Corp Gov OECD Principles Prompt Question: What Information Do Investors Really Want?
I recently attended a roundtable series held in Mumbai on 11–12 February on corporate governance issues. The event was organised by the Organisation for Economic Co-operation and Development (OECD) and Securities and Exchange Board of India (SEBI) with support from the government of Japan. In one of the sessions, I had the privilege of chairing a small group discussion reviewing one of the six principles of the 2004 OECD Principles of Corporate Governance. Participants in the group included corporate governance experts representing various areas across the region such as the Asian Development Bank, International Finance Cooperation, World Bank, market regulators, stock exchanges, government ministries, as well as associations of company directors, corporate secretaries, and minority shareholders.
The group’s discussion centered on disclosure and transparency enumerated in Principle V, which states that a company’s corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including its financial situation, performance, ownership, and governance. After more than three hours of debate, the group recommended that the OECD include in the revised version a simple-to-understand summary statement that would disclose useful information and transparently report potential conflicts that could affect the investment decision-making process.
To reach this conclusion, we started by addressing a fundamental question. Why disclose? We concluded that disclosure provides information that is factual, accurate, timely, understandable, and material for investment decision-making purposes. This ultimately builds a more efficient financial marketplace.
In terms of what to disclose, the answer centered on four key areas that the group felt were relevant for any investor:
- What are the prospects of the company? Important issues to be addressed include, which markets are important to the company, its key business focus areas, its resource allocation criteria, and how it develops and monitors its strategy.
- What can go wrong and where are the risks? The group felt that although this was discussed in some detail in annual reports, most discussions were boilerplate-driven. We surmised that the important information that investors would want to know relate to endogenous (or internal) risks, particularly those arising from operations and staffing. The process of risk assessment and management was also highlighted as an important aspect missing from most annual reports. Finally, with technology being an integral part of any organisation’s ecosystem these days, most felt that technological risk is not sufficiently understood and addressed.
- Who are the people running the company? A participant lamented that not enough information is provided on the human aspect of the organisation. As a director of many companies, he had seen enough to prompt him to express concern that the election of board directors in many companies is a shameful exercise of simply going through the motions. A number of issues not sufficiently addressed includes why a board’s composition is the way it is, how a director has contributed to the firm, what role he is expected to play when he is re-elected, and why a new director is recommended to the board. The group contended that the chair of the nomination committee must play a bigger role in explaining and disclosing the process, reasons, and rationale for nominating each director on the board. Lastly, the group felt that not enough information is provided on the performance of the executive management, particularly the CEO.
- What could affect investors’ judgment of directors who are supposed to act in their best interests? Although related-party transactions were featured as a main reason, most felt that regulations protecting minority shareholders were sufficiently developed in most countries in the region. The real bugbear was in not knowing the real owner of a corporation, as companies in Asia tend to have very opaque structures, particularly through pyramiding. Two other disclosures relating to directors were suggested. The first relates to side agreements a director may have with a shareholder to vote in the same manner. The second relates to share pledging by directors who are also substantial shareholders in the company — a development that is becoming more prevalent in a number of countries and posing an increasing problem when the stock prices start to fall, triggering margin calls.
As the OECD reviews its 2004 Corporate Governance Principles, we hope that it recommends clarity and simplicity of language in the area of disclosure and transparency. As explained above, investors really want to know four things:
- Where is the company heading?
- What can go wrong?
- How capable are the people running the company?
- Are they doing it fully in the interest of shareowners?
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