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OECD issues new guidance on corporate governance with focus on institutional voting

International body releases update of 2009’s Principles of Corporate Governance

The Organisation for Economic Cooperation and Development (OECD) has issued new guidance on corporate governance, which for the first time includes input from G20 countries, and specific recommendations for institutional investors that put a strong focus on voting shares.

The Principles of Corporate Governance were originally developed in 1999 and last updated in 2004. This latest version for the first time has G20 countries participating on an equal footing with OECD Member countries.

The OECD Council adopted the Principles in July, and they were endorsed by G20 finance ministers and central bank governors this week. The new G20/OECD Principles of Corporate Governance will be presented to the G20 Leaders Summit in November.

The Principles maintain many of the recommendations from earlier versions, such as basic shareholder rights, including the ability to elect and remove members of the board, an issue that has been raging in the US with a campaign to make it easier for shareholders to nominate directors (‘proxy access’).

But, a chapter focused on institutional investors, stock markets and other intermediaries is a first in a bid to“address the need for sound economic incentives throughout the investment chain, with a particular focus on institutional investors acting in a fiduciary capacity”.

The report says the investment chain is often “long and complex, with numerous intermediaries” influencing the incentives and the ability to engage in corporate governance.

The Principles recommend that institutional investors disclose their policies with respect to corporate governance and voting. While not requiring institutional investors to vote their shares, the guidance calls for disclosure on how ownership rights are exercised. It also says that disclosure of voting records is good practice.

The Principles also say proxy advisors should minimise conflicts of interest that may compromise the integrity of their analysis or advice. It recommends they disclose to investor clients the process and methodology that underpin their recommendations, and the criteria for their voting policies.

The Principles also strengthen guidance on companies’ reporting with regards to ESG, clarifying that material social issues and human rights policies should be disclosed, alongside business ethics and the environment. Link