The Organisation for Economic Co-operation and Development (OECD) has recently released updated corporate governance principles at the G20 Finance Ministers September 2015 meeting in Ankara.
The Principles were originally developed by the OECD in 1999 and last updated in 2004. The current review has been carried out under the auspices of the OECD Corporate Governance Committee with all G20 countries invited to participate in the review on an equal footing with the OECD Member countries. Experts from key international institutions, notably the Basel Committee, the FSB, and the World Bank Group have also participated actively in the review.
These principles have been applied in the past as the international reference point and tool for implementation:
- They have been adopted as one of the Financial Stability Board’s (FSB) Key Standards for Sound Financial Systems serving FSB, G20 and OECD members.
- They have also been used by the World Bank Group in more than 60 country reviews worldwide.
- And they serve as the basis for the Guidelines on corporate governance of banks issued by the Basel Committee on Banking Supervision, the OECD Guidelines on Insurer and Pension Fund Governance and as a reference for reform in individual countries.
The principles are symptomatic of the global convergence in corporate governance, and as such, should be seen as a reference point for all large ASX listed companies. And, while Australian corporate and institutional governance is considered to be of a reasonably high standard, it is worthwhile to understand the minimum international standards expected and encompassed in these guidelines given that foreigners own about 50% of Australian equities.
While probably overdue, the updated guidelines include a new chapter on institutional investors, stock markets and other intermediaries. This new chapter addresses the need for sound economic incentives throughout the investment chain, with a particular focus on institutional investors acting in a fiduciary capacity. It also highlights the need to disclose and minimise conflicts of interest that may compromise the integrity of proxy advisors, analysts, brokers, rating agencies and others that provide analysis and advice that is relevant to investors. It seems that issues associated with conflicts of interest in the provision of financial advice have not just been limited to Australia. Of interest to Australian entities with securities also listed on the TSX, LSE, NZX and other exchanges, the chapter contains new principles with respect to cross border listings and the importance of fair and effective price discovery in stock markets.
With the growing proportion of Australian equities held via ETFs and index funds, there are warnings for these business models and investment strategies if they do not include resources on active shareholder engagement. Mandatory requirements to engage, for example through voting, may be ineffective and lead to a box-ticking approach. The principles want disclosures to truthfully reflect institutional practices.
Proxy advisers and others also come under scrutiny. The investment chain from ultimate owners to corporations includes a wide variety of professions that offer advice and services to intermediary owners. Proxy advisors who offer recommendations to institutional investors on how to vote and how to sell services that help in the process of voting are among the most relevant from a direct corporate governance perspective. In some cases, proxy advisors also offer corporate governance related consulting services to corporations. Other service providers rate companies according to various corporate governance criteria. Analysts, brokers and rating agencies, perform similar roles and face the same potential conflicts of interest.
Some would say that it is in the area of institutional investors, stock markets, and other intermediaries that Australia has room to improve. It is unfortunate that CAMAC was abolished before it could adequately consider and report on many of the issues identified in this chapter (see HERE).
The G20/OECD Principles of Corporate Governance report can be found HERE.© Guerdon Associates 2022 Back to all articles