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The review process of the OECD Principles of Corporate Governance - Assessment by the TUAC Secretariat
After a year-long review process, the OECD released a new set of Principles of Corporate Governance on the occasion of a meeting of G20 Finance Ministers and Central Bank Governors, 5 September in Ankara. On many key corporate governance issues the revised text falls short of what TUAC called for during the process.

25/09/2015

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Executive summary

 

After a year-long review process, the OECD released a new set of Principles of Corporate Governance on the occasion of a meeting of G20 Finance Ministers and Central Bank Governors, 5 September in Ankara. The updated text, rebranded as a “G20/OECD” instrument, offers some improvements compared with the previous version, which dates back to 2004, and as such could be said to meet the initial expectations set by the OECD Committee in charge of the review. However the revised Principles do not to reflect appropriately broader OECD policy lessons from the crisis, manifested by its New Approaches to Economic Challenges, nor do they appear consistent with other OECD instruments on responsible business conduct and long term investment. The revised text falls short of TUAC’s expectations for the review.

As with the previous version of the Principles, the revised text contains five chapters respectively on: the supervisory framework (I), shareholder rights (II), institutional investors & markets (III), stakeholders (IV), transparency & disclosure (V), and the organisation of the board of directors (VI). The most significant change to the structure of the Principles is with chapter III which now deals with “investment chain” issues, including governance of institutional investors and of markets, which is welcome. The revised Principles also put a much needed emphasis on the supervision of private exchanges and other trading venues (such as “dark pools”) and of new forms of trading practices such as high frequency trading and trading of equity-related derivatives (Ch. I & III). From a trade union and broader stakeholder perspective, the revised text has the merit of recognising the role of board level employee representatives by integrating existing text from the 2005 OECD Guidelines on Corporate Governance of State-Owned Enterprises.

However, on many key corporate governance issues the revised text falls short of what TUAC called for during the process:

  • Ch. IV on “the role of stakeholders” (i.e. employees, local communities and creditors) is largely unchanged and does not take on board the requirements laid down in the OECD Guidelines for Multinational Enterprises, which were revised in 2011;
  • The text on shareholders’ rights concerning executive remuneration (Ch. II) has not been improved significantly, with only a reference to claw-back provisions and to “say-on-pay” in the annotations. Nothing in the text would suggest that executive pay – or shareholder compensation via dividends and share-buybacks – could risk reaching excessive levels;
  • Responsible investment practices are ignored throughout text. Even the proposal that responsible investment practices be disclosed was not taken on board;
  • Corporate reporting on social and environmental performance and broader sustainability reporting are mentioned only in passing in the annotations, despite being widespread practices thanks to forums such as the Global Reporting Initiative and new EU regulatory requirements;
  • On board organisation, the separation of CEO and Chair positions is still not considered as a valid principle. Gender balance in the boardroom is mentioned in the annotations, but is not recommended as such;
  • Despite OECD leadership in curbing aggressive tax planning, there is little in the text that suggests that tax risk should be considered as an issue for the board of directors.

The revised Principles represent the lowest common denominator between participating jurisdictions. They nevertheless reflect the “maximising shareholder value” model of governance with priority given to corporate access to capital. Proponents of a stakeholder approach will consider the outcome of the review process a disappointment.

For the future TUAC would call for more participatory involvement of stakeholders in the review of such a flagship instrument. The OECD could reflect on its own procedures whereby consultation has fallen short of that in the Review of other important instruments such as the OECD Guidelines on Multinational Enterprises.

 

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