The financial crisis has deeply affected the modus operandi of all the main players in the markets and raised new questions for policy makers and regulators. These questions regard, on the one hand, how to handle the crisis itself, and on the other hand, how to remove the structural imbalances, both at macro and micro economic level, which played a crucial role in the creation and the development of the crisis.

Today, there is broad agreement that weaknesses in corporate governance contributed greatly to the depth of the financial crisis and that dealing with such weaknesses is a key element of an effective response. They may not have caused or triggered the crisis but the lack of good corporate governance allowed practices to develop to a point when they were no longer sustainable. Had companies applied better corporate governance standards and had regulators been more vigilant in terms of implementation and enforcement of existing standards, some of the failures could probably have been avoided. From this perspective it was logical and important that the OECD, as the multilateral standard setter in corporate governance, already at an early stage started to focus on the financial crisis. The OECD Principles of Corporate Governance, first adopted in 1999 and revised in 2004, is for good reason one of the Financial Stability Board’s twelve key standards for sound financial systems. As such, they serve as the basis for various country assessments, including the so called Reports on Standards and Codes (ROSC).

The main thrust of the OECD’s proposals is summarised in the report Corporate Governance and the Financial Crisis – Key Findings and Main Messages, which is expected to serve as a reference for further initiatives by international organisations and national regulators worldwide. The report is based on an in-depth analysis of how key corporate governance provisions in several financial companies failed to be effective when they faced unexpected external pressures and strong conflict of interests.

The analysis underlines that while many of the corporate governance failures were specifically connected to financial companies that were under most stress, many of the structural weaknesses are common to large and complex listed companies. The post-2000 market and macroeconomic environment demanded the most of banks in terms of robust corporate governance arrangements. In a rapidly changing economic landscape, new profit and growth opportunities raised new challenges to boards in designing and managing risk appetite and incentive/remuneration mechanisms. In this context, shareholders, both in widely and closely held companies, were able to exercise stronger pressure for short-term results often neglecting their monitoring functions. These issues are common to many non-financial companies even if not to the same degree.

A pivotal conclusion in the report is that the problem is not necessarily a shortage of laws, regulations and voluntary standards; the problem may not even be a misunderstanding of what should be achieved by these regulations. Rather, the problem is often one of incomplete or ineffective implementation of what was and still can be considered a fairly solid corporate governance institutional framework; sometimes deliberately but often not, there is a lack of understanding about what regulation actually works and what doesn’t. As a consequence, the OECD has made it a priority to encourage and support more effective implementation.

The first pillar of the OECD strategic response for a better implementation of the corporate governance principles is the development of a systematic peer review process aimed at examining on a systematic basis how and to what extent the outcomes advocated by the Principles are being realised in a jurisdiction being reviewed. The analysis will also try to identify, at an early stage, key market practices and policy developments that may undermine the quality of corporate governance. The peer review will involve progressively all OECD member countries and will be open to the most important non member countries, such as the so called Brics countries (Brazil, Russia, India, China, South Africa) , which have already developed strong relationships with the OECD in corporate governance.

The second pillar of the OECD current activity is the identification of a set of specific recommendations for a better implementation of the OECD Principles in the areas where corporate governance failures proved to be more relevant in the financial crisis.

At the top of the list is the governance of remuneration, which failed to align the structure of incentive systems of the management with a sustainable process of value creation for all the stakeholders. The OECD recommendations will support a more effective and forward looking incentive system design, which should encourage long term performance and ex post accountability.

At the same time, it is important to consider the risks in transplanting corporate governance reforms designed to address systemic risks in the financial markets to the corporate sector generally. Therefore, the possible introduction of legal limits on remuneration, such as caps and selective fiscal measures, should be limited in time and scope. In the non financial sector, the autonomy of individual companies in the design of incentive systems should not be constrained, so as to avoid unhealthy homogeneity in pay practices and disincentives to develop innovative pay structures.

Rather than imposing specific principles for the design of remuneration systems, the OECD recommendations are aimed to guarantee that remuneration be established through a sound governance process that involves the risk managers and explicitly recognises the impact on overall risk taking. Boards should first set the strategic goals of the company and its associated risk appetite. They are then in a position to establish a compensation system that meets a small number of performance metrics based on these goals. An explicit governance process needs to be established that will also define the role and duties of compensation consultants who are increasingly important.

The process, remuneration structure and performance goals should be made transparent through some form of remuneration report. There also needs to be a possibility for shareholders to express their views about remuneration policy.

Together with the peer review process, the objective is to contribute to the joint efforts by international organisations to strengthen the quality of the corporate governance framework and improve implementation.

Marcello Bianchi is Chairman of the OECD Corporate Governance Committee. Corporate Governance and the Financial Crisis – Key Findings and Main Message, can be downloaded from

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