Revisions to the G20/OECD Principles of Corporate Governance—Sustainability in Name Only
The G20/OECD Corporate Governance Principles are currently undergoing a much needed reform. Last revised in 2015, the OECD Corporate Governance Committee has been working since Fall 2021 to ‘update the Principles, in light of recent evolutions in capital markets and corporate governance policies and practice’.
There have been numerous developments in corporate governance since the Principles were last revised in 2015. Yet, no development has garnered as much attention as the move to better consider stakeholder interests and relatedly, investors’ increasing interest in sustainability matters. Examples of this movement are apparent in the Business Roundtable’s revised commitment to stakeholders, not just shareholders; the Davos Manifesto, introduced at the World Economic Forum, which declared the corporate purpose as involving the engagement of all ‘stakeholders in shared and sustained value creation’, and the Financial Times proclaiming the need for capitalism to be ‘reset’; to name just a few examples. This ethos has pushed its way, among others, into corporate governance codes, stewardship codes, human capital management disclosure requirements; and EU regulation or proposals on sustainable finance and corporate sustainability. It is not surprising that even today, stakeholder issues and sustainability concerns remain arguably the most discussed topics in corporate governance, whether in Asia, Europe, or elsewhere.
Given these developments, the inclusion of a new Sustainability chapter in the revisions to the G20/OECD Corporate Governance Principles (‘the Principles’) is not entirely unexpected. The Principles are, after all, directed at policy makers and are designed to help them ‘evaluate and improve the legal, regulatory, and institutional framework for corporate governance’. Today, an improvement to corporate governance practices must necessarily include some consideration of sustainability issues so its inclusion in the revisions is prudent.
However, what is surprising is the short shrift the Principles often proffer to sustainability issues. Indeed, it is as if the Principles are merely box-ticking the inclusion of sustainability issues in these revisions or engaging with sustainability in name only.
For example, the Principles make several references to the importance of boards considering stakeholder interests but often with a caveat. One provision reads, ‘where consistent with jurisdictional requirements, boards may take into account the interests of stakeholders’. Another reads that because it may be in the long-term interests of a corporation to consider stakeholder interests, and if the ‘jurisdiction’s legal and regulatory framework’ allow, boards should consider the rights and roles of stakeholders.
While the OECD needs to represent a myriad of governments, in today’s economic, political, and social environment, there is broadscale global recognition that corporations should no longer be only beholden exclusively to shareholder interests. The Principles contain a provision that enables governments to adopt practices from the Principles in accordance with their idiosyncratic legal and regulatory framework. Thus, there is no need to preface the consideration of stakeholder interests with a caveat that government adoption of stakeholder concerns should be conditioned by their own legal and regulatory framework.
In fact, by adding this caveat, the Principles seem to suggest that corporate law or corporate governance practices prohibit directors from considering stakeholder interests. They also seem to suggest that this would be a worthwhile practice. While it is true that in many countries there is still a default assumption that the sole purpose of the corporation is to further the financial interests of shareholders, the law usually does not support such an assumption. Instead, corporate law tends to be either ambiguous or neutral on this issue.
Corporate law in several jurisdictions, for example in the UK, the US, and Canada, does not prohibit directors from considering stakeholder interests. On the contrary, in an increasing number of jurisdictions boards are expressly allowed, or even required, to take into account stakeholder interests. In many jurisdictions, as the Principles recognize, the business judgment rule further provides a degree of discretion within which directors are already able to consider stakeholder interests. The reality is that this discretion is often not used, which suggests that it may be worth considering to what extent measures that insulate corporate decision-making from core issues of stakeholder accountability still have merit. However, the Principles do not touch upon this issue or the related issue of adding more ‘teeth’ to enforcement of corporate fiduciary duties vis-à-vis non-shareholder third parties.
From our understanding, the Principles represent a best practices guide for global corporate governance that can inform individual governmental policy, including reform measures. Consequently, they should be more than a restatement of existing principles. Rather, the OECD should strive for the highest possible standard for corporate governance, without being unduly restricted or influenced by existing legislation or policies in specific jurisdictions. Governments unwilling to follow such a standard are free to adjust them down in their individual policies, but the benchmark set by the OECD should be high. A high benchmark also enables governments who wish to increase their corporate governance practices a path for doing so.
Indeed, if the Principles are to represent a high benchmark for corporate governance practices, the references to stakeholder interests in the Principles should not be accompanied by a caveat. Rather, the Principles should include stakeholder interests as part of the standard list of considerations board of directors should include in their decision-making. Modern corporate governance and corporate decision-making is about balancing interests of shareholders and stakeholders, with an emphasis especially on sustainability. The Principles have a chance to take on a pioneering role in this regard, if the next draft include guidance and language to this effect.
The Principles’ reluctance to engage with sustainability issues is also reflected in some of the statements in the Sustainability chapter itself. For instance, the chapter’s introduction notes that ‘directors cannot be expected to be responsible for resolving major environmental and societal challenges stemming from their duties alone’. As with the caveated references to stakeholder interests, this statement (and others like it) seem to suggest that the Principles have a complicated relationship with issues of sustainability.
In truth, most stakeholders do not expect corporate directors to ‘solve’ major environmental and social challenges. This is a role for government. However, corporate directors should be expected to be responsible for solving (by eliminating or minimizing) major environmental and social impacts of their corporations. Ideally, corporate governance and external law and regulations should work in tandem. Instead of stating what directors cannot be expected to do, it is unclear why the Principles do not emphasize the positive steps and contributions that one can and should expect from corporations and their leadership.
In the end, it appears as if the OECD Committee is struggling with wholeheartedly embracing stakeholder and sustainability issues in the Principles. Yet stakeholder and sustainability issues have become too important to corporate governance to be treated superficially. The Committee should use the next set of reforms to the Principles to vociferously commit to engaging with stakeholder and sustainability issues, rather than reluctantly engage with them. Only then can the Principles become more than sustainability in name only.
Barnali Choudhury is a Professor of Law and the Director of the Jack & Mae Nathanson Centre on Transnational Human Rights, Crime and Security of York University.
Martin Petrin is the inaugural Dancap Private Equity Chair in Corporate Governance at Western University.
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