Executive summary
The quality of corporate governance regulation affects the supply of capital to the real economy. It also influences how well this capital is used in the hands of individual companies. As a consequence, the design of corporate governance regulation has a critical impact on key policy objectives, such as the level of investment, productivity growth, business sector dynamics and financial stability.
In order to achieve these objectives and to strengthen a country’s competitive edge, the regulatory framework must be fit for purpose. And in the complex and multifaceted world of business, this means that regulations must be designed to meet the many varying needs of those entrepreneurs, investors and stakeholders who are supposed to use them.
This is why the G20/OECD Principles of Corporate Governance (the G20/OECD Principles) state that policy makers have a responsibility to establish a regulatory framework that is flexible enough to meet the needs of corporations that operate under widely different circumstances. Only then will it provide market participants with the right incentives to exploit new business opportunities that create value and ensure the most efficient use of capital and other corporate resources.
Importantly and in order to support a dynamic business sector, regulations must also be able to accommodate new and innovative business practices. For that reason, the G20/OECD Principles state that when new experiences accrue and business circumstances change, the different provisions of the corporate governance framework should be reviewed and, when necessary, adjusted.
These insights and this approach to regulation are not new. The use of flexibility and proportionality has a long tradition in key corporate governance areas such as company law and securities regulation. And over the years, it has provided entrepreneurs, investors and corporations with a great variety of options when they decide on issues such as the purpose, contractual relations and capital structure of their enterprise.
Flexibility and proportionality is not about less demanding rules or the acceptance of sub-standard practices. On the contrary, a functional and outcome oriented approach to corporate governance will allow regulation to evolve in a way that facilitates implementation and makes enforcement more effective. It will not only improve the ability of entrepreneurs, investors and stakeholders to find arrangements that best fit their needs. It will also meet the recommendations of the G20/OECD Principles that policy measures should be designed with a view to avoid over-regulation, unenforceable laws and unintended consequences that may impede or distort business dynamics.
Policy makers and regulators should also note that flexibility and proportionality must be backed by a solid judicial and supervisory foundation. Institutions must be in place that protect the rights of the different stakeholders and give them access to effective redress if these rights are violated. It also requires effective means of supervision and sanctions that result from public as well as private enforcement. The implementation of these and other core recommendations of the G20/OECD Principles will provide a sound basis on which it is possible to reap the benefits of a flexible and proportionate regulatory framework that remains focused on the ultimate economic outcomes.
Not surprisingly, this report finds that a vast majority of countries have criteria that allow for flexibility and proportionality at company level in all of the seven areas of regulation that are being reviewed. When it comes to rules about board composition, board committees and board qualifications, all of the 39 jurisdictions included in the survey reported that they had criteria that allowed for flexibility and proportionality. In the other six areas of regulation that were reviewed, between 75% and 85% of the jurisdictions reported that there was scope for flexibility or proportionality in their implementation at company level.
Half of the jurisdictions reported that there was room for flexibility and proportionality in all the seven areas of regulation that were surveyed. This includes jurisdictions with a common law tradition, such as the United States and the United Kingdom as well as jurisdictions with a civil law tradition, such as Germany and France.
Overall, company size and the listing status of a firm were reported as the most common reason for allowing flexibility and proportionality. A majority of jurisdictions reported that listing status provided scope for flexibility and proportionality across all the examined areas of regulation, except pre-emptive rights and takeovers. Most frequently the criteria size and listing status allowed for flexibility and proportionality with respect to regulations on board composition and disclosure of information. Other criteria that frequently provided room for flexibility and proportionality were the company’s legal form and its ownership/control structure. Most often these two criteria provided the possibility for flexibility and proportionality with respect to board composition, related party transactions and takeovers.
The results from the survey provide a detailed overview of the frequency and application of flexibility and proportionality across the different areas of regulation. And the findings resonate well with a general ambition to take a functional and outcome oriented approach that simplifies effective compliance and strikes a rational balance between the costs and benefits of regulation. It goes without saying however, that the statistical picture does not, by itself, tell us very much about the quality of the regulation in a specific country. Neither can it be used to rank countries with respect to the quality of their regulatory frameworks. Extensive use of flexibility in a jurisdiction may in principle reflect dysfunctional default rules or regulatory overlap, while the lack of specific flexibility provisions in another jurisdiction may reflect the ability of default rules to accommodate the variety of purposes.
In order to provide a more detailed picture of how flexibility has been used in practice, the report also contains six country case studies covering six different areas of regulation. Each of them gives concrete examples in terms of rationale and regulatory design with respect to the use of flexibility and proportionality.