proper person tests” are applied by regulators for public policy reasons…, the criteria could be extended to technical and professional competence of potential members, including general governance and risk management skills.
- The test for those particular companies might also consider the independence and objectivity of boards….the test might also consider the time that board members have served under the same CEO or Chair.
The exercise of shareholder rights
The OECD report includes six key findings and messages:
- The interests of some shareholders and those of management have been “aligned” in the past…and was associated with a great deal of short-term behaviour.
- …shareholders…have tended to be reactive rather than proactive and seldom challenge boards in sufficient numbers to make a difference.
- Companies need to do more – and it is in their interests – to support constructive engagement with their shareholders.
- …voting behaviour suggests [institutional investors] can have important conflicts of interest…when compelled to vote the reaction often appears to be mechanical.
- Institutional investors (and others) should not be discouraged from acting together in individual shareholders meetings, both through consultation before the meeting, and the presentation of common proposals, provided they do not intend to obtain control of the company.
- …Measures should be taken , both by regulators and by all the institutions involved in the voting chain…to encourage use of flexible voting mechanisms….danger of ”one size fits all” voting advice so that a competitive market for advice needs to be encouraged.
For full details download report here
CTP Global offers a full range of courses on structure and governance , board and executive performance, and essential skills and knowledge for boards. To discuss your requirements please contact us now...
CTP Global - Good Governance: Great Performance
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