2. The corporate governance and institutional framework
The quality of the institutional, legal and regulatory framework is an important foundation for implementing the G20/OECD Principles of Corporate Governance, requiring effective supervision and enforcement that market participants can rely on. Chapter 2 provides insights on the legal framework for corporate governance, revealing the frequency of legislative reforms in this area, as well as the continued relevance of national corporate governance codes or equivalent instruments and their monitoring as complementary mechanisms. Legal and regulatory frameworks should be coupled with strong and independent institutional oversight and Chapter 2 also offers information on the lead regulatory institution for corporate governance of listed companies in each jurisdiction, and on mechanisms to ensure their independence.
Corporate governance legal frameworks continue to adapt to a changing environment: during 2021-22 nearly 70% of Factbook jurisdictions amended either their company law or securities law or both. During the same period, national corporate governance codes or equivalent frameworks were updated by approximately one-third of Factbook jurisdictions. The balance between formal regulation and a “comply or explain” approach in the corporate governance framework varies across jurisdictions.
Traditionally, jurisdictions have used different combinations of laws and regulatory instruments on the one hand, and codes and principles on the other to oversee corporate governance issues. In all surveyed jurisdictions, the corporate governance framework is set forth by company laws and securities or capital markets laws, which provide for additional binding requirements for listed companies, contributing to the enforceability of shareholder protection for regulators. In most jurisdictions, the corporate governance framework is complemented by other binding regulations, often included in listing rules issued by the stock exchange or specific regulations issued by the main public regulators for corporate governance (Table 2.1).
Almost all Factbook jurisdictions have a national corporate governance code or equivalent instrument for corporate governance principles and recommendations, testifying to the continued relevance of such complementary mechanisms in allowing flexibility and the development of company best practices, particularly for emerging corporate governance issues.
The G20/OECD Principles of Corporate Governance, as revised in 2023, specifically refer to corporate governance codes in Principle I.B: “Corporate governance codes may offer a complementary mechanism to support the development and evolution of companies’ best practices, provided that their status is duly defined” (OECD, 2023[1]). Eighty-two percent of the jurisdictions surveyed have a corporate governance code that follows a non-binding soft law “comply or explain” or similar approach. Some of these jurisdictions, including Indonesia and South Africa, have opted for specific variations of the “comply or explain” non-binding approach, such as “apply and/or explain” (See Box 2.1 for more examples).
Conversely, 18% of jurisdictions have either binding or partly binding instruments, a slight increase compared to 16% in 2021. Six jurisdictions (12%) (Costa Rica; Hong Kong (China); Israel; Mexico; Saudi Arabia; and Türkiye) have opted for a mixed system of binding and voluntary measures (Figure 2.1).
Note: Based on 49 jurisdictions. See Table 2.2 for data. When not categorised as “Binding”, or “Mixed”, notwithstanding different preferences in naming approaches by jurisdictions, non-binding approaches fall within the category “Non-binding (Comply or explain & others)”, including those named “Apply or explain”, “Apply or explain an alternative”, and “Apply and explain”.
Only three jurisdictions use a binding approach. These jurisdictions do not have a national code or equivalent instrument under the “comply or explain” framework, and are also the only jurisdictions that adopt a legally binding approach. India and the United States rely upon their laws, regulations and listing rules as their legal corporate governance framework. The People’s Republic of China (hereafter ‘China’) is another notable exception. Its national corporate governance code, updated in 2018, is fully binding so may be considered as a mandatory set of provisions.
A few countries have developed unusual systems for promoting implementation of national corporate governance codes that do not strictly follow the most common “comply or explain” approach but can also be categorised as non-binding soft law approaches. For example, in Costa Rica, it is mandatory to implement the National Council of Supervision of the Financial System (CONASSIF) Corporate Governance Regulation but based on a “comply and explain” rule with some flexibility, unlike the more common model followed in other countries under which the company may simply choose not to comply but must explain why. While complying with the code is considered mandatory, companies may also apply the principle of proportionality, meaning that a company may justify not implementing certain provisions due to its circumstances. Listed companies are nevertheless mandated under the national code to establish and disclose their own codes and additional information consistent with the disclosure and transparency recommendations of the G20/OECD Principles of Corporate Governance.
