OECD Principles on Corporate Governance: Who Wrote Chapter VI?

The Draft Revision of the G20/OECD Principles of corporate governance includes a new chapter VI on “sustainability and resilience” into which previous chapter IV on “the role of stakeholders in corporate governance” has been merged with amendments. The new chapter reflects recent trends in corporate practice and legislation and will be an essential addition to the Principles given the importance of sustainability and resilience in today’s corporate governance. However, the draft text raises some issues and questions that deserve consideration before final approval of the new Principles.

1. The Draft categorizes different jurisdictions based on the distinction between shareholder and stakeholder governance. Consider the following statement (p. 44 of the Draft): “in jurisdictions that allow for or require the consideration of stakeholders’ interests, companies should still consider the financial interests of their shareholders. A profitable company provides jobs for its employees and creates wealth for investors, many of whom are part of the general public and have invested their retirement savings”. However, stakeholders are considered and to some extent protected in all jurisdictions, while corporate profits are pursued also in those jurisdictions that follow a stakeholder capitalism model. In addition, it is not necessary that employees are also investors in corporate equity to justify a stakeholder orientation of corporate governance which is usually grounded on more general considerations.

2.  Chapter VI is not fully coordinated with other chapters of the Draft Principles which include several references to stakeholder interests and/or sustainability. For instance, chapter V includes the following principle: “Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders, taking into account the interests of stakeholders” (V.A.). The words in italics have been added by the Draft and differ from the ambiguous statement quoted above.  The comment to this principle further states: “Where consistent with jurisdictional requirements, boards may take into account the interests of stakeholders, notably when making business decisions in the interest of the company’s long-term success and performance …”. Clearly, this comment subscribes to the Enlightened Shareholder Value approach recommended by finance scholars and widely applied in practice. Therefore, chapter VI should refer to it when defining sustainable governance.

3. Chapter VI takes a defensive stance regarding corporations which is difficult to reconcile with the more balanced approach found in previous chapters: “Corporate directors cannot be expected to be responsible for resolving major environmental and societal challenges stemming from their duties alone. On the one hand, a narrow view of directors’ fiduciary duties as a simple obligation to maximise short-term profits may have detrimental effects, for example on the corporate sector’s long-term performance. On the other hand, an opposite approach also presents risks. If directors in all companies are required to equally balance shareholders’ financial interests with the interests of all stakeholders and, in addition, to fulfil a number of specific public interest missions, the corporate sector could become less efficient in allocating resources”. The distinction made by the Draft amongst corporate governance approaches is too sharp. Between the two extremes indicated – short-termism and pure stakeholderism –other governance approaches are possible (such as ESV) which allow companies to maximize their long-term value while taking the interests of stakeholders into account.

4. Chapter VI recognizes the role of externalities in sustainable governance but requires regulation for their reduction by corporations. At p. 45 of the Draft we read that the relevant “policies could relate to, for instance, environmental regulation, or directly investing in or incentivising research and development of technologies that may contribute to addressing major environmental challenges.” Nevertheless, externalities are also reduced by corporations spontaneously whenever they maximize “shared value” (i.e. the sum of private value and social value) through organizational and/or technological innovation. Therefore, the boundaries between corporate governance and regulation should be better clarified in the new Principles.

5. Chapter VI refers to sustainability and resilience but mainly focuses on climate change, as shown by the following statements at p. 44: “Several jurisdictions have made commitments to transition to a net-zero/low-carbon economy, which will require companies to respond flexibly to rapidly changing regulatory and business circumstances. (…) In addition, investors are increasingly considering disclosures about how companies assess and identify material climate change and other sustainability risks”.  This raises two issues: firstly, despite the relevance of climate change, sustainability encompasses many other environmental issues; secondly, social issues should also be considered when dealing with sustainable governance, as widely acknowledged in other chapters of the Principles. It is enough to consider Chapter V, letter C, which requires the board to apply high ethical standards. The comment to this principle clarifies: “The board has a key role in setting the ethical tone of a company, not only by its own actions, but also in appointing and overseeing key executives and consequently the management in general. High ethical standards are in the long- term interests of the company as a means to make it credible and trustworthy, not only in day-to-day operations, but also with respect to longer term commitments. To make the objectives of the board clear and operational, many companies have found it useful to develop company codes of conduct based on, inter alia among others, professional standards and sometimes broader codes of behaviour, and to communicate them throughout the organisation. The latter might include a voluntary commitment by the company (including its subsidiaries) to comply with the OECD Guidelines for Multinational Enterprises and associated due diligence standards which reflect all four principles contained in the ILO Declaration on Fundamental Principles and Rights at Work (…)”. Similar statements show that the new Principles already cover social sustainability and that other documents issued by the OECD and other international organizations should be aptly referred to by the Principles. The question remains why the scope of Chapter VI is much narrower and coordination with other chapters is clearly lacking.

6. A final and related question is whether sustainability should be dealt with in the last Chapter of the Principles or before. As argued above, other chapters include important references to sustainability. This would advise to anticipate the treatment of the whole issue of sustainability and resilience in the Draft to get a more coordinated and comprehensive approach.

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By Guido Ferrarini, Professor of Business Law and Capital Markets Law at the University of Genoa, Department of Law and Director of Centre for Law and Finance and ECGI Fellow and Research Member.

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