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The Financial Times

November 15, 2002

OECD may toughen its business code

By Paul Betts

Leading industrialised countries are mounting a concerted effort to toughen the Organisation for Economic Co-operation and Development's corporate governance code and help to rebuild investor confidence in financial markets.

The OECD will consult a group of international corporate governance experts today in Paris as a first step to revise and expand the code, approved in 1999.

The Paris-based organisation is also to launch a survey of its 29 member countries to see what scope there is for consensus on a revised and tougher code, to be approved by ministers in the spring of 2004. Rainer Geiger, the OECD's deputy director for financial, fiscal and enterprise affairs, said yesterday that the organisation planned consultation with business, trade unions, non-governmental organisations and others.

"The OECD cannot do it alone but is in a position to take the lead in setting principles and standards," he said. The 1999 code was widely considered "an astonishing achievement" in arriving at a broad consensus among countries with significantly different corporate cultures - including the US, the UK, continental Europe and Japan.

"But I believe this is no longer sufficient," Mr Geiger argued, adding that the original code was an international response to financial crises in Asia, Russia and developing countries. The current crisis was deeply rooted within OECD countries themselves.

He added that the general principles, also adopted by the World Bank and the Basle-based Financial Stability Forum (the task force set up by the G8 industrialised countries in the wake of the Asian crisis), risked being undermined by recent corporate scandals in the US and Europe.

At the root of the current crisis were misleading financial reporting and negligent and misleading auditing, he added.

The Financial Stability Forum concluded recently that restoring confidence in the quality and integrity of external audits was "the single most critical element" in re-establishing trust in financial reporting.

Mr Geiger argued there was now a need to establish independent oversight bodies for auditing companies, because self-regulation was not sufficient.

Policymakers are hoping to include in the revised code detailed recommendations covering the role of lawyers, financial analysts and rating agencies; greater protection for shareholders; urging institutional investors to take a more active role, and requiring them to disclose what they do with their voting rights; greater transparency in corporate structures involving cross-shareholdings and pyramids of holding companies, as well as the use of shell companies to disguise ownership; and a definition of independence in the context of boards, audit committees and other oversight bodies.

Mr Geiger said the code should be extended not only to listed companies but needed to make reference to state-owned enterprises and how governments managed corporate assets. The role of the state as a minority or majority shareholder should be subject to the same rules as for the private sector.

Corporate ethics should also form part of the revised code.

Experts said yesterday that drawing up more specific general rules was expected to prove much harder than reaching the inter-governmental consensus on the OECD's general principles three years ago.

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