In Saudi Arabia, the Capital Market Authority’s Corporate Governance Regulations are binding by default for all companies listed on the Main Market, except when provisions clarify that they represent guiding provisions. In addition, the Regulations also specify that there are some mandatory provisions for companies on the Parallel Market.
South Africa’s King IV Report on Corporate Governance (King IV Code) issued by the Institute of Directors in South Africa of 2016 represents a set of recommendations and best practices in line with the soft law approach, but it has an application regime named “apply and explain”. While the Code’s principles are described as voluntary, companies are expected to apply the principles and provide an explanation of the practices implemented, explaining how they support the application of the principles.
In Malaysia, the Malaysian Code on Corporate Governance follows an alternative application method named “apply or explain an alternative”, according to which companies that are not applying the practices prescribed by the Code must provide an explanation for the departure, and disclose an alternative practice that meets the intended outcome of the principles of the Code.
Mexico is an example of a mixed approach involving binding laws and voluntary code recommendations. In 2005, its securities market law incorporated a minimum framework of the practices and principles of sound corporate governance for listed companies contained in the Code of Principles and Best Practices in Corporate Governance. That is, while the Code itself is not binding, many of the practices recommended in it have become binding by law. Moreover, stock exchange listing rules require listed companies to disclose their degree of adherence to the Code both to the stock exchange on which their stock is traded, and to investors. Stock exchange listing rules also require issuing companies to be knowledgeable about the Code.
National corporate governance codes or equivalent instruments are updated regularly: 16 jurisdictions amended or revised their codes or made equivalent changes in their listing requirements and rules (e.g. United States) in 2021-22 (Table 2.3). Nearly two-thirds of jurisdictions revised their codes or equivalent framework between 2019 and 2022. Five jurisdictions updated their code more than once during that period (Austria; Germany; Hong Kong (China); Saudi Arabia; and the United States) Since the last revision of the G20/OECD Principles of Corporate Governance in 2015, more than 90% of all surveyed jurisdictions have revised their codes or equivalent provisions at least once. For example, Germany carries out reviews of its Corporate Governance Code on an annual basis to determine whether best practices included are still relevant or need to be adapted, with the latest update taking effect in June of 2022. Malaysia has updated its code four times since it was first adopted in 2000, including most recently in 2021.
In the majority of jurisdictions, national authorities and/or stock exchanges have taken the lead in establishing or revising the codes. In some jurisdictions, codes are devised and updated by working groups comprising institutions representing different markets segments (such as the Interagents Working Group in Brazil), as well as both public and private actors, such as in Indonesia where the National Committee on Corporate Governance includes representatives from regulatory authorities, issuers as well as individual market experts and assists the Financial Services Authority (OJK) as custodian of the corporate governance code and instruments.
The most common approach adopted for overseeing corporate governance codes by Factbook jurisdictions is a mixed public-private sector model, involving either joint oversight exercised by national authorities together with a mix of private sector groups (27%) or of national authorities and stock exchanges (8%). National authorities have played a growing role as the formal and sole custodian for their codes and updates, increasing from 17% to 25% of jurisdictions between 2015 and 2022.
Stock exchanges and private associations when they carry out these functions alone also play an important role as the key custodian in 18% and 22% of surveyed jurisdictions respectively (Table 2.3, Figure 2.2). For example, in Hungary, the Corporate Governance Committee is an advisory committee of the Budapest Stock Exchange (BSE). Members of the Committee include representatives of issuers, regulatory authorities and the stock exchange, as well as independent market experts and lawyers appointed by BSE’s board of directors.
Note: Based on 49 jurisdictions. See Table 2.3 for data.
To support effective disclosure and implementation of non-binding “comply or explain” codes, a national report is published in more than two-thirds of the jurisdictions covered by the Factbook, a notable increase from 2015 when less than half published such reports. Reviewing listed companies’ adherence to such codes is an increasingly common practice across jurisdictions, in line with the recommendations of the G20/OECD Principles of Corporate Governance, as revised in 2023. Responsibility for publishing such reports is more or less evenly split between governmental authorities, stock exchanges, and private sector or stakeholder groups.
The G20/OECD Principles of Corporate Governance, as revised in 2023, in addition to recognising corporate governance codes as a tool to develop good governance, also highlight the importance of clear definitions in terms of coverage, implementation, compliance and sanctions of corporate governance codes or equivalent instruments to strengthen their effectiveness for companies.
