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Last Updated: Thursday, 13 May, 2004, 07:58 GMT 08:58 UK
OECD to wipe out company scandals
By Steve Schifferes
BBC News Online economics reporter in Paris

Briefcase full of dollars
Tighter controls should prevent cash from being stashed away
The leading industrial countries have reached agreement on a new code of corporate governance designed to stop any future Enron-style scandals.

International regulations are expected to be endorsed at an Organisation for Economic Co-operation and Development (OECD) meeting in Paris.

The new rules should make sure company managers will not be able to deceive their investors and accountants.

The OECD would also like to see shareholders becoming more involved.

Wrong incentives

The OECD is urging governments to tackle three major problems.

Firstly, it believes that the shareholders should have more power to hold management to account. They are the ultimate owners of the companies, but too often they have been passive when confronted with management manipulation that lifted the share price in the short term.

Secondly, the OECD wants to abolish unfunded executive share options, which encouraged many managers to manipulate share prices for financial gain. And it wants shareholders and boards to have more power to regulate executive salaries and require full disclosure of conflicts of interest, to create more checks and balances.

Thirdly, it argues that checks and balances must be strengthened in the corporate sector, for example by forbidding accounting firms to also act as consultants (as happened in the case of Enron and its accountants Anderson, now defunct.)Firms must also disclose relevant factors to the market.

The OECD says that in retrospect it is clear that the wrong incentives were given to managers - especially in the United States - during the corporate excesses of the l990s.

But it argues that governments, especially in the US and the UK, have now begun to tackle the issue.

Code of conduct

The OECD code of conduct has no formal legal status, but it is likely to form a basis for legal revisions in many of the 30 OECD countries.

Enron headquarters
Enron-style scandals pose risks to the industrial economies
The OECD first began work on corporate codes of conduct in the late 1990s, and it hopes to persuade both governments and companies to take its newly revised principles seriously.

It cites the UK approach as a model in this regard, with the Cadbury code, introduced a few years ago, widely copied abroad.

The UK is now revising its own corporate governance legislation in line with OECD recommendations.

The OECD warned that no code or legal statute could prevent fraud or guarantee that there would be no scandals in the future.

But it was hopeful that in this, as in its fast-developing work on tax evasion and tax havens, it will have a broad influence on the development of corporate governance worldwide.

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