The corporate governance framework should provide incentives for companies and their investors to make decisions and manage their risks, in a way that contributes to the sustainability and resilience of the corporation.
Companies play a central role in our economies by creating jobs, contributing to innovation, generating wealth, and providing essential goods and services. Countries have made commitments to transition to a sustainable, net-zero/low-carbon economy in line with the Paris Agreement and the Sustainable Development Goals, which will require companies to respond to rapidly changing regulatory and business circumstances taking into account any applicable policies and transition paths followed by different jurisdictions. In addition, many companies and investors are setting voluntary goals or otherwise taking steps to anticipate a future transition towards sustainable development. A sound corporate governance framework would allow investors and companies to consider and manage the potential risks and opportunities associated with such transition pathways, which in turn may contribute to the sustainability and resilience of the economy.
In addition, investors are increasingly considering disclosures about how companies assess, identify and manage material climate change and other sustainability risks and opportunities, including for human capital management. In response, many jurisdictions require or plan to require disclosures about companies’ exposure to and management of sustainability matters. A core feature of these disclosures is to provide investors with a better understanding of the governance and management structures and processes for managing climate and other sustainability risks and identifying related opportunities. The corporate governance framework should support both the sound management of these risks and the consistent, comparable and reliable disclosure of material information in order to support investors’ financial, investment and voting decisions. The combination of sound governance and clear disclosures will promote fair markets and the efficient allocation of capital, while supporting companies’ long-term growth and resilience.
Several jurisdictions have oriented their capital market policies to foster a more sustainable and resilient corporate sector. In doing so, such policies should aim to also preserve access to capital markets by preventing prohibitively high costs of listing a company while still ensuring that investors have access to the information necessary to allocate capital efficiently to companies. Investors, directors and key executives must also be open to a constructive dialogue on the best strategy to support the company’s sustainability and resilience. A company that takes account of stakeholder interests may be better able to attract productive workforce, support from the communities in which it operates, and more loyal customers.
In jurisdictions that allow for or require the consideration of stakeholders’ interests, companies should still consider the financial interests of their shareholders. A profitable company provides jobs for its workforce and creates value for investors, many of whom are part of the general public and have invested their retirement savings.
Corporate directors are not expected to be responsible for resolving major environmental and societal challenges stemming from their duties alone. To guide corporate activities, sectoral policies that make companies internalise environmental and social externalities as well as corporate governance frameworks that set predictable boundaries within which directors have to exercise their fiduciary duties should be considered by policy makers. These policies could relate to, for instance, environmental regulation, or directly investing in or incentivising research and development of technologies that may contribute to addressing major environmental challenges.
VI.A. Sustainability-related disclosure should be consistent, comparable and reliable, and include retrospective and forward-looking material information that a reasonable investor would consider important in making an investment or voting decision.
To ensure the efficiency of capital markets, investors must be able to compare different companies’ past performance and future prospects and then decide how to allocate their capital and engage with companies. With the emergence and greater awareness of environmental and social risks, investors have been demanding better disclosure from companies on governance, strategy, risk management (e.g. overall results of risk assessments for different climate change scenarios) and sustainability-related metrics (for example related to greenhouse gas emissions and biodiversity) that are material for investors when assessing a company’s business perspectives and risks.
While stakeholders may not typically be the primary users of corporate sustainability-related disclosure, disclosures may benefit such stakeholders. For instance, disclosure on collective bargaining coverage and mechanisms for workforce representation may be both material for an investor’s assessment of a company’s value and relevant to its workforce and other stakeholders.
At the same time, sustainability-related disclosure frameworks need to be flexible in relation to the existing capacities of companies and relevant institutions. Limiting mandatory sustainability-related disclosure to publicly traded companies might result in a disincentive for companies to go public. With these challenges in mind, policy makers may need to devise sustainability-related disclosure requirements that are flexible with respect to the size of the company and its stage of development.
Companies and their service providers, as well as regulators themselves, may face a learning curve in their understanding of sustainability matters and might need time to develop adequate processes and good practices. This may justify prioritising disclosure requirements of some of the most relevant sustainability matters, phasing in other requirements such as for independent, external assurance, or establishing some recommendations in “comply or explain” corporate governance codes.
VI.A.1. Sustainability-related information could be considered material if it can reasonably be expected to influence an investor’s assessment of a company’s value, investment or voting decisions.
Without prejudice to voluntary initiatives or specific environmental regulations that may contain additional disclosure requirements, corporate disclosure frameworks require at a minimum information on what is material to investors’ assessment of a company’s value, investment or voting decisions. This assessment typically includes the value, timing and certainty of a company’s future cash flows over the short, medium and long-term.
