On 19 September 2022, the OECD released a proposal of revision of the G20/OECD Principles of Corporate Governance. First drafted in 1999 as a set of OECD Principles (following the Russian and Asian Financial crises), the Principles were substantially revised in 2004 (Enron & WorldCom scandals) and then lightly updated in 2015, when the text was upgraded to an official G20 instrument. The text is once again up for review. Following the on-going consultation, negotiations should continue behind closed doors in 2023, with a likely endorsement by the OECD and the G20 by end of the year.
Overall, the proposal of revision appears much in line with the spirit of the last review in 2015: integrating new practices at the margin, particularly when non-financial matters are concerned. One can regret the low ambition. However, we should bear in mind that this G20/OECD text is supposed to be endorsed by a wide group of jurisdictions, much beyond like minded OECD countries – from the US Delaware State to People’s Republic of China, from Finland to South Africa, etc.
Catching up with latest trends
Looking at the proposed amendments, we are heading toward an “update”, similar to what happened in 2015, unlike the more consequential process that took place post-Enron in 2003. Some of the amendments aims at catching up with new trends, not foreseen in 2015:
- This is obviously true for digitalisation, with the added reference to digital tools to enhance supervision (revised Principle I.F) and the holding of virtual and hybrid AGMs (II.C.3).
- There are also minor adjustments to the text dealing with the governance of the board. This is the case of ensuring gender diversity at the board (IV.A.6 on disclosure of board processes and V.E.4 on board evaluation and assessment) and of risk management policy (new principle V.D.2). A new Principle may raise eye brows: V.A.1 which recommends granting full immunity to individual board members against litigation for collective board decisions.
There are however more substantial changes.
Taking aim at the complexity of group structures
Clearly, the opacity of company group structures is a central concern of the proposal of revision. It is addressed in several amendments, including through a new stand-alone principle (“I.H. Clear regulatory frameworks should ensure the effective oversight of listed companies within company groups”), and in changes to existing principles, respectively on protection of minority shareholders (II.G.), transparency over capital structures (IV.A.3.), beneficial owners and voting rights (IV.A.4) and related party transactions (IV.A.7), as well as in board members access to information (V.F).
Raising the profile on “sustainability”, at last
The corporate governance experts at the OECD are not known for being too enthusiastic about bridging corporate governance and responsible investment / sustainability practices together. Proponents of a keep-it-pure approach to corporate governance have been dominating the discussions. Considering that, the fact that the proposed revision takes several sustainability-related elements on board comes as a surprise.
- There is a new principle on lobbying (VI.C.1. “Boards should ensure that companies’ lobbying activities are coherent with their sustainability-related commitments”);
- There is also new wording on the transparency of ESG criteria in setting executive remuneration (IV.A.5.) – yet the text refrains from recommending ESG criteria as such;
- There is little change to the section on the role of shareholder activism other than a brief reference to climate-related issues (under II.D allowing institutional shareholders “to consult with each other”).
Beside these small changes, the major innovation of the text when it comes to sustainability matters is with (i) the increased scrutiny over ESG analysts, and (ii) the creation of a new chapter on “sustainability and resilience”.
ESG analysts under scrutiny
ESG analysts and their methodologies are definitely on the radar screen. The role of credit agencies was under the spotlight in 2003-2004 when the Principles were revised post-Enron. At the time it led to the creation of a hard-fought new principle on conflicts of interest of “intermediaries delivering advice and rating” (III.D). This principle is once again subject to revision, this time to increase supervision of ESG rating agencies which, we are told, “can have significant impact on companies’ governance and sustainability policies given their rating methodologies and index inclusion criterion”. The proposed amendment calls for “the methodologies used by service providers that produce ratings and indices should be transparent and publicly available to clients and market participants”.
Siding with proponents of the single materiality approach
The new chapter on “sustainability and resilience” helps modernise the Principles. It’s about time. However, the definition of materiality and more broadly the OECD’s approach to defining the scope of sustainability matters may be of concern. Clearly the proposed text is siding with proponents of the single materiality approach (disclosing matters only if relevant to the company, not to society at large, issues that “contribute to the sustainability and resilience of the corporation”, that “can reasonably be expected to affect a company’s asset value and its ability to generate revenues” etc.). The text does tolerate “double materiality” approaches (i.e. integrating the impact of business on society as a whole) but it does so with explicit caveats (“If consistent with a jurisdiction’s legal and disclosure requirements”, “companies should still consider the financial interests of their shareholders”).
The missing parts
Other issues are missing. The text says nothing about dividend and share buyback policies. And while there are improvements regarding board risk management policy, the text is far too timid when it comes to the specific risk posed by aggressive tax planning (despite a new reference to tax in V.D.2 and improved text on auditors’ fees in IV.C). And of course, the text remains undecided on traditional corporate governance issues such as separation of CEO and chair functions and the responsibility (not just the rights) of shareholders to act in the long-term interest of the company.