The OECD acknowledges global trends in corporate governance

The OECD Corporate Governance Committee has recently submitted Draft revisions to the G20/OECD Principles of Corporate Governance for public consultation. In my capacity as member of the Committee since its very start, I allow myself to make a few observations.

First and foremost, one must bear in mind that the G20/OECD Principles of Corporate Governance is not a Corporate Governance Code. There are many making the mistake to think of the Principles as just another Code to which companies must adhere. This is simply wrong. The Principles are directed not to companies but to policy-makers and regulators, to help them develop and shape a suitable national corporate governance framework.

The Principles focus primarily on listed companies and establish recommended practices and expectations with respect to the traditional corporate governance topics such as shareholder rights, the responsibilities of the board of directors, the role of stakeholders, and disclosure. Recognizing the interdependence between corporate governance and capital markets, the Principles, however, also address the underpinnings of effective capital markets and the role of institutional investors and market intermediaries.

The manner in which a jurisdiction chooses to implement the Principles will depend on its national legal and regulatory context.

The Principles are non-binding and suggests various means for achieving the identified objectives, like legislation, regulation, listing rules, corporate governance codes etc. The manner in which a jurisdiction chooses to implement the Principles will depend on its national legal and regulatory context. The principles are global in nature and are widely used as a benchmark by individual jurisdictions around the world. More than 50 jurisdictions adhere to the Principles, including all G20, OECD and FSB members. They are also one of the Financial Stability Board´s key standards for sound financial systems and form the basis for the World Bank Reports on the Observance of Standards and Codes in the area of corporate governance.

The Principles do not aim at harmonising national rules. To the contrary, they state that there is no single model of good corporate governance. What works in one company or for one group of investors may not necessarily be generally applicable.

Originally developed in 1999, the Principles were first revised in 2004, and following a review of lessons learned from the 2008 Global Financial Crisis a revision was again undertaken during 2014-15. The Principles were endorsed by the leaders of the G20 in 2015 and are since then entitled the G20/OECD Corporate Governance Principles.

Building on national experiences during the COVID-19 crisis and on longer-term developments in the corporate and capital market landscape, the Corporate Governance Committee identified ten priority areas for the current review:

• Corporate ownership trends and increased concentration
• The management of environmental, social and governance (ESG) risks
• The role of institutional investors and stewardship
• The growth of new digital technologies and emerging opportunities and risks
• Crisis and risk management
• Excessive risk taking in the non-financial corporate sector
• The role and rights of debtholders in corporate governance
• Executive remuneration
• The role of board committees
• Diversity on boards and in senior management.

I will comment on just the first two of them.

For a set of principles providing guidance to policy-makers and regulators of corporate governance it is of course of utmost importance to observe the major shifts that have taken place in the global population of listed companies over the last decades. While in Europe, US and Japan during the last two decades the number of listed companies has decreased dramatically, primarily due to delistings, the trend in Asia has been the opposite. Asia as a region has become the largest equity market by number of listed companies, hosting today more than half of the total number of companies globally. Furthermore, between 2009 and 2019, 47% of all public equity in the world was raised by Asian companies.

Another factor impacting concentration at the company level has been the rise of institutional investors.

Since Asian companies are characterised by having a controlling shareholder, the change in the composition of listed companies has also tilted the ownership structures of listed companies towards concentrated ownership models. Another factor impacting concentration at the company level has been the rise of institutional investors. This development has been particularly prominent in the US, which is by far the largest  public equity market in terms of market capitalisation and where atomistic dispersed ownership was long considered the norm. Institutional investors today hold approximately two thirds of the US equity market.

In short, neither the international corporate governance debate nor global corporate governance principles can today build on the traditional wisdom that most listed companies are characterized by dispersed ownership and that individual shareholders might have too small a stake to warrant the cost of taking action or for making an investment in monitoring performance.

The Principles add a new chapter to their previous versions, dealing with sustainability and resilience. With the overarching principle that “the corporate governance framework should provide incentives for companies and their investors to make financing and investment decisions, as well as to manage their risks, in a way that contributes to the sustainability and resilience of the corporation”, the Principles adopt the widely followed approach to deal with sustainability matters by upgrading the disclosure duties to facilitate the comparability across markets.

The Principles advocate policies that make companies internalise environmental and social externalities as well as set predictable boundaries within which directors have to exercise their fiduciary duties

The Principles do not jump on the populistic bandwagon to redefine the purpose of the corporation or the duties of directors. “Corporate directors”, the Principles state, “cannot be expected to be responsible for resolving major environmental and societal challenges stemming from their duties alone”. If directors would be required to balance shareholders’ financial interests with the interests of various stakeholders and, in addition, to fulfil a number of specific public interest missions it would de facto be impossible to evaluate the board, and the corporate sector would become less efficient in allocating resources. Hence, the Principles advocate policies that make companies internalise environmental and social externalities as well as set predictable boundaries within which directors have to exercise their fiduciary duties. This is well in line with the fundamental rationale of the Principles to shape a legal, regulatory and institutional framework that supports economic efficiency and sustainable growth through investment, business sector dynamics and financial stability.

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By Rolf Skog, Professor at the University of Gothenburg, Director General of the Swedish Securities Council, Co-Founder and Managing Director of the Swedish Corporate Governance Forum, member of the European Company Law Expert Group (ECLE) and ECGI Research Member. 

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