By Mak Yuen Teen
Yesterday (10 October 2022), I participated in the panel discussion on the review of the G20/OECD Principles of Corporate Governance at the SIAS Corporate Governance Conference. I was told beforehand that I would have five minutes to give my views after the two main speakers have delivered their speeches, before the Q&A. The following are the comments I prepared (slightly edited), which formed the thrust of what I said at the conference.
Comments on the review of the G20/OECD Principles of Corporate Governance
When the OECD Principles of Corporate Governance were first issued in 1999, it was very timely for this part of the world. We had just been through the East-Asian financial crisis in mid-1997 and weaknesses in corporate governance were identified as a key contributing factor. At that time, no country in this region had issued a code of corporate governance.
I was privileged to be invited to the discussion of the formulation of the first edition of the principles in Paris, although I was only a passive observer as I was relatively inexperienced in the subject of corporate governance at that time (my joke was that in the land of the blind, the one-eyed is the king, and I was one of the less ignorant ones about corporate governance then). In 1999, I was invited to speak at the first OECD Asian CG roundtable in Seoul about corporate governance and disclosures in Singapore – that was prior to the issuance of Singapore’s first Code of Corporate Governance. I subsequently suggested to some key stakeholders here that Singapore should be engaged in the discussions of developments in corporate governance at the international and regional level. I was pleased that Singapore hosted the third Asian roundtable in 2001 when our first code was released, and again in 2007, during which my report on improving the implementation of corporate governance practices in Singapore, commissioned by MAS and SGX, was launched.
The OECD Principles (renamed as the G20/OECD Principles of Corporate Governance in 2015) were used as the main benchmark for developing the ASEAN CG scorecard which was launched in early 2011, an initiative of the regional capital market regulators, which I was involved in for the initial development and assessment of companies. The Singapore Governance and Transparency Index, a CG ranking of listed companies here, has in recent years been revised to achieve closer alignment with the principles.
While the OECD Principles are the only global set of corporate governance principles and have been widely endorsed by member and non-OECD member countries, and remain useful for countries that are developing or reviewing their corporate governance framework, the fact that they aim to be global and are generally non-prescriptive also means that they provide more of a reference or tool for identifying pertinent issues and possible measures to address them. They are more aspirational than a single set of standards to converge to, unlike what financial reporting or sustainability reporting standards aim to achieve. As the preamble to the principles itself acknowledges, individual countries need to consider issues most relevant to their context when formulating or revising local rules and guidelines.
Certain principles or aspects of the principles may be seen to be less relevant to individual countries, a consequence of them being a set of global principles and having to accommodate a wide range of legal regimes and institutional environments, and because of different stages of development of capital markets in different countries. Some may become more relevant over time.
Take the case of the pillar on the “Role of stakeholders in corporate governance”. Back in 1999 and even when the Principles were last revised in 2015, this pillar may not have been seen as particularly relevant to countries that were following the shareholder model. However, today, the importance of stakeholders other than shareholders is more relevant than ever, even to countries that followed the shareholder model, with the increasing emphasis on ESG factors. However, this pillar as it stands focuses more on the interests of employees and creditors. In this regard, I agree with the proposal in the consultation to replace it with a pillar focusing on the broader theme of “Sustainability and resilience’. It is also timely to incorporate sustainability considerations into the other pillars as the proposed revision seeks to do.
I also agree with the ten priority areas identified for review. However, they are likely to further widen the gaps in adherence among countries as certain countries may not see some of these as priority areas for reform – even if such a view is misplaced. For example, the area of corporate ownership and increased concentration highlights important issues relating to the governance of company groups, but outside of the financial sector, corporate governance rules and guidelines in most countries continue to focus on corporate governance of the listed parent entity. Most listed companies are company groups, with listed and/or unlisted subsidiaries, joint ventures, associates, special purpose entities, etc., and there are significant governance risks residing in these entities that may be subject to little effective oversight by the parent entity board.
Another area is executive remuneration, where rules and practices in many Asian countries remain woefully inadequate in protecting minority shareholders from abuse by controlling shareholders.
I will conclude my initial comments with two observations/suggestions. I think many countries, including Singapore, are not in compliance with key aspects of certain core principles: for example, principle 1 relating to effectiveness, transparency and consistency in regulation and enforcement; principle 2 in terms of shareholder rights and investor protection; and principle 3 in terms of institutional investors’ role and accountability of intermediaries. Therefore, while it is appropriate to revise the principles to ensure their relevance in light of the significant developments since they were last revised, we should not lose sight of the fact that some of the foundational elements of good corporate governance remain lacking in many countries and some may even have regressed.
Second, it took 5 years for OECD to make its first revision to the principles, 11 years for the second revision, and it would be 8 years by the time this latest revision is released. Perhaps the OECD could consider more frequent revisions in specific areas of the principles, rather than a major revision after such a long period, so that the principles remain timely and relevant.