Among surveyed jurisdictions, at least 44 institutions (in 34 jurisdictions) issue a national report reviewing listed companies’ adherence to the corporate governance code in the domestic market. The report is published by more than one institution in eight jurisdictions (Belgium, Canada, Denmark, France, Italy, Lithuania, Portugal and Slovenia).
Importantly, Brazil, Poland, and South Africa for the first time report reviewing adherence to the corporate governance codes in this edition of the Factbook.
Almost two-thirds of institutions issue these reports annually, which usually cover all listed companies and all code recommendations. Among surveyed jurisdictions, 15 of them do not issue a national report on corporate governance as of 2022, including India and the United States, which do not have a corporate governance code based on the “comply or explain” approach.
Note: Based on 44 reporting institutions in 34 jurisdictions. See Table 2.4 for data.
Overall, national regulators review listed companies’ adherence and publish these reports in 14 jurisdictions, while stock exchanges review and publish them in 12 jurisdictions. Although the role of national authorities in issuing these reports has not changed since 2021, more stock exchanges and private groups have taken this role. Notably, in jurisdictions that have started publishing a national report in the past two years, the responsibility has been assigned either to a stock exchange, such as the Warsaw Stock Exchange in Poland, or to private groups, for example KPMG in Brazil and the Institute of Directors/King Committee in South Africa. Exchanges and private groups are responsible for publishing reports on listed companies’ adherence to codes in more than a half of jurisdictions surveyed, a significant increase since 2015 when stock exchanges were responsible for issuing reports on codes in seven jurisdictions and private institutions in nine (Table 2.4, Figure 2.3).
In all surveyed jurisdictions, public regulators have the authority to supervise and enforce the corporate governance practices of listed companies. Securities or financial regulators generally play the key role in most jurisdictions.
Public regulators have the authority to supervise and enforce corporate governance practices of listed companies in all surveyed jurisdictions. Securities regulators, financial regulators or a combination of the two play the lead or at least a shared role in 82% of all jurisdictions (Table 2.5, Figure 2.4). Central banks play the key role in an additional eight jurisdictions (16%).
A few jurisdictions take differing approaches. Korea is the only jurisdiction in which the ministry in charge of corporate governance is the Ministry of Justice. This ministry also has the main responsibility for the supervision and enforcement of corporate governance. In India, the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI), the securities market regulator, are both responsible for enforcing the corporate governance framework. In some jurisdictions, such as the Czech Republic, Luxembourg, the Netherlands, Singapore, and Sweden, the role of the public regulators is limited only to issues related to securities laws, as in principle, civil rules on corporate governance are mainly supervised and enforced privately. The authority of corporate governance regulators has proven to be quite stable over the years and has not changed significantly since 2015.
Note: Based on 49 jurisdictions. See Table 2.5 for data.
In some jurisdictions, the division of responsibilities for regulatory and supervisory functions involves multiple layers. For example, in South Africa, the Companies and Intellectual Property Commission (“CIPC”) is responsible for company law and corporate governance requirements such as the functioning and composition of the audit committee, while the Johannesburg Stock Exchange enforces stock exchange listing requirements. In the United Kingdom, the Financial Reporting Council (FRC) sets codes and standards including for corporate governance, but the FRC’s corporate governance monitoring and third country auditor registration activities are relevant to the work of and may lead to enforcement by the Financial Conduct Authority. In the United States, state law is the primary source of corporate governance law, but the federal securities regulator (the Securities and Exchange Commission) and exchanges regulate certain governance matters.
Autonomy over their budget can reinforce the operational independence of regulators. Sixty percent of regulators are funded fully by fees from regulated entities or by a combination of fees and fines. Others rely upon a mix of public and regulated entity funding sources, while just 17% of regulators are fully financed by their government’s budget.
Most regulators (30 institutions in 28 jurisdictions) are fully self-funded by fees. Other regulators (seven institutions) ensure budgetary autonomy by supplementing their self-funding with fines. Mixed sources of financing from both public funds and fees from regulated entities are also common (12 institutions in ten jurisdictions). Only ten regulatory institutions rely exclusively on government funding for their budget (Figure 2.5).
