Con Keating shares his thoughts on the OECD’s consultation on revisions to its principles of corporate governance.
The principles have a strange objective: The corporate governance framework should promote transparent, and efficient and fair markets. (Emphasis added) Corporate governance is certainly not a topic limited to listed and traded companies though its failings may be most evident there.
It is true that: What works well in one company, for one investor or a particular stakeholder may not necessarily be generally applicable to corporations, investors and stakeholders that operate in another context and under different circumstances, but there are many overarching generalities that arise from the nature and substance of the corporation which do apply everywhere.
The consultation continues: … with the objective of maintaining and strengthening its contribution to market integrity and economic performance. We are left in the dark as to which market this might be, and it is certainly not evident that strengthening the contribution to economic performance should be an objective for all companies.
The consultation is correct to note that there may be damaging conflicts of interest in both the private sector and in public institutions. The issue of corporate governance is, in fact, all about the management of conflicts by the board of the company. These are both potential conflicts between the members[1] of the corporation, the different classes of stakeholders within the company, and with external agencies, such as government. Indeed, the governance arrangements within a company and among its stakeholders may have material impacts on external relations. For example, a governance regime that delivers shareholder primacy will require the board to promote their interests above those of both other stakeholders such as employees, and above those of external parties such as the taxation authorities.
The role of the board is to balance these conflicting interests, both internal and external. This suggests that the responsibility and accountability of the board is paramount.
Against this viewpoint, Section A of the paper strays widely: The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets.
By contrast, Section B is correct but extremely limited in its perception. The section states: The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable. This is central in that it establishes the corporation as a legal person and defines and limits the powers of the corporation. It should also be recognised that some of these powers, such as limited liability, are the source of conflict among members. Deficiencies in the definition of the responsibilities of the corporation and its board are the source of much of the current dissatisfaction and distrust expressed by the public. This has found expression in the literature on the social license to operate: in return for the valuable commercial concessions of incorporation and recognition as a distinct legal person, this person, the corporation, has certain responsibilities to the state that granted these rights. This is no more than saying that these legal persons have obligations to the community in that same way that we as individuals have obligations. Indeed, it is little more than the Kantian observation that as the state defines and enforces property rights, it has obligations with respect to the relief of absolute poverty.
It appears that many of the corporate governance interventions of recent years have been concerned with restricting the ability of the board to maintain a balance of its choosing between different classes of member, for example, among different classes of shareholder. Much of this takes the form of prescriptive regulation of how different parties should be treated in specific situations. Some even remove certain actions entirely from the ambit of the board.
When discussing the role of non-shareholder stakeholders the consultation states: The corporate governance framework should recognise the rights of stakeholders established by law, international agreements or through mutual agreements, and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. It continues with The governance framework should recognise that the interests of the corporation are served by recognising the interests of stakeholders and their contribution to the long-term success of the corporation.
But, when it comes to specifics, we see very little; less than two pages in a 37 page consultation. What there is tends to be weak and unhelpful: Mechanisms for employee participation should be permitted (Emphasis added) to develop and later: External auditors should be accountable to the shareholders (Emphasis added) and owe a duty to the company to exercise due professional care in the conduct of the audit.
The consultation ends with an extensive section on the responsibilities of the board but immediately degenerates with The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. (Emphasis added) There is an interesting challenge posed here; just how could you make any board accountable to the company?
Responsibilities are described in one paragraph as: Together with guiding corporate strategy, the board is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation. (Emphasis added). Subsequently this view is reinforced with Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.
The question of accountability is covered in a paragraph: The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests. (In English law, this is highly questionable.) In addition, boards are expected to take due regard of, and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities. Observance of environmental and social standards is relevant in this context. It is notable that here we have only an expectation rather than a responsibility and that there is no mention of board accountability to these non-shareholder groups.
The only further palliative to this doctrine of shareholder primacy comes with The board should apply high ethical standards. It should take into account the interests of stakeholders, and high ethical standards are warranted by: High ethical standards are in the long term interests of the company as a means to make it credible and trustworthy, not only in day-to-day operations but also with respect to longer term commitments.
The remainder of this section on board responsibilities contains the usual cook-book of ingredients associated with shareholder primacy governance cuisine. The shame is that, after several decades of error and trial, we have yet to recognise that this produces the unpalatable mess that we have.
It is difficult to believe that this consultation will advance the corporate governance agenda in any meaningful way.
Con Keating is head of research at BrightonRock Group
[1] The members of a corporation are its stakeholders: shareholders, management, employees, creditors, suppliers and customers.
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