The OECD principles embrace "sustainability" but keeps a liberal approach

The G20/OECD corporate governance principles are undergoing a public consultation until the 21  October 2022 and the revised Principles are expected to be delivered in 2023. Much has occurred since the latest edition of 2015, the Covid-19 pandemic, various scandals (e.g. Wirecard in 2020), the development of the environmental, social and governance (ESG) agenda and the fight against climate change... Unsurprisingly, this review has been preceded by a string of publications on various issues, such as "Climate change and corporate governance" and six other reports.

The G20/OECD principles, first issued in 1999, are high-level and often more descriptive than prescriptive. Despite this, they have a large influence since their endorsement by the G20 Leaders Summit in 2015 and they are used by various international organisations, including the OECD itself for candidate countries.

Taking note of a trend, especially in Europe, the draft notes that some jurisdictions require an opinion or evaluation from an external auditor or outside specialist, in some cases as a precondition for shareholder approval of RPTs.

Part of the review consists of a traditional update and suggested improvements in "recurring issues". More transparency and more protection are requested in groups. The tone of the review is, as always, suspicious of related-party transactions (RPTs) and groups. The draft adds a note that "A key underlying principle for board members who are working within the structure of a group of companies is that even though a company might be controlled by another company, the duty of loyalty for a board member is related to the company and all of its shareholders and not to the controlling company of the group." The focus is on minority shareholder protection. The OECD also calls for more transparency of group structures. Taking note of a trend, especially in Europe, the draft notes that some jurisdictions require an opinion or evaluation from an external auditor or outside specialist, in some cases as a precondition for shareholder approval of RPTs. It is also noteworthy that the draft endorses derivative lawsuits more strongly than before. This is very positive.

Several revisions are linked to the COVID-19 crisis. They deal with digital meetings and the digitalization of company law. The OECD supports the idea of purely virtual meetings rather than hybrid ones, but it is very dangerous in terms of protection of minority shareholders in listed companies. The OECD acknowledges those risks but not enough. It should have distinguished between virtual meetings, which should not be authorized in order to avoid abuses, and hybrid ones which are perfectly fine. The draft also recognizes the role of debtholders in corporate governance since the pandemic has led to a significant increase in debt issuance and weakened balance sheets around the world. It calls for more transparency. It is all the more important to finally address those aspects as debt covenants are usually highly secretive.

Also, the OECD recognizes the continued rise of institutional investors, especially passive ones, and the request by civil society for more shareholders' engagement. As a consequence, the review considers that the corporate governance framework should facilitate and support engagement by institutional investors with their investee companies. It also supports stewardship codes as a complementary mechanism. Those comments reflect current developments.

It notes that the governance framework should consider the rights, roles and interests of stakeholders and their contribution to the long-term success of the corporation.

However, the key changes are related to stakeholders, ESG and climate change. Those developments have led to the creation of a new chapter VI "Sustainability and resilience". It consolidates existing provisions, including the former Chapter IV on "The role of stakeholders in corporate governance", and expends them significantly in order to cover those issues. The draft proclaims that "well-designed corporate governance policies may also support the sustainability and resilience of corporations and in turn, may contribute to the sustainability and resilience of the broader economy". The draft tries to balance the traditional shareholder-centric perspective described as having "a narrow view of directors’ fiduciary duties as a simple obligation to maximise short-term profits" that may have detrimental effects, with the opposite approach which also "presents risks". The draft does not take a clear side. It notes that the governance framework should consider the rights, roles and interests of stakeholders and their contribution to the long-term success of the corporation. The definition of the responsibilities of the board is modified to include stakeholders. It states that "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." However, the OECD is cautious and simply notes that "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."

The issue of gender diversity is also addressed but as a disclosure element and not so much as a substantive requirement. However, the revised principles call for countries and companies to consider additional and complementary measures as tools to strengthen the female talent pool and reinforce other policy measures aimed at enhancing board and management diversity." The OECD notes cautiously that "Diversity may be understood as based on criteria such as gender, age, or other demographic characteristics, but also on experience and expertise, for example on accounting, digitalisation, sustainability, risk management or specific sectors."

The draft also suggests various possible improvements. It notes the creation of a sustainabilitycommittee of the board working in particular on climate-related risks or a technology committee with an advisory role concerning digital security risks and the company’s digital transformation. It also notes the need to have "adequate processes in place within their risk management frameworks to handle non-operational, but company-relevant risks, such as health crises, supply chain disruptions and geopolitical tensions.

The liberal approach with a focus on minority shareholders' protection stays dominant in the principles. This is clear when the draft notes that when corporate governance frameworks allow for existing companies to adopt both for-profit and public benefit objectives, such frameworks should provide for due consideration of dissenting shareholder rights, such as super-majority votes or sell-out rights.

The OECD embraces "sustainability" with caution and keeps a strong focus on minority shareholders' protection. Some might regret this shyness but it is not really surprising

The influence of Europe can clearly be felt in the draft since out of 38 members, 21 are Member States of the European Union (EU) and 4 other European states such as the United Kingdom. In addition, the debate on "rethinking of capitalism" is not limited to Europe. However, the OECD embraces "sustainability" with caution and keeps a strong focus on minority shareholders' protection. Some might regret this shyness, but it is not really surprising. The OECD is made up of 38 members with different visions and levels of developments. In addition, the revision involved non-OECD countries which are members of the G20, such as Brazil, China, Saudi Arabia and India. Therefore, the "sustainability" agenda in corporate governance promoted in the developed world might not be embraced with the same fervour in developing countries (often already developed) that want to prioritize development, have different cultural visions and where minority shareholders’ protection is still insufficient.

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By Pierre-Henri Conac, Professor at the University of Luxembourg, Max Planck Fellow, Max Planck Institute Luxembourg and ECGI Research Member.

This article reflects solely the views and opinions of the authors. The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.