Corporate Governance Quick overview of OECD Principles 2004

What is Corporate Governance Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. (Economic Times)

What is Corporate Governance Intersection of 3 major areas: – Commercial law – Financial Economics – Management (risk, operational, HR) – Institutional economics (principal agent problem) With outreach to: – Criminal law (in case of corporate governance failures) – International private law (global companies, arbitrations, choice of law) – Economics of competition – Accounting and Auditing

Stakeholder vs. Shareholder model

Typical issues falling under CG Shareholder rights – Information rights – Equitable treatment (including the big EU issue on cross-border voting) – Shareholders‘ loyalty to the company (German case) Stakeholder rights – Inclusion of employees – Insolvency and restructuring

Typical issues falling under CG Transparency of the company – Annual/Quarterly/Monthly Reports – Remuneration policies – Governance Codes – Related party transactions – Forseeable risks – Audits

Typical issues falling under CG Rights and obligations of boards – Continental model (2-tier model) Supervisory Board (non-executive) Board of Directors – Anglosaxon model (1-tier model) CEO Board of Directors (executive) – Duty of care (incl. reasonable business risk) and duty of loyalty

Typical issues falling under CG Control mechanisms – External – auditors, rating agencies (but who controls them?) – Internal – committee of audit (responsible to non- executive directors/supervisors), committee for remuneration Non-executive board members – Respected experts from outside of the company representing all shareholders/stakeholders (ENRON case?)

OECD lessons learned from financial crisis (2011) Remuneration – Disclosure and beyond (stronger link between performance and remuneration, less complex remuneration schemes, empowering the non- executive members of boards and remuneration committees, clawbacks) Risk management – Part of standard documents of company, partial disclosure – Risk committee or risk officer

OECD lessons learned from financial crisis (2011) Boards – Search for greater competence in board members – Greater resources for boards to form independent judgement (but limitation of proxy advice?) – Ex ante specification of expertise and capabilities of board members (SOEs?) – Obligatory disclosure of membership in other boards – Financial liability of board members?

Corporate governance scandals ENRON – – – wFile/7627/ wFile/7627/5855 – Mismanagement and great complexity of operations – Creative deployment of SPV for loss coverage, off- balance sheet accounting – Failure of auditors (Arthur Andersen) – Failure of non-executive directors