Introduction.

This critique applies to the "Revised Draft Principles of January 2004" published by the OECD.

All "Comments on the Revised Draft Principles of January 2004" were published on February 11, 2004.

[Ed; please note that the items linked above take forever to open.  The OECD is far better at churning out words than it is at running a website and communicating in the modern medium.]

Preamble

The preamble is biased towards management and economic efficiency rather than concerns of shareholders or the social and political concerns of communities that give corporations the right to exist.

For example the preamble defines "Good corporate governance" in terms of:
1. Incentives for "the board and management to pursue objectives" rather than providing power to shareholders to make board and management accountable for achieving their objectives in controlling their savings.
2. "Encouraging firms to use resources more efficiently" without concern of the social, environmental and political impact of corporations.
3. "Economic performance" and "efficient markets" without concern on how corporations can influence the quality of life or undermine and replace democracy with autocracy and plutocracy.
 
The OECD Principles allows corporate owners and/or managers who represent a small minority of citizens to deny direct democratic control of the corporate economy to undermine and erode local autonomy.

I.  The rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of shareholders' rights.

However, the excessive powers that directors possess over shareholders' exercising their rights is largely ignored in the OECD Principles as is the excessive conflicts of interest that corporate constitutions vest with the directors.  For example:

* The Principles do not provide to shareholders the right to be informed of the nature of counter parties when they transfer shares to expose shareholders to unwittingly trade with insiders, manipulators and other parties whose identity would constitute price sensitive information (A3).
* Provision for shareholders to only have "the right to participate in"… "fundamental corporate changes" so shareholders do not necessarily have the right to make corporations subject to their will (B).
* The Principles do not entitled shareholders to determine or control the rules and conduct of general shareholder meetings and so they are subject to the grace, favour and determination of the directors as to how they might "participate effectively and vote" (C).
* No provision to protect minority shareholders as only disclosure of their position is required (D).
* Requirement only to make management and the board accountable for entrenching their position not to protect shareholders from the management and the board from becoming and maintaining their entrenchment (E).
* No requirement for shareholders to disclose their ultimate beneficial owners and/or controllers which can be both price and political sensitive information as well as hiding insider trading (F/G).
* No mention of any obligation of governments to protect the rights of shareholders, stakeholders and community interests.
* No mention of any obligation on shareholders and/or stakeholders to regulate corporations instead of governments to "improve the legal, institutional and regulatory framework" (Preamble)
* No requirement to protect shareholder rights with material quorums

II.  The equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.  All shareholders should have the opportunity obtain effective redress for violation of their rights.

The Principles allow the wealthy to control corporations with one share one vote to create a plutocracy.  When wealthy shareholders like institutions do not vote or give their proxy vote to corporations, directors become accountable to, and are appointed by them-selves to create an autocracy.  Either way democratic control of an economy is reduced to be inconsistent with aims of the OECD, World Bank, BIS and IMF.  It means that the degree that an economy is subject to democratic control and accountability is eroded when corporatization and privatisation uses one vote per share as is now common but which was judged to be unlawful by the New Jersey Supreme Court in 18341(A1).

Minority shareholders are dependent upon controlling shareholders or unspecified external agents to protect them from abuse rather than requiring corporations to establish effective internal means of protecting, redressing and/or compensating minority interests (A2).

Likewise the ability of shareholders to make corporations accountable is left to "Company procedures" and the untenable conflicts of interests of having procedures determined by the directors who are being held accountable.  The authority given by governments for corporations to exist need corporate constitutions to safeguard the "equitable treatment of all shareholders" and "not make it unduly difficult or expensive to cast votes"(A4).

The statement that "Insider trading and abusive self-dealing should be prohibited" is inadequate without corporate constitutions requiring all valid share transfers to be predicated upon full disclosure at the time of transfer of all ultimate beneficial owners and/or controllers with a declaration of any insider knowledge or relationship (B).  Such "sunlight share trading" would allow shareholders to protect themselves by tracing and checking the possibility of insider trading and sue for compensation when improper disclosure was found.

The statement that "board and key executives should be require to inform the board whether they".."have a material interest in corporate transactions" does little or nothing for the equitable treatment of shareholders if such interests are not reported to them or there is no redress for non disclosure or for loss of value through such transactions (C). What is required are corporate constitutions that forbid any director or executive to hold their position with the corporation if there is non-disclosure of any related party transactions or if such transactions are not reported and approved by the shareholders or their representatives.

The Principles are inadequate as there are:

* No rights for shareholders to be informed of other shareholders with inside information
* No rights for shareholders to know who is trading shares
* No requirement for statutory insiders to disclose their trading intentions
* Reliance on legal rights rather than administrative rights to protect shareholders
* Assumes shareholder rights depends upon directors not shareholders/government
 

III.  The role of stakeholders in corporate governance

The corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability for financially sound enterprises.

