Elizabeth Von M

15. The OECD Economic Survey of Japan, 2002, called for the authorities to strengthen

bank restructuring and to insist on reforms to governance and to operating

structures including credit assessments. A programme announced in

October 2002 strengthens the function of external auditors and puts banks on

notice that the authorities will rigorously use their powers to issue a Business

Improvement Administrative Order to a bank which has not achieved its

rationalisation plan (for those which have been previously recapitalised). The

government has also clarified the criteria under which it would convert preferential

shares to normal voting shares. In Korea, the OECD Economic Survey, 2003, noted that

the banks had returned to profitability and credit ratings have improved. However,

despite government efforts to ensure independent and responsible management of

the banks it owns, privatising them is essential to remove any doubts about

government intervention in operational management decisions.

16. For a review see The Growth Project: Beyond the Hype, OECD, 2001.

17. The Sources of Economic Growth in the OECD Countries, OECD, 2003.

18. Leahy, M. et al., “Contributions of financial systems to growth in OECD countries”,

OECD Economics Department Working Papers, 280, March 2001.

19. R. La Porta et al., “Investor protection and corporate governance”, Journal of

Financial Economics, 58, 2000. However, the sample of this study is quite broad and

it is not clear that a strong relationship might also apply only to OECD countries.

20. OECD, op. cit., 2003 noted very different patterns of firm entry and exit across

countries. New entrants in the US were much smaller in scale than European

counterparts but when successful grew quite rapidly. The study hypothesised that

the larger size in Europe led to a bias against innovative and risky activities while

remaining agnostic about whether excessive dynamics might also be associated

with economy-wide costs.

21. For an explanation of the theory underlying the relationship between corporate

governance arrangements and growth see M. Maher and T. Anderson, “Corporate

governance: Effects on firm performance and economic growth”, in J. McCahery et

al., Corporate Governance Regimes: convergence and diversity, Oxford, 2002.

22. For an exception see Johnson, et al., who find that measures of corporate

governance explain the extent of exchange rate depreciation and stock market

decline during the Asian crisis better then do standard macroeconomic measures.

S. Johnson et al., “Corporate governance in the Asian financial crisis”, Journal of

Financial Economics, 58, 2000.

23. W. Carlin and C. Mayer, “How do financial systems affect economic performance”,

in J. McCahery et al., Corporate Governance Regimes: Convergence and Diversity, op. cit.

24. For an even stronger conclusion which argues that the evidence favours a greater

reliance on equity finance see R. Rajan and L. Zingales, “Financial systems,

industrial structure and growth”, Oxford Review of Economic Policy, Vol. 17, 4, 2001.

25. For example, opinion polls show a dramatic fall in the standing of CEOs in the eyes

of the public.

26. Concerns about lack of integrity were reflected in the record number of account

restatements in the US during 2002. The steep decline of stock prices after 2000

should not be taken as prima facie evidence of lack of integrity since a macroeconomic

correction to overvaluation was also underway.

1. POLICY CONCERNS AND DRIVING FORCES

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27. The situation was made even worse by rapidly rising stock prices. But even without

these, the incentive structure of remuneration systems, especially in the US, appears

to have been deficient. One study concluded that “Whatever the appearances,

executive compensation is not generally the product of arm’s length bargaining, but

is the result of a process that executives can substantially influence. Moreover,

although executive compensation is set against the background of market forces,

these forces are hardly strong enough to compel optimal contracting outcomes. As a

result, executives can use their power to influence compensation arrangements and

to extract rent”. See L. Bebchuk, J. Fried and D. Walker, “Managerial power and rent

extraction in the design of executive compensation”, NBER Working Paper, 9068, 2002.

ISBN 92-64-10605-7

Corporate Governance: A Survey of OECD Countries

© OECD 2004

CORPORATE GOVERNANCE: A SURVEY OF OECD COUNTRIES – ISBN 92-64-10605-7 – © OECD 2004 39

Chapter 2

Broad Policy Choices Underlying

Recent Developments

2. BROAD POLICY CHOICES UNDERLYING RECENT DEVELOPMENTS

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Principles, regulation and law: a shifting balance

An important feature of the Principles is that they do not explicitly assign

responsibility for implementation. Rather they are intended to serve as a

reference point to be used by both policy makers as they deal with their legal

and regulatory frameworks and by market participants as they develop their

own practices. However, the preface does note that “as important a role as

governments may play in shaping the legal, institutional and administrative

environment in which corporate governance and control are developed, the

main responsibility remains with the private sector”. The efforts on the part of

enterprises to improve their own corporate governance arrangements is only

now becoming clearer with the development of indicators by a number of

private bodies.

In dealing with corporate governance issues, member countries have used

a varying combination of legal and regulatory instruments on the one hand, and

voluntary codes and principles on the other. In some instances, the latter are

backed by legal or regulatory obligations to “comply or explain”. The balance

between law, regulation and voluntary principles varies widely in the OECD area

depending in part on history, legal traditions, efficiency of the courts, the

political structure of the country and the stage of enterprise development. From

the point of view of applied policy these factors are essentially given, but that

should not prevent the current policy process from looking at alternatives when

considering changes or new initiatives. In this regard, the principles developed

by the OECD as part of its work on Regulatory Reform are useful. These

principles call for policy initiatives to consider carefully the costs and benefits of

the proposed changes and the consideration of a wide range of alternative

policy instruments with the objective to minimise regulatory cost.1

Voluntary principles or codes delineate the direction for change while

also allowing for the fact that “one size does not fit all” and that achieving the

desired practice might be done via many different instruments and

organisational structures. Compliance costs could thus be expected to remain

lower than with regulatory alternatives. That said, most countries would also

define some features such as basic financial information, transparency, etc.,

as legally binding. The variation within the OECD is wide. On the one hand,

some countries take the view that “principles-based laws”, supported by

detailed best practice guidelines, is the preferred framework for governance

issues. Moreover, setting out detailed requirements in regulations could lead

2. BROAD POLICY CHOICES UNDERLYING RECENT DEVELOPMENTS

CORPORATE GOVERNANCE: A SURVEY OF OECD COUNTRIES – ISBN 92-64-10605-7 – © OECD 2004 41

to a “show me where it says we can’t do it” mentality, with a shift in focus to

complying with the rule rather than the policy behind it. A different approach

can be found in Austria and Germany, with the former stating that there was

no need for a set of principles since it is all covered in law and regulation.

However, in Germany there is also a call to reconsider the nature and detail of

corporate law. As Hommelhoff observes, the real issue is finding a pragmatic

and reasonable balance between those issues that should be regulated by

rule-makers outside the corporations – and by legislators and regulators – and

those issues which should be left to the corporations’ own regulation.2

There is also a greater tendency to devolve rule setting from the legislature

to a regulator which in turn can choose between competing private groups to

establish standards. This is the case in both the UK and in Germany where the

listing regulator has accepted governance standards set by others, thereby

restricting their voluntary nature but also lending them political legitimacy. The

case of the two major US stock markets (NYSE, Nasdaq) is more difficult to

classify. They have set their own standards, subject to SEC approval and

...