In September 2023, the OECD and G20 Principles of Corporate Governance (hereinafter “the Principles”) were approved and published.[1] This is an important document, which took more than 18 months of study and work.
The Principles are addressed both to so-called policy makers (such as governments, parliaments, regulatory and supervisory authorities, trade associations and committees for the promotion of good corporate governance) and directly to market participants (corporations and their directors, shareholders, lenders). According to the Principles, it is up to the governments, supervisory authorities and private sector of each participating state (including, of course, Switzerland, a member state of the OECD since 1961) to assess the national corporate governance framework and to introduce mandatory or voluntary implementing rules as appropriate, taking into account the economic, regulatory and cultural characteristics of each market.
The Principles are not intended to replace government regulations, but aim to identify specific objectives and suggest various ways to achieve them. These ways may take the form of primary and secondary legislation, listing rules, self-regulatory rules such as codes of corporate governance or stewardship, contractual commitments, unilateral commitments and behavioural practices (best practices). This article will focus on the indications of the Principles that are already of immediate relevance to market participants (issuers, shareholders, lenders).
The Principles focus on listed companies (publicly traded companies), but also claim to be a useful tool for improving the corporate governance of other corporations. The Principles provide suggestions in relation to the issues of sustainability and resilience with the aim of helping companies manage environmental and social risks, including by supplementing and updating guidelines on market disclosure, the role and rights of shareholders and other stakeholders, and the role and responsibilities of boards of directors.
Six sections of the Corporate Governance Principles
The Principles are divided into six sections:
- Ensuring the basis for an effective corporate governance framework;
- The rights and equitable treatment of shareholders and key ownership functions;
- Institutional investors, stock markets, and other intermediaries;
- Disclosure and transparency;
- The responsibilities of the board; and
- Sustainability and resilience.
For the most part, the indications in the first and second sections are, by their very nature, such as to require the enactment of primary or secondary legislation, or international covenant rules. They are therefore not of direct and immediate relevance to market participants, although they may draw useful information from them with respect to likely developments in the regulatory framework, as well as with respect to the general objectives that the Principles set forth.
The third section is significant for financial intermediaries and in any event useful for issuers in understanding the objectives and behaviour of their investors. Sections four, five and six are of interest to issuers, and therefore also useful to other market participants. This article focuses on the principles of immediate interest to issuers and other market participants, and thus on sections three to six.
Section IV: Transparency and market disclosure
As we will see, several elements of the Sustainability and Resilience Principles relate to market disclosure and emphasise its importance. Principle IV. Disclosure and transparency provides a detailed description of the disclosure to be made to the market and how it should be done.
Without claiming to be exhaustive, I will mention some that are particularly significant, also because they may give rise to investor expectations. Principle IV.A.2 requires issuers to disclose the most relevant company policies and indicators (performance metrics) on environmental and social issues. Similarly, Principle IV.A.6 requires disclosure of policies insuring the liability of directors and senior management (so-called D&O policies) as their existence is considered to influence board decisions. Furtherly, the Principles state that it is good practice to publish the rules of the board of directors and its committees (IV.A.9).
With respect to transparency and dialogue with shareholders, it is provided (IV.D) that shareholders may communicate directly with the audit committee or other corporate body responsible for monitoring the auditor.
Transparency on a company’s prospective situation and financing agreements
Particular attention is paid by the Principles to the disclosure of the company’s financial outlook and financing arrangements. In this matter, the Principles contain important innovations: The definition of material information in Principle IV is “information whose omission or misstatement can reasonably be expected to influence an investor’s assessment of a company’s value”. The reference to the issuer’s value is, of course, of particular importance in situations of corporate crisis in which the value is impacted far beyond the typical fluctuations due to economic performance and future expectations, reaching – in the extreme case of insolvency – zero. Principle IV.A.1 states that investors have a particular interest in information that can help them understand the future performance of the company.
