The new OECD Principles of Corporate Governance

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By Jim McFie, a Fellow of ICPAK

The Mode of Doing Business Is Constantly Changing And “Sustainability” Is the New Buzzword

The Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance serve as a benchmark for many Corporate Governance codes around the world. They were first issued in 1999. They aim to help policy makers and regulators evaluate and improve legal, regulatory and institutional frameworks for corporate governance, with a view to supporting market confidence and integrity, economic efficiency, and financial stability.

No mention of the document is made in the various publications of the Nairobi Securities Exchange or the Acts and Regulations promulgated by the Kenya Capital Markets Authority. But in “Mwongozo: The Code of Governance for State Corporations” it is clear that the OECD Principles acted as the framework for the instrument. In December 2014 President Uhuru Kenyatta signed the Foreword to Mwongozo and stated: “My Government is particularly eager to ensure that Kenya accedes to the Convention of the Organization for Economic Cooperation and Development (OECD) in the near future for the purposes of entrenching corporate governance. In this regard, I will shortly be issuing Mwongozo as Regulations under section 30 of the State Corporations Act, Chapter 446 of the Laws of Kenya”. In the body of Mwongozo is stated: “The Corporate Governance framework developed into this Code embodies the six principles of good governance developed by the OECD, and which are now global benchmarks for corporate governance principles”. In the 1999 version of the OECD publication, which was updated in 2015, the six principles were(1) Ensuring the basis of an effective corporate governance framework; (2) The rights and equitable treatment of shareholders and key ownership functions; (3) Institutional investors, stock markets, and other intermediaries; (4) The role of stakeholders in corporate governance; (5) Disclosure and transparency; and (6) The responsibilities of the board”. Mwongozo also incorporated the “2005 OECD Guidelines on Corporate Governance of State-Owned Enterprises”. Mwongozo points out that these Guidelines require that: “State-owned enterprises should observe high standards of transparency; the boards of state-owned enterprises should have the necessary authority, competence and objectivity to carry out their function of strategic guidance and monitoring of management; and members of the Board are required to act with integrity and be held accountable for their actions”. The original OECD principles have been adopted as one of the Financial Stability Board’s Key Standards for Sound Financial Systems; in addition, they are the foundation for the World Bank’s Corporate Governance Reports on the Observance of Standards and Codes (ROSC).

One could argue that these principles are as applicable today as they were years ago: why do they need to be updated? But the mode of doing business is constantly changing and “sustainability” is the new buzzword. And so, the OECD carried out a comprehensive review in 2021-2023 to update the Principles in keeping with changes in corporate governance and capital markets. The new Principles were adopted by the OECD Council at Ministerial Level in June 2023. The G20, which came into existence in 1999, is a group of twenty of the world’s largest economies. Originally nineteen countries and the European Union made up the G20: the countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea (i.e. South Korea), Mexico, Russia, Saudi Arabia, South Africa, Türkiye (as the Turks like to spell it), the United Kingdom and the United States.  The G20 meets regularly to coordinate global policy on trade, health, climate, and other issues. At the 2023 summit, the group welcomed the African Union as its newest member. Together, the nations of the G20 account for more than 85 percent of global economic output, around 75 percent of global exports, and about 80 percent of the world’s population. Another action that the G20 leaders carried out, in September 2023, was to endorse the revised Principles. 

The review had two major objectives: to support national efforts to improve the conditions for companies’ access to finance from capital markets, and to promote corporate governance policies that support the sustainability and resilience of corporations which, in turn, may contribute to the sustainability and resilience of the broader economy. Hence a major addition to the Principles is the new Chapter on “Sustainability and resilience” which reflects the growing challenges corporations face in managing climate-related and other sustainability risks and opportunities. This new Chapter also incorporates Chapter IV on “The Role of Stakeholders in Corporate Governance” of the previous version of the Principles. A substantial number of new recommendations have also been developed and integrated within the existing chapters of the Principles, whose structure remains otherwise unchanged. The Principles are presented in six chapters: (1) Ensuring the basis for an effective corporate governance framework; (2) The rights and equitable treatment of shareholders and key ownership functions; (3) Institutional investors, stock markets, and other intermediaries; (4) Disclosure and transparency; (5) The responsibilities of the board; and (6) Sustainability and resilience. Each chapter is headed by a single Principle that appears in bold italics and is followed by a number of supporting Principles and their sub-Principles in bold. The Principles are supplemented by annotations that contain commentary on the Principles and sub-Principles and are intended to help readers understand their raison d’être, or justification. The annotations also contain descriptions of dominant trends and offer alternative implementation methods and examples that may be useful in making the Principlesoperational.

