An Agenda for Modernization

1.2 An Agenda for Modernization

15. The Advisory Group believes that enabling the corporation to improve its competitiveness and access to capital markets through improved corporate governance will require both public policy and private sector initiatives. The Advisory Group offers this Report to promote supportive international public policy perspectives, to encourage voluntary pri- vate sector initiatives and, particularly, to offer the OECD suggestions about the direction of its further efforts.

“There will be increased pressure on all our economies and societies to adjust to the requirements of global financial markets. This process of convergence must of course be guided by building up a consensus on what should be the rules of the game. Institutions like the OECD can play an important role in shaping that process.”

Dr. Henning Schulfe-Noelle, Chairman of the Board of Management, Allianz AG (Germany)

16. The Advisory Group suggests that such further public and private sector initiatives – and OECD efforts – focus on the following Agenda (which is described in the remaining chapters of this Report):

◊ Defining the mission of the corporation in the modern economy: Generating long-term economic gain to enhance shareholder (or investor) value is necessary to attract equity investment capital and is, therefore, the corporation’s central mission. At the same time, however, corporations must function in the larger society. To varying degrees, different national systems and individual corporations may temper the economic objective of the corporation to address noneconomic objectives. Full transparency of eco- nomic and noneconomic objectives – both as to the national system and the individual corporation – will be necessary in the global competition for capital. (Chapter 2)

◊ Ensuring adaptability of corporate governance arrangements: The primary role for regulation is to shape a corporate governance environment, compatible with societal values, that allows competition and market forces to work so that corporations can succeed in generating long-term economic gain. Specific governance structures or practices will not necessarily fit all companies at all times. Nor should it be taken for granted that a given design may suit the same company during different stages of its development. For dynamic enterprises operating in a rapidly changing world, corporate governance adaptability and flexibility – supported by an enabling regulatory framework – is a pre- requisite for better corporate performance. (Chapter 3)

◊ Protecting shareholder rights: For companies to attract equity investment, regulatory safeguards must emphasize fairness, transparency and accountability. These safe- guards should take into account the new and growing category of noncontrolling shareholders who have emerged in the form of institutional investors. The focus of current efforts to improve shareholder protection should center on investor access to performance-related information, shareholder exercise of voting rights, and promotion of active and independent (nonexecutive) members of boards of directors to strengthen the quality of corporate governance. (Chapter 4)

◊ Aligning the interests of shareholders and other stakeholders: Corporate success is linked to the ability to align the interests of directors, managers and employees with the interests of shareholders. Performance-based compensation is a useful tool for this purpose. Independent (nonexecutive) members of the board of directors – or in certain nations, board of auditors – have a special responsibility in designing and approving appropriate remuneration schemes. (Chapter 6)

◊ Recognizing societal interests: Companies do not act independently from the societies in which they operate. Accordingly, corporate actions must be compatible with socie- tal objectives concerning social cohesion, individual welfare and equal opportunities for all. Attending to legitimate social concerns should, in the long run, benefit all parties, including investors. At times, however, there maybe a trade-off between short-term social costs and the long-term benefits to society of having a healthy, competitive private sector. Societal needs that transcend the responsive ability of the private sector should be met by specific public policy measures, rather than by impending improvements in corporate governance and capital allocation. (Chapter 7)

17. The specific topics on this Agenda are interrelated and complementary. Therefore, the consequences of any particular public policy reform measure need to be carefully con- sidered to ensure a coherent approach to corporate governance.

18. Based on its discussion of this Agenda in the ensuing Chapters, the Advisory Group has formulated Perspectives that it believes should guide:

APPENDIX I C ORPORATE G OVERNANCE : I MPROVING C OMPETITIVENESS AND A CCESS TO C APITAL IN G LOBAL M ARKETS

◊ public policy makers and regulators to encourage the development of improved governance practices, with strong emphasis on government enabling voluntary private sector development rather than attempting to regulate it; and

◊ corporations and investors voluntarily to improve governance practices.

19. Based on these Perspectives, and the Advisory Group’s discussion of specific substantive issues in this Report, the Advisory Group has also formulated Recommendations for further efforts by the OECD.