The Principles also require transparency about several other factors that come into play in a corporate crisis situation, such as the presence of intra-group guarantees (IV.A.4), dependence on particular commodities or supply chains, financial risks related to interest rates or derivative contracts (IV.A.8).
Particular attention is devoted by Principle IV.A.10 to financing contracts, the provisions of which may significantly limit the decision-making discretion of the company and its shareholders. Examples are commitments (covenants) that provide for restrictions on the distribution of dividends, the disposal of assets, or situations – typical early stages of debt restructuring transactions – in which creditors demand different ways of managing the company in exchange for the granting of a waiver of the company’s breach of a covenant. This is why the Principles call for the markets to be informed about the main elements of the loan agreements and the issuer’s assessments of them.
Section V: The role of the Board of Directors
As in the case of transparency and disclosure to the market, the Principles’ provisions on the role of the board of directors are already to a large extent to be found in our legal system or in the Swiss Code of Best Practice for Corporate Governance. Also in this matter, however, the Principles contain certain additions that issuers should take into account. As an example, the V.C. Principle provides that the directors’ duties include appointing and supervising key executives and points out that in some jurisdictions the board is required to exercise oversight over strategies for institutional relationships aimed at influencing institutional behaviour (lobbying), financial, and tax planning.
Section VI: Sustainability and resilience
The starting point is the assertion that corporate governance rules must be such that they provide incentives for companies and their investors to make decisions and manage risks in a way that contributes to the sustainability and resilience of the company itself.
Principle VI.A. deals with sustainability-related disclosures and in part contains guidance that may be useful to issuers wishing to improve their disclosures to the market. For example in terms of identifying information useful to investors for their own capital allocation decisions (VI.A.), assessing the materiality of information (VI.A.1), linking sustainability information to financial information (VI.A.3).
Principle VI.B. emphasises the usefulness of dialogue with investors and other stakeholders in assisting the informed actions of directors and identifying which sustainability information should be considered significant and thus be disclosed to the markets.
The role of the board of directors with regard to sustainability is addressed in Principle VI.C., which requires that corporate governance rules ensure that directors give due consideration to the most significant sustainability risks and opportunities when exercising their functions of reviewing, overseeing and guiding corporate governance, market disclosure, corporate strategy, risk management and internal control.
It is then required (VI.C.1) that the board of directors ensure that any lobbying activities are consistent with the company’s sustainability objectives, even at the expense of sacrificing possible short-term benefits (the example given in the Principles relates to delaying the introduction of carbon pricing measures for a company that intends to make a transition to an economy that reduces emissions from fossil fuels). The board should also verify that the company’s capital structure is consistent with the strategic objectives and the risk deemed acceptable, continuously checking that capital is sufficient taking into account various scenarios, including scenarios with a low probability of occurrence but high impact (VI.C.2).
Principle VI.D. advocates that corporate governance frameworks take into account the rights, role and interests of stakeholders and encourage cooperation between issuers, shareholders and other stakeholders in the creation of value, quality jobs, and sustainable and resilient societies. The principle is articulated in indications that enhance the company’s human capital, including by calling for the development of worker participation in various aspects of the company’s activities (VI.D.3); it calls for companies – in the absence of regulatory or contractual constraints – to voluntarily and unilaterally adopt commitments to stakeholders, for example through the adoption of due diligence standards.
Conclusions
The new edition of the Principles has been drafted taking into account the important changes of recent years (the growth in importance of ESG factors, the movement from shareholder capitalism to stakeholder capitalism, the impact of pandemics and weather phenomena, geopolitical tensions) and thus constitute an effective roadmap for identifying possible improvements in the corporate governance of our issuers. Their non-binding nature and the absence of a comply-or-explain mechanism make them an important stimulus for board debate, leaving directors with every freedom.
References
- G20 and OECD, Principles of Corporate Governance (2023). Available at: https://doi.org/10.1787/ed750b30-en ↑
