Draft corporate governance principles under review by a high-level European body have come under fire for struggling to “wholeheartedly” embrace stakeholder and sustainability issues.
The OECD (Organisation for Economic Co-operation and Development) launched a review of its baseline corporate governance code in September, seven years after the code was last given an overhaul.
The review is intended to allow the code to be adapted so it remains “fit for purpose”, according to Carmine Di Noia, the OECD’s director for financial affairs, incorporating issues such as climate change, the Covid-19 pandemic and current geopolitical conflicts.
However, some are not so impressed. Two senior academics say the draft principles fall short of properly reflecting the now widely recognised importance of stakeholders and sustainability.
Barnali Choudhury and Martin Petrin write that references in the OECD principles seem to suggest stakeholder and sustainability interests should be considered only where it is “consistent with jurisdictional requirements”.
Stakeholders as standard
The two professors say this is unnecessary and that it appears to imply that corporate law and corporate governance “prohibit” directors from considering stakeholder interests. They argue that while, in many countries, the default assumption is that the sole purpose of the corporation is the satisfaction of shareholder, “the law usually does not support such an assumption”.
They add that “if the principles are to represent a high benchmark for corporate governance practices, the references to stakeholder interest 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 boards of directors should include in their decision making.”
Elsewhere, Norges Bank Investment Management (NBIM), Norway’s giant sovereign wealth fund, also indicated the OECD had not gone far enough on sustainability issues. It wants wording on managing risks to go beyond climate “to reflect that companies must address all material sustainability risks and opportunities, not just climate change”.
Human capital
Carine Smith Ihenacho, NBIM’s chief governance and compliance officer, says the principles could mention human capital management.
“It is a material topic, increasingly important for value creation and profitability. We expect companies to have a strategy signed off by the board for how they are going to invest in their employees to secure growth, innovation, as well as good and safe workplaces.”
NBIM also sees biodiversity and ecosystems as significant sustainability risks.
The International Federation of Accountants (IFAC) finds some common cause with Ihenacho. The IFAC calls on the OECD to expand the objective of corporate governance to “sustainable economic, environmental and social performance”.
It says: “The OECD is well positioned and has a unique opportunity to emphasise this expanded performance objective in the revised principles.”
IFAC also calls for “explicit reference to the pivotal role” of audit committees in the principles.
The comments may sting OECD officers, given that one of the review’s aims is to “offer clear guidance with respect to the management and disclosure of climate and other ESG risks”. The OECD’s corporate governance committee is now considering all consultation responses. Its member states—all 38 of them—await the outcome.