I am very honoured to be here and wish to thank the Slovene Managers Association for their kind invitation. Today I want to address the global issues around corporate governance and how they are evolving before turning to the challenges being faced by economies such as Slovenia. But before going further, I should note that the views expressed are mine and not necessarily those of the OECD or its member countries. 

It is a key time to be meeting to talk about corporate governance.  Every weekend seems to bring news of yet another financial company failure. And as the business cycle continues to develop, it will not be long before some non-financial casualties appear. All this raises issues about corporate governance. Indeed, our Secretary General Gurria issued a call to action last week by the OECD:
 “Rebuilding investors’ confidence will be vital to help the economy get back on track. Strengthening the rules, regulations, and codes of corporate governance will be central to this. I call on member countries to work urgently with us to address major corporate governance failures. This will be a vital step to reinforce the market integrity”.

What he has in mind are saome moves to strengthen the implementation of the OECD Principles of corporate governance. I should point out that the Principles are one of 12 core standards adopted by the Financial Stability Forum for sound financial systems on 26th March, 2000.  

Global issues: Banking and corporate governance
The banking crisis is truly a global one and while the cause lies in easy monetary policies in the past and the subsequent run up in asset prices around the globe, such as housing, there is a corporate governance dimension. Corporate governance may not have been causal but it certainly allowed the crisis to destroy a number of financial institutions. Two factors stand out: poor risk management and what appears to be ineffective boards. Other factors include remuneration and accounting standards, especially the continued ability to use off-balance sheet entities (de-recognition).

Risk management is fundamental to the corporate governance mission. Following the Principles, the board’s duty is to the company and therefore to oversee its strategy and the associated risk appetite. The Principles therefore call for the board to oversee risk management systems and to disclose relevant risks. This is not the same as internal control for financial reporting, which the Principles also note as a key responsibility, but much wider.

The experience in a number of financial companies has been shocking. The UBS board approved a strategy including no rise in risk weighted assets, but what actually happened was the opposite. There were no controls until August 2007. Indeed, the board did not know until the first week in August 2007, that the bank was in dire trouble. This was only several days after the CEO was revealed the true situation. Systems also failed at Credit Suisse, Societe General and Citibank.

In recent years, risk management systems have also failed in non-financial companies such as Airbus, BP, Siemens, Boeing, etc., so it is not just a banking problem.
An important question is where were the boards, although in the banking system they have been active of late in dismissing CEOs, albeit with large golden parachutes. Board failure was nowhere more apparent than at Lehman Brothers which appeared to be dominated by the CEO, as at Citibank and UBS (in this case the chair/CEO). Other banks have done much better, showing that it can be done. 

The bigger issue for corporate governance and the Principles is, however,  whether a board can effectively oversee a large complex company.  Some are now arguing that there has been too much emphasis on independence to the neglect of competence. These are two separate questions. The former, I will come back to a bit later.

It is difficult to argue that the current situation shows the failure of independent boards. Who would claim that Lehmann’s Board was independent—and the same at Citi or at UBS. They might have been independent in a narrow legal way but not in the sense of the Principles … “the board should be able to exercise objective independent judgement on corporate affairs”.  The Principles go on to recommend that boards should consider assigning a sufficient number of non-executive directors capable of exercising independent judgement to tasks where there is a potential for a conflict of interests”.

Surely risk management is one of these, yet at UBS non-executives were only a quarter of the risk committee. At Citi, the head of the audit committee was nominally independent, but several shareholders were so impressed after meeting him, that they decided to vote against his renewal. He has now been replaced at Citi by the ex head of the CIA.
  Where were the shareholders before the crisis one might ask? 

In short, the current crisis shows the difficulty of finding those capable of independent objective judgement. It does not prove that a return to insiders with conflicts of interest  would be desirable. Competent directors with a conflict of interest raises another question, but remember that the Principles do not advocate a board comprising of only independent directors. It also recommends continued training of board members. 

Global issues: Trends
The corporate governance landscape in the world continues to evolve so that the OECD remains active in testing to see whether the Principles remain relevant. We will soon be issuing an interpretation or commentaries on the Principles, to show how they can be applied in new settings, such as with new investors classes (private equity and activist hedge funds, multiple voting shares).

Recently, the Secretary General convened a meeting in Paris with the private sector to look at evolving issues and the longer term beyond the current short run difficulties. Three questions were identified, namely the changing  nature of investors, the evolving duties of the board and the rising influence of state owned companies and investment funds. However, if there was a clear message it was this - yes, manage the current crisis, but be careful about rushing into new regulatory initiatives, since the law of unanticipated consequences is truly global. 

Investors: A remarkable fact is the increasing dominance of institutional investors and the trend decline of individuals that have been all but replaced by investment intermediaries. In addition, the global diversification of investment continues with large slices of ownership in countries such as Germany, France and Japan, now held by foreigners.
A number of  investors are increasingly activist and not content to simply vote with the management or vote at all. Such investors might be private equity, activist hedge funds or investors such as the members of the ICGN. Management and directors do not often like their attention, especially when they are foreign. Others are passive, and even when required to vote will blindly follow their management proposals.

Activism could and should continue to grow in influence and companies will need to adjust to this new reality. The thrust of the Principles is that shareholders do have rights and we are concerned about facilitating their use. But questions have arisen about what if any are investor responsibilities? Are they excessively short term?  What are their own corporate governance arrangements?  We, at the OECD are looking at pension fund governance from this perspective.

