The need to revise the OECD’s Principles of Corporate Governance, last updated in 2004, has been clear for a while now.
Since then the world has experienced a global financial crisis, increasing economic clout of emerging markets, greater cross-border equity ownership and stock trading, and growth of institutional investors. Times have changed.
Hence the Organization for Economic Cooperation and Development published revised corporate governance guidelines last fall, and collected public comment on the updates through January. Some critics say the revisions should have included more about social and environmental values in corporate governance; others complained that the new OECD guidelines stray from their role as a policy document and include too many provisions that apply to companies, rather than to jurisdictions that oversee companies.
Still, nobody says an update isn’t warranted.
“It’s a live document,” says Fianna Jurdant, senior policy analyst in the corporate affairs division with the OECD. “To ensure the continued … usefulness of the Principles, we have to take into account recent developments in the corporate sector, the capital markets, and the lessons from the financial crisis.”
The Principles are intended “to assist governments and regulators in their efforts to evaluate and improve the legal, regulatory, and institutional framework for corporate governance,” according to the preamble. They are one of the key standards for sound financial systems used by the Financial Stability Board, and are a benchmark for the World Bank’s reports on the observance of standards and codes (ROSCs). They are also increasingly used by organizations such as the Association of Southeast Asian Nations (ASEAN) as a scorecard on corporate governance, Jurdant says.
“The revised Principles will, we hope, attract attention and continue to serve” as a benchmark for corporate governance, Jurdant says. The idea is to present an outcome widely viewed as the best approach, yet leave enough flexibility so the Principles can be implemented in cultures around the world.
To accomplish that, the revisions had to address challenges the existing OECD framework faces today, such as those arising from concentrated ownership of companies in many countries. One result is greater attention on related-party transactions. “There were already references to this, but they were beefed up based on our experience, including with emerging markets,” Jurdant says.
“To ensure the continued high quality, relevance and usefulness of the principles, we have to take into account recent developments in the corporate sector, the capital markets and the lessons from the financial crisis.”
Fianna Jurdant, Senior Policy Analyst, OECD
Another significant change is a new chapter on intermediaries. This reflects the growing importance of institutional investors and the changing role of stock markets, Jurdant says.
“The document provides a useful reference tool for any policy-maker looking to benchmark against good practices on corporate governance,” says Richard Chambers, chief executive officer with the Institute of Internal Auditors. A case in point: the added discussion on the “comply or explain” principle was a step forward.
“We’ve never taken the position internal audit should be mandated,” Chambers says. “But if you don’t have internal audit, you have to explain how you’re achieving strong internal control.”
At the same time, “there is nothing earth-shattering in the proposed changes,” says Richard Ufland, a London-based partner with the law firm of Hogan Lovells. (Many of the changes, he adds, seem aimed at emerging markets rather than mature ones like Britain.) Many of the concepts and principles within the document, such as the need to disclose related-party transactions, already are in place in the United Kingdom.
Others point out the benefits of offering a set of principles that can apply in developing economies. “They’re not preaching to their own choir,” says Alexandra Lajoux, chief knowledge officer with the National Association of Corporate Directors. That counters against the perception of the OECD as being part of “a quaint old world that seems to be on the decline,” she says, and shows its determination to reflect current realities.
Principles for Whom, Exactly?
A number of comments took aim at what they saw as too great a focus on the needs of shareholders, with correspondingly less attention paid to other stakeholders.
“Corporate governance should account for the needs of all stakeholders, including shareholders, employees, creditors, the communities in which they operate, and the environment,” wrote Paige Morrow, head of Brussels operations with the law firm Frank Bold. “A broader orientation to corporate governance would promote both economic and environmental sustainability.”
The International Federation of Accountants (IFAC) recommended expanding the objectives to include sustainable economic, environmental, and social performance. “Sustainable value creation involves considering economic, environmental, and social factors—not only because different stakeholders had different interests, but also because these factors are interdependent,” according to the organization’s comments.
IFAC also criticized the revisions for lacking substance. “While the draft Principles contain many proposed revisions, a number of these changes may be interpreted as being somewhat cosmetic, shying away from more fundamental modifications that would arguably enhance the quality, relevance, and usefulness of these Principles,” IFAC wrote in a comment.
Below is a look at what is planned in OECD’s upcoming review of the Principles of Corporate Governance.
The OECD Principles are one of the 12 key standards for international financial stability of the Financial Stability Board (FSB) and form the basis for the corporate governance component of the Report on the Observance of Standards and Codes of the World Bank Group.
The rationale for the review is to ensure the continuing high quality, relevance and usefulness of the Principles taking into account recent developments in the corporate sector and capital markets. The outcome should provide policy makers, regulators and other rule-making bodies with a sound benchmark for establishing an effective corporate governance framework.
The basis for the review will be the 2004 version of the Principles, which embrace the shared understanding that a high level of transparency, accountability, board oversight, and respect for the rights of shareholders and role of key stakeholders is part of the foundation of a well-functioning corporate governance system. These core values should be maintained and, as appropriate, be strengthened to reflect experiences since 2004.
As the Principles are a global standard also adopted by the FSB, all FSB member jurisdictions are invited to participate in the review as Associates and have the same decision-making rights as OECD members.
The review will benefit from consultations with stakeholders, including the business sector, investors, professional groups at national and international levels, trade unions, civil society organisations and other international standard setting bodies.
Peer reviews - In response to the corporate governance challenges that came into focus in the wake of the financial crisis, the Corporate Governance Committee launched a thematic review process designed to facilitate the effective implementation of the OECD Principles and to assist market participants and policy makers to respond to emerging corporate governance risks. These peer reviews provide valuable background support to the review.
Some questioned the intended audience of the revised Principles: policy-makers or businesses? Much of the content is geared to the former. Some updates, however—such as a section on need for shareholders to be informed about decisions regarding fundamental corporate changes—seem most relevant to businesses themselves. “It would be more useful if they would separate country versus company” recommendations, Lajoux says.
Fayez Choudhury, IFAC’s chief executive officer, noted that given how quickly modern governance and economic trends evolve, even these updated principles will become outdated unless the OECD commits to a “rigorous schedule of frequent updates.”
To minimize that risk, IFAC advises writing the principles at a higher level, so they focus more on desired outcomes and less on detailed implementation guidance, Choudhury says. Such a change also would forge greater alignment between the Principles and their primary audience of policy-makers, regulators, and stock exchanges. More detailed principles could then be drafted for the companies within their jurisdictions, he adds.
It’s too early to tell if the OECD will issue a revised document for a second round of comments. Jurdant says the organization has received about 75 comments, which it is reviewing; the have also been posted on the OECD Website. It’s also too early to say if the OECD will begin issuing country reviews of compliance regimes, she says. (Something the OECD already does for countries’ anti-bribery regimes.)
Over the next few months, the OECD corporate governance committee will meet to decide next steps. These members will approve the final document, which is scheduled to be released this year.
Although it’s easy to view the revisions as an attempt by the OECD to remain relevant, Lajoux notes that the organization, with its orderly way of proceeding, willingness to ask for and consider comments, and focus on boosting the economic well-being of everyone, may be more relevant now than it ever has been.
She points to its mission, which includes a “shared commitment to market economies backed by democratic institutions and focused on the well-being of all citizens. Along the way, we also set out to make life harder for the terrorists, tax dodgers, crooked businessmen, and others whose actions undermine a fair and open society.”