The first principle is that the corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.Effective corporate governance requires a sound legal, regulatory and institutional framework that market participants can rely on when establishing their private contractual relations. Legal jurisdictions seeking to implement the Principles should monitor their corporate governance framework with the objective of maintaining and strengthening its contribution to market integrity, access to capital markets, economic performance, and transparent and well-functioning markets. The division of responsibilities among different authorities and self-regulatory bodies should be clearly articulated and designed to serve the public interest.

Secondly, the corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights at a reasonable cost and without excessive delay. This principle goes on to point out that the company cannot be managed by shareholder referendum. The shareholding body is made up of individuals and institutions whose interests, goals, investment horizons and capabilities vary. Moreover, the company’s management must be able to take business decisions rapidly. In light of these realities and the complexity of managing the company’s affairs in fast moving and ever-changing markets, shareholders are not expected to assume responsibility for managing company activities. The responsibility for company strategy and operations is typically placed in the hands of the board and a management team that is selected, motivated and, when necessary, replaced by the board.

Thirdly, the corporate governance framework should provide sound incentives throughout the investment chain and provide for securities markets to function in a way that contributes to good corporate governance. In order to be effective, the legal and regulatory framework for corporate governance must be developed with a view to the economic reality in which it is to be implemented. In many jurisdictions, the real world of corporate governance and ownership is no longer characterized by a straight and uncompromised relationship between the performance of the company and the income of the ultimate beneficiaries of shareholdings. In reality, the investment chain is often long and complex, with numerous intermediaries that stand between the ultimate beneficiary and the company. The presence of intermediaries acting as independent decision makers influences the incentives and the ability to engage in corporate governance.

Fourthly, the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the company, including the financial situation, performance, sustainability, ownership, and governance of the company.

Fifthly, the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. 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 and board members should be protected against litigation if a decision was made in good faith with due diligence. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. The board should apply high ethical standards. The board has a key role in setting the ethical tone of a company, not only through its own actions, but also in appointing and overseeing key executives and consequently the management in general. High ethical standards are in the long-term interests of the company as a means to make it credible and trustworthy, not only in day-to-day operations, but also with respect to longer term commitments. To make the objectives of the board clear and operational, many companies have found it useful to develop company codes of conduct based on, among other matters, professional standards and sometimes broader codes of behaviour, and to communicate them throughout the organisation. 

Finally, the corporate governance framework should provide incentives for companies and their investors to make decisions and manage their risks, in a way that contributes to the sustainability and resilience of the corporation. Investors are increasingly considering disclosures about how companies assess, identify and manage material climate change and other sustainability risks and opportunities. Paying a living wage is an important element of human capital management. A core feature of sustainability disclosures is to provide investors with a better understanding of the governance and management structures and processes for managing climate and other sustainability risks and identifying related opportunities. The corporate governance framework should support both the sound management of these risks and the consistent, comparable and reliable disclosure of material information in order to support investors’ financial, investment and voting decisions. The combination of sound governance and clear disclosures will promote fair markets and the efficient allocation of capital, while supporting companies’ long-term growth and resilience.

The revised Principles of Corporate Governance help policy makers evaluate and improve the legal, regulatory and institutional framework for corporate governance. They identify the key building blocks for a sound corporate governance framework and offer practical guidance for implementation at the national level. The Principles also provide guidance for securities exchanges, investors, companies and others that have a role in developing good corporate governance.


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