As discussed in one of my previous articles, the Corporate Governance Committee of the Organisation for Economic Co-operation and Development (OECD) is currently revising its OECD Principles of Corporate Governance. The Principles are one of the 12 key standards for international financial stability, per the Financial Stability Board. The Principles provide specific guidance for policymakers, regulators, and market participants to improve the legal, institutional, and regulatory framework underpinning corporate governance with a focus on publicly traded companies. They also provide practical suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. In November 2014, the OECD issued a draft of the revised Principles for public comment.
Through our membership in the Business and Industry Advisory Committee to the OECD, IFAC is directly participating in these revisions (BIAC comments and responses from 75 other organizations are available on the OECD website). Through BIAC, IFAC submitted a significant number of detailed suggestions during the revision process. In addition, IFAC submitted our own comments to the public consultation of the updated text.
In the response, we welcomed the enhancements to Principles but noted that some 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 the Principles. IFAC believes that a more fundamental revision of the Principles would have a greater impact in ensuring the appropriate implementation, application, and oversight of governance arrangements.
The fundamental revisions that IFAC believes are worthy of consideration include:
- More focus on the creation of more sustainable value (as per the OECD’s mission statement). In addition to economic performance, environmental and social performance are integral to the sustainability of an organization, and require a continual commitment from the leadership of the organization and strong and integrated governance practices at all levels.
- Greater clarity regarding the primary audience. IFAC believes that the OECD Principles are particularly important for policymakers, regulators, and market participants, such as stock exchanges, to create an environment to enable good governance in organizations. In contrast, corporations themselves would arguably benefit more from implementing a governance code specifically designated for the individual organization.
- A greater focus on desired outcomes. The current Principles contain many detailed arrangements/prescriptions that differ between jurisdictions and become outdated faster than the OECD Principles are updated. The Principles could be better formulated on a higher level, focused on broad measures or desired outcomes. That is, answering what an organization wants to achieve instead of what an organization has to do.
- Including less detail within the Principles. Instead of duplicating already existing standards and frameworks, or parts thereof, the Principles might rather refer to those existing, established, accepted standards and frameworks. Such an approach would greatly reduce the chance of inconsistencies, especially when these other standards and frameworks are updated in the future.
In February, the OECD Corporate Governance Committee discussed submitted comments on the exposure draft. Although the meeting and its minutes are not public, the updated draft Principles indicate that most of IFAC’s concerns, if not all, remain. Additionally, it appears that many of the suggestions for further improvement from the other 75 respondents were also not taken into account. If this is true, it indicates a revised set of Principles with many cosmetic changes but little re-energized thought leadership.
The revised draft Principles have not yet been formally finalized. The Committee will reconvene once more in March; the Principles will also be addressed at the OECD/G-20 Conference on Corporate Governance in Istanbul in April before they will be approved at the OECD Council meeting in July and then forwarded in to the G-20 meeting in September. However, a second public consultation is not expected.
If you still would like to influence the outcomes and the Principles, we recommend approaching the Committee directly (see contact details on the OECD consultation page). Though the BIAC, IFAC will also continue the dialogue with the Committee. Therefore, you could also direct your comments to us and we will include them in our future response.