Material sustainability-related information could include environmental and social matters that can reasonably be expected to affect a company’s asset value and its ability to generate revenues and long-term growth. However, a company’s own impact on society and the environment could also be considered material if it is expected to affect the company’s value, such as environmental liabilities under a jurisdiction’s existing laws or regulations, or greenhouse gas (GHG) emissions that may be capped or taxed in the future. Likewise, human rights and human capital policies, such as training programmes, retention policies, employee share ownership plans, and diversity strategies, can communicate important information on the competitive strengths of companies to market participants.
The determination of which information is material may vary over time, and according to the local context, company-specific circumstances, and jurisdictional requirements. The assessment of material information may also consider sustainability matters that are critical to a company’s workforce and other key stakeholders. For example, sustainability risks that may not seem to be financially material in the short-term but that are relevant to society may become financially material for a company in the long-term. In addition, some jurisdictions also consider what is material to investors to include companies’ influence on non- diversifiable risks. For example, an investor may consider that the value created by a profit maximising major carbon emitting company in their portfolio would be offset by losses in the value of other investee companies affected by climate change. In this context, some jurisdictions may also require or recommend disclosing sustainability matters critical to a company’s key stakeholders or a company’s influence on non-diversifiable risks.
VI.A.2. Sustainability-related disclosure frameworks should be consistent with high quality, understandable, enforceable and internationally recognised standards that facilitate the comparability of sustainability-related disclosure across companies and markets.
The efficiency of capital markets is enhanced if investors are able to compare sustainability-related disclosure by companies, including those listed in different jurisdictions, helping investors decide how best to allocate their capital and engage with companies. Consistency and interoperability between regional or national sustainability-related disclosure frameworks and internationally recognised standards can still allow for flexibility of complementary local requirements, including on matters where specific geographical characteristics or jurisdictional requirements may influence materiality.
VI.A.3 Disclosure of sustainability matters, financial reporting and other corporate information should be connected.
Corporate disclosure frameworks, including financial reporting standards and regulatory filing requirements (e.g. public offering prospectuses), should have the same goal of providing information that a reasonable investor would consider important in making an investment and voting decision. It follows that information understood as material in a sustainability-related report should also be considered and assessed in the preparation and presentation of the financial statements. The same level of rigour applied to the measurement and reporting of financial information should be applied to the measurement and reporting of sustainability-related information. Ensuring such connectivity between different corporate disclosures implies the consideration of material sustainability matters in financial estimates and assumptions in the financial statements, as well as in the disclosure of risks that have had or are likely to have a material impact on a company’s business.
VI.A.4. If a company publicly sets a sustainability-related goal or target, the disclosure framework should provide that reliable metrics are regularly disclosed in an easily accessible form to allow investors to assess the credibility and progress towards meeting the announced goal or target.
Sustainability-related goals, such as GHG emissions reduction targets or goals established under climate transition plans, can affect an investor’s assessment of the value, timing and certainty of a company’s future cash flows. These goals may also help a company to attract funding from investors to whom the relevant sustainability matters are important. Both from a market efficiency and an investor protection perspective, if a company publicly sets a sustainability-related goal or target, the disclosure framework should require sufficient disclosure of consistent, comparable and reliable metrics. This would allow investors to assess the credibility of the announced goal and management’s progress towards meeting it. The disclosure may include, for instance, the definition of interim targets when a long-term goal is announced, annual consistent disclosure of relevant sustainability metrics, and possible corrective actions the company intends to take to address underperformance against a target.
VI.A.5. Phasing in of requirements should be considered for annual assurance attestations by an independent, competent and qualified attestation service provider in accordance with high quality internationally recognised assurance standards in order to provide an external and objective assessment of a company’s sustainability-related disclosure.
Sustainability-related disclosures reviewed by an independent, competent and qualified attestation service provider may enhance investors’ confidence in the information disclosed and the possibility to compare sustainability-related information between companies. Wherever high quality assurance for all disclosed sustainability-related information might not be possible or is too costly, mandatory assessment for the most relevant sustainability-related metrics or disclosures, such as GHG emissions, may be considered. However, greater convergence of the level of assurance between financial statements and sustainability-related disclosures should be the long-term goal.
VI.B. Corporate governance frameworks should allow for dialogue between a company, its shareholders and stakeholders to exchange views on sustainability matters as relevant for the company’s business strategy and its assessment of what matters ought to be considered material.
General shareholder meetings provide an important forum for a structured decision-making process. Dialogue between companies, shareholders, the workforce and other stakeholders may also play an essential role in informing management’s decision-making process and in building trust in a long-term business strategy. While such dialogue may be useful for a range of issues, this is notably important for decisions to improve a company’s sustainability and resilience, which may represent short-term cash outflows while generating long-term benefits. Such dialogue may also prove helpful for the company to assess which sustainability matters are material and, therefore, should be disclosed. When in dialogue with shareholders, the company should comply with the principle of equitable treatment of shareholders.
