The OECD's corporate governance report
The OECD's business sector advisory group on corporate governance, chaired by Ira Millstein, recently submitted its report, Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets. The report's foreword says the OECD formed the advisory group because it perceived the significance of corporate governance to the economies of its member countries.
The group was asked to determine whether 'the OECD could be of significant assistance to its members in developing an understanding of the respective roles of government and the private sector.' With this carefully worded mandate, Millstein collected a blue ribbon panel from five key countries: Michel Albert (France), Sir Adrian Cadbury (UK), Robert Denham (US), Dieter Feddersen (Germany) and Nobuo Tateisi (Japan).
Consensus builder
The report should be viewed as an important consensus-building tool. As such, it has something for everyone, no matter the varied governance and market structures of the member countries. It would seem at first blush to be internally inconsistent in its two key themes. First, it calls for market-driven and voluntary corporate governance initiatives rather than regulation, but wants regulation to shape the framework for competition. This may not be such a big leap in the Anglo-Saxon economies, but consider how far some will have to travel to establish a competitive regulatory framework that protects shareholders and promotes investor confidence.
Second, the report acknowledges that generating long-term economic gain to enhance shareholder value is necessary in order to attract equity capital. It is, therefore, a corporation's central mission. But the report's authors also accept that companies must function in the wider society and that some national systems and individual corporations may temper that economic objective - or address non-economic ones. This is all very well - provided they are transparent about those objectives.
Smart negotiators know you can't build consensus without creating win-win situations based on making people feel comfortable. Building consensus on corporate governance throughout 29 OECD countries is just about as daunting a task as any negotiator can face.
Right direction
Some will question the role of the OECD and whether it adequately incorporates business, as opposed to government, interests. But two major developments will move the debate forward toward the global best practice norms outlined in the report.
First, it is in the best interest of companies who are farther along the governance curve to persuade others to achieve high standards of transparency and accountability. Moreover, those companies in the lead will probably not have their own bars raised; improving standards to a common and acceptable denominator will likely affect others.
Second, institutional investors, more active than ever, will increasingly demand high standards of transparency and accountability. Findings from a new international survey of institutional investors by Russell Reynolds Associates reinforce the notion that investors care about corporate governance and market confidence. In the US, 26 percent of investors say that establishing global corporate governance standards is either very or extremely important; this compares to 27 percent in the UK, 52 percent in Australia, and a startling 67 percent in France.
Even more telling is whether an investor would avoid a foreign company without sound governance practices. Over half (55 percent) of investors in the US say they are very reluctant to invest in a foreign company if they know it has a record of poor governance; fewer than one in ten (7 percent) assert they are not at all reluctant. In the UK, 29 percent of investors say they are extremely or very reluctant to invest in a foreign company that has poor governance; the figures are 51 percent in Australia and 76 percent in France.
In publishing its report, the OECD has taken a major step in moving the debate forward. The devil will be in the details, of course. But at least the spectrum of issues is well laid out for negotiators to discuss. Even if individual company, investor and even countrywide regulatory action takes place at a faster rate than the collective OECD can move, that may not be so bad.
Dr Carolyn Kay Brancato is director of the Conference Board's Global Corporate Governance Research Center