The G20/OECD Principles of Corporate Governance recognise and emphasise the importance of regulators’ autonomy, resources, and capacity as key aspects to allow them to carry out their functions in a professional and objective manner (Principle I.E). The revised Principles provide examples of how jurisdictions have achieved autonomy and collected adequate resources, for example by imposing levies on supervised entities with or as an alternative to government funding. The Principles, at the same time, underline that fees imposed on regulated entities should not impede independence from market participants and should be imposed transparently and according to objective criteria.
Note: Based on 59 regulatory institutions across 49 jurisdictions. Jurisdictions with more than one main regulator are counted more times. See Table 2.6 for data.
The issue of the independence of regulators is commonly addressed through the creation of a formal governing body. The most common size for the board of these bodies across jurisdictions surveyed is five to seven members, but it ranges from as low as two members (Austria) to as high as 17 (Switzerland).
The G20/OECD Principles of Corporate Governance note how the creation of a formal governing body, typically a board, council or commission, is the solution adopted by many jurisdictions to address political independence (Principle I.E).
In line with the recommendations of the G20/OECD Principles of Corporate Governance, 87% of the regulatory institutions established by the Factbook jurisdictions have established a formal governing body (e.g. a board, council or commission) (Figure 2.6). Colombia, Korea, and Slovenia are the only regulators without a governing board for any of their regulatory bodies responsible for the supervision of corporate governance requirements. Four additional jurisdictions (India, Japan, Saudi Arabia, and South Africa), which have more than one regulator, report a mixed approach with at least one regulatory institution lacking a governing body.
Seats on these governing bodies are sometimes reserved for representatives from specific institutions, such as central banks (in 20 governing bodies across 19 jurisdictions), public sector institutions (in 16 governing bodies across 15 jurisdictions) or from the private sector (in 12 bodies across 11 jurisdictions) (Table 2.7).
In the United States, no more than three out of five Commissioners of the Securities and Exchange Commission may belong to the same political party. In France, the Autorité des Marchés Financiers (AMF) has one of the largest boards with 16 members, including judges from the Supreme courts (Cour de Cassation and Conseil d’État). In Switzerland, the SIX Exchange Regulation (SER) division is overseen by a 17-member board responsible for enforcement of SIX Exchange listing rules.
Note: Based on 56 institutions in 49 jurisdictions. Jurisdictions with more than one main regulator are counted more than once. See Table 2.7 for data.
Members of the governing body of a national regulator are usually given fixed terms of appointment ranging from two to eight years, with all but four regulators allowing their re-appointment.
According to the G20/OECD Principles of Corporate Governance, as revised in 2023, to foster regulatory independence, members of the governing body are appointed for fixed terms, and as an additional precaution, some jurisdictions have also staggered appointments to avoid overlaps with the political calendar. Another solution adopted by some jurisdictions to strengthen independence and reduce potential conflicts of interest of regulators is the introduction of policies to restrict post-employment movement to industry through mandatory time gaps or cooling-off periods (Principle I.E).
Members of a governing body or a regulatory head such as a commissioner or superintendent are appointed for fixed terms in 51 out of 56 institutions. Of the 49 Factbook jurisdictions, only four do not make fixed term appointments (SEHK’s Board in Hong Kong (China); FSA’s Commissioner in Japan; the Ministry of Justice governed by a Minister in Korea; and CNBV’s Governing Board in Mexico). When specified, maximum terms generally range from two to eight years, and most commonly are set at four or five years (for 10 and 20 institutions, respectively) (Table 2.8, Figure 2.7).
The re-appointment of members is allowed in all jurisdictions that set fixed terms with the exception of Brazil, Italy, Peru and Portugal. The re-appointment of the chairperson is not allowed in France and is allowed only once in Hungary for the Governor of the Financial Stability Board. The number of reappointments is limited to one in six additional jurisdictions (Costa Rica, the Czech Republic, France, Ireland, Saudi Arabia, and Spain) and to two in one jurisdiction (the Netherlands).
Note: Based on 55 institutions for 49 jurisdictions reporting data. Jurisdictions with more than one main regulator are counted more than once. One institution among surveyed jurisdictions, SEBI’s board in India, has a different manner for setting the duration of the appointment and is not included in this figure. See Table 2.8 for data.
References
[1] OECD (2023), G20/OECD Principles of Corporate Governance 2023, OECD Publishing, Paris, https://doi.org/10.1787/ed750b30-en.