VI.B.1. When corporate governance frameworks allow for existing companies to adopt corporate forms that incorporate both for-profit and public benefit objectives, such frameworks should provide for due consideration of dissenting shareholder rights.
A number of jurisdictions have frameworks for the establishment of public benefit corporations or other specific corporate forms that enable companies to incorporate both for-profit and public benefit objectives, that allow them to pursue explicit objectives related to environmental and social matters. In such cases where an existing for-profit company adopts public benefit objectives, it is important to have mechanisms in place that provide for the due consideration of dissenting shareholder rights. Possible solutions to protect the interests of dissenting shareholders could include requiring the consent of minority shareholders or a supermajority shareholders’ approval for a company to add public benefit goals to its articles of association, or providing the right for dissenting shareholders to sell their shares back to the company at a fair price.
VI.C. The corporate governance framework should ensure that boards adequately consider material sustainability risks and opportunities when fulfilling their key functions in reviewing, monitoring and guiding governance practices, disclosure, strategy, risk management and internal control systems, including with respect to climate-related physical and transition risks.
When fulfilling their key functions, boards are increasingly ensuring that material sustainability matters are also considered. Notably, the board has a role in ensuring that effective governance and internal controls are in place to improve the reliability and credibility of sustainability-related disclosure. For instance, boards may assess if and how sustainability matters affect companies’ risk profiles. Such assessments may also relate to key executive remuneration and nomination (e.g. whether targets integrated into executives’ compensation plans would be quantifiable, linked to financially material risks and incentivise a long-term view) or how sustainability is approached by the board and its committees. OECD due diligence standards on responsible business conduct can provide an important framework for embedding sustainability factors in risk management systems and processes.
VI.C.1. Boards should ensure that companies’ lobbying activities are coherent with their sustainability-related goals and targets.
Boards should effectively oversee the lobbying activities management conducts and finances on behalf of the company, in order to ensure that management gives due regard to the long-term strategy for sustainability adopted by the board. For instance, lobbying against any carbon pricing policy may be expected to increase a company’s short-term profits but not be in line with the company’s goal to make an orderly transition to a low carbon economy. In some jurisdictions, boards also have a role in overseeing the disclosure of political donations, including related to lobbying activities.
VI.C.2. Boards should assess whether the company’s capital structure is compatible with its strategic goals and its associated risk appetite to ensure it is resilient to different scenarios.
The management and board members are best placed to decide if the capital structure of a company is compatible with the strategic goals and its associated risk appetite, within existing restrictions established by shareholders. In order to ensure the company’s financial soundness, the board should monitor the capital structure and capital sufficiency with due consideration to different scenarios, including those with low probability but high impact.
VI.D. The corporate governance framework should consider the rights, roles and interests of stakeholders and encourage active co-operation between companies, shareholders and stakeholders in creating value, quality jobs, and sustainable and resilient companies.
Corporate governance aims to encourage the various stakeholders in the company to undertake economically optimal levels of investment in company-specific human and physical capital. For workers, the company they work for is not only their source of income but also where they spend a large part of their lives and the company’s long-term sustainability is important to them. The competitiveness and ultimate success of a corporation is the result of teamwork that embodies contributions from a range of different resource providers including investors, the workforce, creditors, customers, affected communities, suppliers and other stakeholders. Corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable businesses. It may, therefore, be in the long-term interest of corporations to foster value-creating co-operation among stakeholders.
VI.D.1. The rights of stakeholders that are established by law or through mutual agreements are to be respected.
The rights of stakeholders are to a large extent established by law (e.g. labour, business, commercial, environmental, and insolvency laws) or by contractual relations that companies must respect. In some jurisdictions, it is mandatory for companies to carry out human rights and environmental due diligence. Nevertheless, even in areas where stakeholder interests are not legislated or established by contract, many companies make additional commitments to stakeholders, given that concern over corporate reputation and corporate performance often requires the recognition of broader interests. This may in some jurisdictions be achieved by companies using the OECD Guidelines for Multinational Enterprises and associated due diligence standards for risk-based due diligence to identify, prevent and mitigate actual and potential adverse impacts of their business, and account for how these impacts are addressed.
VI.D.2. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights at a reasonable cost and without excessive delay.
The legal framework and process should be transparent and not impede the ability of stakeholders to communicate and to obtain redress for the violation of rights at a reasonable cost and without excessive delay.
VI.D.3. Mechanisms for employee participation should be permitted to develop.
