Recently the G20 and the OECD published a revised version of the Principles of Corporate Governance. Although strictly speaking not legally binding, the Principles are an important international reference point for legislators and regulators worldwide on issues such as shareholder rights, board remuneration, transparency, institutional investors' responsibilities and the functioning of the capital markets.
The Principles were originally developed by the OECD in 1999 and updated in 2004. The 2015 revision, a joint effort of the OECD and the G20, was endorsed at the G20 summit in Ankara on 5 September after having been adopted in July by the OECD.
Underlining the Principles' importance, the G20/OECD point out that they have been adopted by the Financial Stability Board (FSB) as one of the "key standards for sound financial systems" and are used by the World Bank in more than 60 country reviews worldwide. In addition, they form the basis for the (recently revised) corporate governance guidelines for banks issued by the Basel Committee on Banking Supervision (BIS).
The current revision stems from recommendations made with regard to earlier versions but is also a response to recent corporate governance challenges. These include, in particular, the increased complexity of the investment chain, the changing role of stock markets and the arrival of new investors, investment strategies and business practices (see below) and are addressed mainly in the new Principle III on "Institutional investors, stock markets, and other intermediaries". In fact the revision process, whose formal kick-off was in 2013, actually began in 2008 with thematic research into various corporate governance challenges resulting from the financial crisis.
The revised Principles are structured slightly differently from the earlier versions. In the current structure each of the six chapters consists of a main principle, supporting sub-principles and annotations. Previously, the Principles were divided into two parts, one containing the principles and sub-principles and the other the annotations.
Below we will discuss the most important substantive changes in the revised Principles, chapter-by-chapter.
I. Ensuring the basis for an effective corporate governance framework
This chapter explains the role of a jurisdiction's corporate governance framework in promoting fair and transparent markets and the efficient allocation of resources. It is noteworthy that, compared to the prior version, references to the concept of an "efficient market" have been scrapped, except with regard to the market for corporate control. As mentioned above, an important theme is the role that stock markets can play in enhancing corporate governance. In that light, the G20/OECD underline the importance of the quality of listing rules and criteria as an element of the corporate governance framework. The importance of independent supervision is also addressed, especially because stock markets are increasingly being operated by companies that are themselves listed. The issue of the symbiosis between markets and corporate governance also comes up elsewhere in the Principles: "Effective corporate governance means that shareholders should be able to monitor and assess their corporate investments by comparing market-related information with the company's information about its prospects and performance." (Principle III.G)
II. The rights and equitable treatment of shareholders and key ownership functions
The second chapter focuses on shareholder rights and the equitable treatment of shareholders, but also addresses disclosure requirements in relation to capital structures and control arrangements (subjects that were previously addressed in separate chapters). An important addition is the inclusion of extensive and stricter rules on related-party transactions. Whereas transparency was sufficient under the earlier versions, the current recommendations require that jurisdictions not only adopt "broad and precise" definitions of such transactions but also mandate that the transactions be approved by the board (in a two tier-model, the supervisory board) or shareholders. It is described as good practice for a "contaminated" director to refrain from participating in any decision regarding the transaction (a rule already in effect in the Netherlands) and, if the board decides to proceed with the transaction, for it to state the reasons justifying that decision. Another important addition relates to say-on-pay: shareholder approval should be required for equity-based remuneration schemes for board members and key executives (this relates to the general policy and individual grants) and for material changes to such schemes. Not surprisingly, there is currently less resistance to such rules than was the case 11 years ago.
III. Institutional investors, stock markets and other intermediaries
In this new chapter, more attention is given than before to the longstanding problem of the complex, inefficient chain of intermediaries between a company and its ultimate investors. In essence, information is not effectively passed on through this chain and consequently the ultimate investors have too little influence on the way in which voting rights are exercised. Strikingly, the solution-oriented changes made in the revised Principles are very limited. Proxy advisers, analysts, brokers and rating agencies are now required to disclose and minimise conflicts of interest, whereas the 2004 Principles demanded only an effective approach that promotes transparency.
IV. The role of stakeholders in corporate governance
The changes to this chapter have been the least far-reaching. A change that is likely to raise eyebrows in traditionally stakeholder-oriented countries like the Netherlands is the deletion of the sentence "the interests of the corporation are served by recognising the interests of stakeholders". It is questionable whether the deletion was intended to bring about a substantive change, given that the following sentence has been retained: "The governance framework should recognise the interests of stakeholders and their contribution to the long-term success of the corporation." Furthermore, Principle VI.C of the Dutch Corporate Governance Code expressly states that the board should take into account the interests of stakeholders.
V. Disclosure and transparency
Largely unchanged from prior versions, this chapter requires disclosure and transparency in the areas of financial and operating results, corporate strategy, major share ownership, remuneration, related-party transactions and risk factors (among others). It is noteworthy that the G20/OECD refer in passing to the trend towards more transparency on information about corporate social responsibility and other non-financial information, but make no attempt to further address this issue in the Principles.
VI. The responsibilities of the board
The last chapter primarily focuses on a classic corporate governance theme: the responsibilities of the board (in a two-tier model, the supervisory board). Here too, the main body of the Principles has remained the same but numerous interesting adjustments have been made, partly in response to international developments. For example, the G20/OECD warn that more and more jurisdictions are demanding increased board oversight of financing and tax planning by management in order to discourage aggressive tax avoidance. Other areas in which the recommendations in this chapter have been updated are: risk management, remuneration (the establishment of a remuneration committee with a majority of independent members and the introduction of malus and claw-back rules are good practice); the responsibility of the nomination committee and the use of board/supervisory board committees in general; the functioning of the board/supervisory board; and, where applicable, employee representation.
It goes without saying that the revised Principles will have an impact in the Netherlands (as it will elsewhere). The Dutch Corporate Governance Monitoring Committee has had the revision on its radar and will certainly look to the Principles for guidance when it revises the Dutch Corporate Governance Code, a project set to launch this year with a public consultation on the committee's proposals. However, the revised Principles can be expected to provide limited guidance because of their high-level approach.