The G20/OECD Principles of Corporate Governance 2015: A Critical Assessment of their Operation and Impact

The Organisation for Economic Co-operation and Development (‘OECD’) promotes the G20/OECD Principles of Corporate Governance 2015 (‘Principles’) as a means ‘to support investment as a powerful driver of growth’. Indeed, there may be reasons why the OECD could be confident about the impact of its Principles. The 35 members and 5 partner countries of the OECD belong to the wealthiest of the world and account for 80% of world trade and investment. Beyond its members and partners, the OECD plays an important role at a global scale since its recommendations are often aimed at the law makers of less developed countries and businesses themselves.

The question remains, however, how realistic this ambition of the OECD is and how satisfactorily the Principles operate across the world.  Our paper ‘The G20/OECD Principles of Corporate Governance 2015: A Critical Assessment of their Operation and Impact’ examines this question. To our knowledge, it is the first paper that discusses the 2015 version of the Principles. We map the governance model of the Principles and discuss their impact on state legislation and corporate governance at the firm level, with a particular focus on the situation in Mexico. We also use the concepts of ‘networked governance’ and ‘wicked problems’ in order to evaluate the nature and operation of the Principles.

Amongst other things, we show that the 2015 version of the G20/OECD Principles of Corporate Governance are an example of crisis-driven law making with the explicit aim of promoting financial stability, investment and growth. A possible line of critique may therefore be that failures in corporate governance were not the main reasons for the financial crisis of 2008, and that the empirical research into whether good corporate governance ‘matters’ for financial development has produced ambiguous results (as we previously researched in separate publications such as here and here).

However, regardless of the debate about causal links, it may be laudable that the OECD keeps the Principles up-to-date. The more valid criticism is therefore that the very idea of a global model of corporate governance has its flaws. Our analysis shows that social, cultural and economic differences play a role at both the country and firm level of corporate governance. As the Principles are based on a common understanding of its member countries, they are likely to be incompatible with institutional contexts dominated by informal institutions, such as family-firm governance, corruption and tricks to veil or obscure the transparency and accountability assumed as the basis of the Principles in the leading OECD countries.

This critique can invite two suggestions on how to transform the nature of the Principles. On the one hand, the suggestion could be to have detailed rules enacted as a binding treaty of international law, but that it would then be for companies to decide whether they want to opt into this OECD model of corporate governance, for example, in order to attract international investments. On the other hand, the suggestion could be to transform the Principles into a mere ‘common frame of reference’ that has the aim of facilitating discussion about corporate governance across borders.

We think that the second option is the more realistic one. It is in line with the general trend for more flexible forms of ‘networked governance’. Specifically, for the OECD Principles, this option also finds support in the notion that those Principles are a ‘living document’ and that regional roundtables are seen as crucial to assess their usefulness in the local context. Thus, we conclude that, contrary to the implementation of the Principles in Mexico, law makers should not transform the Principles into rules of codified company law, but respect their nature as global soft law or even just treat them as a mere ‘common frame of reference’ in the on-going debate about corporate governance reform.

More broadly, our article draws attention to the systemic complexity which cannot be addressed by principles of corporate governance only. The effectiveness of conventional policy tools such as legislation, regulation and soft laws to achieve widespread behavioural change, depends on the systemic integration of the overall policy instruments and on developing an understanding of how better to engage stakeholders in cooperative behavioural change. Therefore, we agree that tackling such ‘wicked problems’ necessitates a better understanding of behavioural change by policy makers.

Mathias Siems is Professor of Commercial Law at Durham University and Oscar Alvarez-Macotela is an independent researcher and board treasurer at the Interdisciplinary Institute on Human Ecology and Sustainability (‘INTERHES’).