The degree to which employees participate in corporate governance depends on national laws and practices, and may vary from company to company as well. In the context of corporate governance, mechanisms for participation may benefit companies directly as well as indirectly through the readiness by employees to invest in firm specific skills. Examples of mechanisms for employee participation include employee representation on boards and governance processes such as works councils that consider employee viewpoints in certain key decisions. International conventions and national norms also recognise the rights of employees to information, consultation and negotiation. With respect to performance enhancing mechanisms, employee stock ownership plans or other profit sharing mechanisms can be found in many jurisdictions. Pension commitments are also often an element of the relationship between the company and its past and present employees. Where such commitments involve establishing an independent fund, its trustees should be independent of the company’s management and manage the fund in the interest of all beneficiaries.
VI.D.4. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.
Where laws and practice of corporate governance frameworks provide for participation by stakeholders, it is important that stakeholders have access to information necessary to fulfil their responsibilities.
VI.D.5. Stakeholders, including individual workers and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and/or to the competent public authorities, and their rights should not be compromised for doing this.
Unethical and illegal practices by corporate officers may not only violate the rights of stakeholders but also be detrimental to the company in terms of reputational effects. It is therefore important for companies to establish a confidential whistleblowing policy with procedures and safe-harbours for complaints by workers, either personally or through their representative bodies, and others outside the company, concerning illegal and unethical behaviour. The board should be encouraged to protect these individuals and representative bodies and to give them confidential direct access to someone independent on the board, often a member of an audit or an ethics committee. Some companies have established an ombudsman to deal with complaints. Relevant authorities have also established confidential phone and e-mail facilities to receive complaints. While in certain jurisdictions representative workforce bodies undertake the tasks of conveying concerns to the company, individual workers should not be precluded from, or be less protected, when acting alone. In the absence of timely remedial action or in the face of reasonable risk of negative action to a complaint regarding contravention of the law, workers are encouraged to report their bona fide complaint to the competent authorities. Many jurisdictions also provide for the possibility to bring cases of alleged violations of the OECD Guidelines for Multinational Enterprises to the relevant National Contact Point. The company should refrain from discriminatory or disciplinary actions against such workers or bodies.
VI.D.6. The exercise of the rights of bondholders of publicly traded companies should be facilitated.
The extended and substantial rise in the use of bond financing by publicly traded companies and their subsidiaries warrants greater attention to the role and rights of bondholders in corporate governance, as well as its importance for the resilience of companies.
In bond issuances offered to a large number of investors, an independent bond trustee is typically assigned to represent them, review instances of covenant default and protect the interests of bondholders during debt restructuring. While the exact scope of a trustee’s activities is generally contractually defined, policy makers may enact regulation regarding the eligibility of a trustee and its duties prior to and during a default.
The exercise of bondholder rights can also be facilitated by incentivising institutional investors to monitor and engage with companies. Institutional investors have different business models and liability structures, and therefore face distinct incentives to be more or less active as bondholders. Corporate governance frameworks can, however, spur investors to be more active as creditors, such as recommending in a stewardship code that signatories can actively exercise their rights with respect to corporate bonds. Further, market initiatives may be useful to set standards and incentivise the use of enforceable and clearly defined covenants. The use of adjustable financial metrics that leave issuers the discretion to define whether they comply with covenants may need to be avoided.
Out-of-court debt restructuring, such as a distressed debt exchange, is often more cost-effective than formal bankruptcy proceedings and its use may, therefore, be facilitated. In addition to adhering to internationally recognised benchmarks for creditor rights and insolvency frameworks, countries could benefit from facilitating bondholders’ participation in publicly traded companies’ out-of-court debt restructuring. For instance, clear guidance on how insider trading rules may apply during a debt restructuring or a covenant waiver negotiation could provide more comfort for bondholders to take part in such processes. Another possibility would be to make the identification of bondholders easier so that corporate debtors can quickly find them to start a debt restructuring negotiation. However, this is subject to jurisdictional legislation, such as the resolution and restructuring regime applicable to banks and credit institutions in several jurisdictions.
VI.D.7. The corporate governance framework should be complemented by an effective and efficient insolvency framework and by effective enforcement of creditor rights.
Creditors are key stakeholders and the terms, volume and type of credit extended to companies will depend importantly on their rights and on their enforceability. Companies with a good corporate governance record are generally able to borrow larger sums on more favourable terms than those with poor records or which operate in less transparent markets. The framework for corporate insolvency varies widely across countries. In some countries, when companies are nearing insolvency, the legislative framework imposes a duty on directors to act in the interests of creditors, who might therefore play a prominent role in the governance of the company.
Creditor rights also vary, ranging from secured bondholders to unsecured creditors. Insolvency procedures usually require efficient mechanisms for reconciling the interests of different classes of creditors. In many jurisdictions provision is made for special rights such as through “debtor in possession” financing which provides incentives/protection for new funds made available to the company in bankruptcy.