Corporate governance: An IOSCO perspective
Edited transcript of a presentation by ASIC Deputy Chairman Jeremy Cooper to OECD-ADBI 8th Round Table, Tokyo 11 & 12 October 2006
Any discussion of corporate governance invariably involves a reference to the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance.
By way of background, the OECD Principles were originally developed in 1999, with the OECD releasing its revised Principles in 2004. Since their development, the significance of the Principles to the development of corporate governance practices has been recognised by a number of international bodies. The Principles have been endorsed by the Financial Stability Forum as one of the 12 key standards for financial stability.
The International Organisation of Securities Commissions' (IOSCO) interest in corporate governance, like so many regulatory reforms, finds it origins in financial frauds such as Parmalat Finanziaria SpA. Following the collapse of Parmalat, IOSCO formed the Securities Fraud Task Force to examine ways that international securities regulators could strengthen important mechanisms in combating financial frauds.
The report of the Securities Fraud Task Force focused on seven separate areas that had featured prominently in recent collapses:
- corporate governance;
- auditors and audit standards;
- issuer disclosure requirements;
- bond market regulation and transparency;
- the role and obligations of market intermediaries;
- the use of complex corporate structures and special purpose entities; and
- the role of private sector information analysts.
The work of IOSCO's Securities Fraud Task Force confirmed in the mind of IOSCO members the link between strong corporate governance, as espoused by the OECD Principles, and strong financial markets.
The Securities Fraud Task Force identified the following corporate governance issues as being critical, given the circumstances contributing to the collapse of Parmalat, and other financial frauds:
- the ability of the board to exercise independent judgement; and
- the importance of protection for minority shareholders.
The Securities Fraud Task Force noted that the presence of strong independent directors might have the effect of discouraging majority shareholders from engaging in conduct to derive a private benefit at the expense of other shareholders. Independent directors provide a means by which minority shareholders can monitor how majority shareholders and management utilise corporate assets.
Independent directors can also be one of a number of mechanisms that provide a safeguard against abusive related party transactions.
While it was recognised that majority shareholders have the same interest as minority shareholders in maintaining the viability of the corporation, the controlling shareholder may be in a position to expropriate assets of the corporation for its own benefit at the expense of minority shareholders.
Corporate laws generally counter predatory conduct by imposing duties on the directors of the corporation to act on behalf of all shareholders. Many jurisdictions also provide specific protections to minority shareholders.