The draft:

* Does not provide guidelines or processes to assure that stakeholders are protected as required by law (A).
* Does not protect stakeholders not protected by law (A).
* Does not provide guidelines or processes to assure that stakeholders can obtain redress for violation of their rights (B).
* Ignores the ability of stakeholder engagement to replace government regulation and/or act as co-regulators (B&D).
* Employees, on whom any business depends for its existence, are not given rights to participate in the governance of a corporation (C).
*  Does not recognise that no firm can exist without stakeholders and so stakeholder engagement and participation in corporate governance should be a fundamental requirement (D).
*  The suggestion that "stakeholders and individual employees, should be able to freely communicate their concerns about illegal or unethical practices to the company board" is likely to be counter-productive for the stakeholders with companies so governed centrally with a single board (E).  
* The Principle of a division of power with checks and balances to detect and protect the company, its shareholders and stakeholders from illegal and unethical practices is ignored (E).
*  The Principles are dependent upon outside agents to protect creditors.  They ignore the contribution that creditors can make by being engaged in the governance of firms to protect themselves, the company, shareholders and other stakeholders (F).
 
IV.  Disclosure and transparency
 

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company

In the Draft there is:

* No requirement for directors, auditors, employees or any other stakeholders to disclose to anyone unethical practices, malfeasance, fraud and/or illegal acts (A).
* No provision to establish and protect whistleblowers (A).
*  No provision for stakeholders to disclose to the board and/or the shareholders the Strengths, Weaknesses, Opportunities and Threats (SWOT) in the business operations, employees, management and/or the board (A).
* No provision for corporate constitutions to separate the power and conflicts created by those responsible for corporate performance being also responsible for reporting on their performance (B).
* No requirement in corporate constitutions to prohibit directors engaging auditors to carry out other duties for the company (C).
*  Conflicts of interest and confused accountability of auditors created by requiring them to "be accountable to the board as well as shareholders" and owning "a duty of care to the company" (D).
* No provision to disclose standards of corporate behaviour including standards of disclosure (E).
* No provision to disclose integrity of processes to report deviations from disclosed standards.
* No provision to disclose integrity of processes to correct deviations from disclosed standards.

V.  The responsibilities of the Board.

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and its shareholders.

The Draft:

* Ignores the fact that many corporations only have members not shareholders (A).
* Ignores the fact that "the best interest of the company" may be not to have shareholders, especially companies providing education, health, and other community services where shareholder interests can jeopardise the integrity of the reason for the company to exist (A).
* Ignores the need for "different shareholder groups" to have their own elected representatives to voice their perspective to allow the board to "treat all shareholders fairly" (B).
* Ignores the unethical practice of boards or the board chairperson controlling the process by which the board is held accountable to shareholders at general meetings and the conflicts created by a director chairing a meeting of shareholders (C). 
* Ignores the need for stakeholders to have their rights protected in the corporate constitution to give advise to the board on how to "take into account the interest of stakeholders" (C).
* The Principles concerning the functions of the board introduce untenable conflicts of interest with opportunities for directors to self deal, determine their own remuneration and entrench their position of power, privilege and influence without meaningful checks and balances or processes to mediate their conflicts (D).
* The board functions required by the Principles in large and/or complex dynamic corporations introduce unrealistic workload, information assimilation, analysis, and responsibilities that are beyond the capabilities of gifted humans to creditably achieve on a reliable manner (D).
* The Principles provide no creditable processes for directors to carry out their key function of monitoring management and the business, independently of the management that they are monitoring (D. 3).
* The Principles provide no creditable or systemic processes for directors to discover when their trust in management might be misplaced and so represent irresponsible governance over the savings of investors' and the interest of its employees, customers, suppliers and host community (D).
* The Principles assume that directors and key executives require economic rewards "to best serve the longer term interests of the company" when this approach may be unnecessary and counter productive (D4).  Non economic incentives and internal competition by management for recognition and job satisfaction are ignored.
* The Principles are only concerned with "potential conflicts of interest of management, board members and shareholders" and not the actual conflicts.  Contentious and crucial actual conflicts for directors commonly arise from determining their own remuneration, the conditions of other related party transactions, their re-nomination to the board, methods of determining profit or loss within accepted accounting standards, and the process of being accountable to members (D6).
* The Principles are unrealistic in expecting board to manage, mediate and/or report all their own conflicts of interest without corporate constitutions establishing processes to avoid, minimise and/or mediate conflicts as commonly found in sustainable employee controlled firms (D, E1).
* The Principle that the board should "exercise objective judgement" independent from "dominant shareholders" (E) is inconsistent with the Principle in Section II (A.1.) which states "Within any class, all shareholders should have the same voting rights" as this makes directors beholden to a dominant shareholder.
* The Principles ignore the ability of strategic stakeholders such as employees, customers, supplies and host communities to complement and simplify the duties of directors by providing them with inside expert and committed information independently of management on the SWOT of management and the business operations (D).
* The Principals are inconsistent with the natural laws of governance that allows biota to sustain their existence on a reliable self-regulating and self-governing basis as explained in my article 'The Science of Corporate Governance.'

Shann Turnbull PhD, is Principal, International Institute for Self-governance.  Contact Shann at sturnbull@mba1963.hbs.edu