If shareholders should have rights in areas such as executive compensation and dividend policy, the Principles do foresee a counter balance: the fiduciary duty of the board to the whole company. Often this may be unclear or interpreted too narrow. But with new classes of investors, the SG’s meeting in Paris also indicated that boards have a role to play in ensuring good communications with investors – and not just taking a high handed approach.

A good example concerns Pfizer. Several years ago, it was the subject of fierce criticism by shareholders over high executive remuneration and about high losses incurred in selling a drug patent. The reaction was, that it was none of their business: the imperial US CEO. The company became one of the first to start an electronic discussion group (now permitted by the SEC) with shareholders, and even asking the top dogs to a meeting. They are also careful to explain the evolving business model of big pharma.

All this underlines the point I made before about the challenge the boards are facing. The world is changing and the investors are changing. Companies have to restructure in order to promote innovation, sometimes committing assets to joint ventures outside the control of the board. The injudicious sale of one patent can be a disaster. How does the board cope?  Does this mean that boards should not be looking for the CEO of another company to join the board, but rather technical specialists along the lines of private equity?  We still have a long way to go in defining independence and competence. 

The other challenge is the rising role of the state, especially via partially privatised Russian and Chinese companies. Out of the top 15 firms in the world, 5 are state owned. We expect the trend to continue. Following, there is the question of Sovereign Wealth Funds. Remember, one is now a major shareholder of Citibank, but another has been a shareholder of Mercedes since 1973. The issue is that there is a fundamental distrust in state objectives: are they strategic or political? The OECD has addressed the particular problems of SOE through its Guidelines and  we have established a Global Forum  to further this work. This might be a good point of turning towards the particular issues facing Slovenia. 

Think globally, act locally: the Principles and conditions in Slovenia.
Slovenia is characterised by concentrated ownership and control. The state also remains a significant player, either directly or indirectly. It is also small, which carries with it its own challenges.

While there is a rightful feeling in many countries that they must be unique it is not so in terms of corporate governance landscape. Following the issue of the principles in 1999, the OECD started Corporate Governance Roundtables around the world. In nearly all cases the reaction was that the primary concern was with concentrated ownership and the abuse of minority shareholders. Rubber stamp boards that are appointed mainly by controlling shareholders was also identified as a problem.
In response, in 2004, we revised the Principles to address the situation. The changes on the whole are relevant to Slovenia.
Before outlining the relevant changes, let me say that the Principles is not opposed to concentrated ownership including ownership by the management. If they have “skin in the game” this might lead to a dynamic company as is the case with many family companies. But there is also another danger: management with substantial stakes in a firm might also be highly risky while being concerned with protection of their wealth. This can lead to not very dynamic or innovative companies. A listing gives a way for management to diversify their wealth but can also lead to other problems. What are they?

The 2004 revision introduced a new chapter covering the adequacy of laws and institutions. The requirement that supervisory, regulatory and enforcement authorities should have sufficient authority, integrity and resources is of particular importance in markets with dominant owners. Their rulings should be timely transparent and fully explained. Such powers are necessary since marked forces are likely to be very weak. In our review of Turkey, we noted that owners were simply not very interested in market prices and shareholder sentiment, that is until a foreign investor arrived.

Concentrated ownership can lead to the view that I am the owner and not those pesky shareholders. We, therefore, often see the abuse of minority shareholders and conflicts of interest such as via related party transactions (extraction of private benefits). The revised Principles contain a number of new principles covering these issues, but implementation around the world remains a problem. We are currently working with our Asian partners in the CG roundtable to find some solutions.

Another issue around the world concerns rubber stamping boards and the difficulty of finding independent directors who will continue to act in this way after being appointed. The Principles were strengthened to include independence from controlling shareholders, while at the same time recognising that they do have the right to control. In practice this proves a challenge. Some countries now demand that in controlled companies minority shareholders should have their own board members who might focus on approving key areas such as related party transactions. Experience in Italy has shown that enforcing such requirements needs a strong regulatory authority.

The key point is the implementations of not one principle, but how they all hang together to produce good corporate governance outcomes. We have a Methodology to assess implementation of the Principles which develops such an approach.

Finally, let me turn to state owned companies. Anybody with experience in them will attest to the fact that they have their own corporate governance issues. Political interference, confused corporate objectives and ineffectual boards are just a few. They might also be treated differently under the law and also have access to privileged finance from state owned banks. In addition, these arrangements often lead to inefficient companies which drain the budget and disadvantages from the rest of the economy such as through high telecommunication prices and poor service. It also leads to economic distortions through an uneven playing field.

With these issues in mind, the OECD established the Guidelines for the Corporate Governance of State owned Enterprises. We consulted closely with non-OECD countries in the process, which is why there is now such attention to the guidelines around the world.

Very briefly, they call for regulatory activities of the state to be separated from the ownership roles of the state and for the playing field including access to finance to be levelled. The state should let SOE boards exercise their responsibilities and respect their independence. They should have a clear mandate and ultimate responsibility for the company’s performance. They should have the power to appoint the CEO. They should also recognise the rights of all shareholders and ensure equitable treatment, including access to corporate information. Disclosure should be on par with listed companies.

Together, the Principles (including the Methodology) and Guidelines represent the OECD’s contribution to effective “wiring” for globalisation. We continue to keep them up to date and relevant, thereby providing an effective guide to action at companies and authorities around the world. They are applicable to Slovenia but it is up to you to determine how they should be implemented in the light of your own history and institutional conditions and of course keeping in mind that conditions change.

Thank you. I am prepared to answer any questions.