The OECD's updated G20/OECD Principles of Corporate Governance (the "Principles") highlight that core corporate governance principles are well embedded in the Canadian framework and that many of the new governance initiatives outlined in the Principles are already being pursued in Canada.1 The Principles, first published in 1999 and previously revised in 2004, provide a widely accepted international reference point used by policymakers in setting corporate governance standards across the globe.
This post highlights a few of the newly-updated Principles that may be of interest to readers of this blog as a barometer of current corporate governance practices and trends.
As with many non-binding codes, the Principles act as a high-level reference point rather than a detailed guide of how to achieve sound governance. The Principles are divided into 6 chapters:
- Ensuring the basis for an effective governance framework
- The rights and equitable treatment of shareholders and key ownership functions
- Institutional investors, stock markets and other intermediaries
- The role of stakeholders in corporate governance
- Disclosure and transparency
- The responsibilities of the board
Of particular interest are the Principles relating to institutional investors, stock markets and other intermediaries (chapter 3), the role of stakeholders (other than shareholders) in corporate governance (chapter 4) and the responsibilities of the board (chapter 6) – topics which are the subject of current and ongoing debate in Canada.
Institutional Investors, Stock Markets and Other Intermediaries
Although previous editions of the Principles included some discussion regarding the roles of institutional investors, the newly-dedicated chapter recognizes the importance of these institutions and other intermediaries in the corporate governance landscape. The Principles generally encourage institutional investors acting in a fiduciary capacity (such as pension funds and other collective investment schemes) to act with consideration of such obligations and specifically state that such institutional investors should disclose the procedures they follow when deciding how they use their voting rights and how they manage material conflicts of interest which may affect the exercise of their share ownership rights.
The Principles also address the need for proxy advisory firms to be transparent with their methodology as well as any potential conflicts of interest. Proxy advisory firms continue to play a major role in the corporate governance landscape; their ability to influence both professional and private investors only continues to grow. Similar to National Policy 25-201 Guidance for Proxy Advisory Firms published by the Canadian Securities Administrators in April 2015, the Principles promote disclosure which increases the transparency behind the recommendations of advisory firms as well as the functions they play which will assist in the analysis of those recommendations by both boards and investors.
The Role of Stakeholders
The Principles state that, where recognized by law or mutual agreement, a corporate governance framework should recognize the rights of stakeholders. Canadian law provides that the duty of a corporate director is owed to the corporation. The Supreme Court of Canada has interpreted that duty broadly and ruled in BCE Inc. v. 1976 Debentureholders that when making decisions, "directors may look at the interest of shareholders, employees, creditors, consumers, governments and the environment to inform their decisions".2
The role of stakeholders in corporate governance issues is an evolving topic. For example, in some jurisdictions, most notably Delaware, corporate law has been amended to permit special public benefit corporations which operate on a for-profit basis with the goal of producing a "public benefit".3 In other jurisdictions, most notably Germany, employees at large enterprises are given an opportunity to participate in the management of the corporation through the allotment of dedicated board seats for employee representatives.
The Principles are cognizant of such jurisdictional differences, however they encourage mechanisms which allow for employee participation and respect for the rights of creditors. The evolution of the role of stakeholders in OECD countries is a continuing dialogue and it is likely that developments in other jurisdictions will continue to inform Canadian jurisprudence and the business judgment rule.
The Responsibilities of the Board
Aligned with many Canadian board renewal initiatives, the Principles promote the continued evaluation of board members' qualifications as well as the consideration of "measures such as voluntary targets, disclosure requirements, boardroom quotas, and private initiatives that enhance gender diversity on boards and in senior management." The reasons given for these recommendations relate to the avoidance of "groupthink" and ensuring boards have varied points of view.
The OECD's addition of this principle is particularly timely given the recent updates to National Instrument 58-101 Disclosure of Corporate Governance Practices, requiring certain issuers to disclose whether or not policies exist related to director term limits and the representation of women on the board and in senior management positions. The addition of this principle into the guidelines suggests that, on an international level, diversity is not only supported but expected. Canadian companies competing in a global market must continue to assess how diversity can contribute to their business and organizational goals.
The Principles provide a non-binding reference point of governance best practices with an aim of increasing accountability to attract new investment and drive growth. These most recent updates attempt to bring the Principles in line with the contemporary international perspective on governance. Readers should be comforted by the fact that many revisions to the Principles are already common practices in Canada.
However, it is important to remember that sound governance is more than just compliance with a set of written objectives. Companies need to assess appropriate governance targets based on their size, business judgment and market practices. Any decision regarding which corporate governance policies are appropriate for a particular corporation to adopt should reflect a dialogue among the board, shareholders, management and their advisors in order to implement practices best suited to the organization's mission.
1. The Principles were endorsed by the G20 Leaders at their summit in Antalya, Turkey on November 16, 2015.
2. 2008 SCC 69 at para 40.
3. "Public benefit" means a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. General Corporate Law, 1 Del Code Ann tit 8 § 362 (2015).
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