The OECD should go further in recognising a changed world

The OECD has opened a public consultation that will run until 21 October 2022 on proposed Draft Revisions of the G20/OECD Principles of Corporate Governance. This action is overdue since the current version dates from 2015. In the meantime, grave global problems have emerged, which in 2015 were still widely neglected, in particular climate change, the pandemic, the supply chain crisis and the Ukrainian war. As a result, the corporate governance discussion as existing in 2015 has changed fundamentally; ESG, climate change and human rights, digitalization, concentration and risk taking are now at the forefront. The consultation’s 10 priority terms of reference include also more traditional, long-standing issues such as stewardship by institutional investors, executive remuneration, diversity, board committees and debtholder rights. The draft maintains its current six Principles without making clear where it identifies priorities among them and among the priority terms. While in the end this is a matter for the corporations themselves, the draft could have more effectively given some indications regarding prioritization since it is obvious that not all of this can be taken care of at the same time and with the same intensity.

The draft also takes a firm position acknowledging the importance of corporate governance codes and other self-regulation mechanisms for corporations and markets. 

An effective corporate governance framework is certainly an important factor for facilitating access to capital markets (ch. I). The draft rightly underlines the need for effective implementation of this framework, be it by institutional investors or by regulators. The draft also takes a firm position acknowledging the importance of corporate governance codes and other self-regulation mechanisms for corporations and markets. This is important because both the codes and the comply or explain principle have been called into question by practitioners and legal authors in several countries, such as in Germany and most recently – and astonishingly – even the UK. The new sections on digital technologies (I.F.) and on having clear regulatory frameworks to ensure the effective oversight of listed companies within company groups (I.H.) deal with two key modern problems. Digitalization is still sadly underdeveloped in many European jurisdictions, including Germany; progress is too slow and this is detrimental to competition with the USA. It is also true that group structures with controlling parent companies and pyramid relationships pose risks to shareholders as well as stakeholders, particularly in cross-border groups. Jurisdictions should face these risks by means of regulation and cooperation.

Sustainability and resilience (new ch. VI; cf. old ch. IV on stakeholders), including ESG and climate change, are now the most urgent and widely discussed political and legal problems, see for example the new French legislation, the recent draft directive of the European Commission and the Dutch Shell court decision. The topic is interwoven with the acute controversy over shareholderism as opposed to stakeholderism. It is understandable that the draft does not take sides, but merely stating that the corporate governance framework should “consider the rights, roles and interests of stakeholders consistent with jurisdictional requirements” (VI.D., cf. also V.A. on “taking into account the interests of stakeholders”) is too meagre (but see also the separate OECD report Climate Change and Corporate Governance 2022). The recommendation that employee participation should be permitted to develop (VI.D.3.) has been retained nearly untouched. Here again, the draft falls short of reflecting recent developments in Europe towards more employee participation, and in particular it does not engage the critical pros and cons. An important addition is the new section VI.D.6., which rightly takes notice of the bondholders of publicly traded companies and recommends facilitating their rights. Some problems, such as out-of-court restructuring, insider trading and covenant waiver negotiation, are touched on (on covenants, cf. also IV.A.10.), but the role bondholders could play in corporate governance could have been spelt out more clearly.

The new recommendation on disclosure of group structures and their control arrangements is to be applauded

Other chapters are rightly revised too, for example ch. II with a new section on virtual or hybrid general shareholders meetings (II.C.3.), which have been allowed in COVID times by many jurisdictions and are now being allowed more generally. The key problem here is of course the protection of shareholder rights. The role of institutional investors as stewards and of stewardship codes is well-known (III.A.); disclosure by proxy advisors and credit rating agencies – as well as these figures’ conflicts of interest – is dealt with (III.D.). More generally disclosure and transparency is the topic of ch. IV. The new recommendation on disclosure of group structures and their control arrangements is to be applauded (IV.A.3., addressed partly in old II.E.2.). In light of recent scandals, e.g. Wirecard, the emphasis on annual audit and international auditing standards is fully justified (IV.C.). It was urgently essential to substantially overhaul the chapter on the responsibilities of the board (old VI, now V). The need to review and assess risk management policies and procedures is obvious (new V.D.2.); digital security and tax risks are rightly highlighted, but the same should have been done for non-financial risks. Executive and board remuneration (V.D.5.) and independence (V.E.) are long-standing issues.

The recommendation that board members should be protected against litigation if a decision was made in good faith with due diligence  takes note of the dramatical increase in directors’ liability.

In view of all these problems and recommendations for the corporate world, a central message for the corporation, the board and management is business judgment. In some jurisdictions, such as Germany, there is a codified business judgment rule, while in others, as in many US states or Switzerland, this rule has been firmly established by the courts. This rule is key because it affords great room for manoeuvring in difficult times and prevents second-guessing by judges and supervisors. The rule is mentioned only in passing in the introduction as obviously not being restricted by the Principles. The recommendation that board members should be protected against litigation if a decision was made in good faith with due diligence (new section V.A.1.)   takes note of the dramatical increase in directors’ liability.

The pandemic, the financial crisis and other crises have boosted the trend towards more state interference and state-owned enterprises. While the state must intervene in such critical times, state-owned and state-run enterprises are certainly not a general solution and should be monitored carefully. In view of this, the OECD should hurry to revise as well its separate Guidelines on Corporate Governance of State-Owned Enterprises, which still date from 2015.

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By Klaus J. Hopt, Emeritus Professor at the Max Planck Institute of Comparative and International Private Law, Hamburg and ECGI Fellow and Research Member.

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