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OECD to revise corporate governance guidance for SOEs

Author: ICAEW Insights

Published: 18 Dec 2023

Proposed revisions to corporate governance of government-owned businesses mark a welcome step up in sustainability, economic security and resilience, ICAEW says.

A growing focus on environmental, social and governance (ESG) principles and climate change, the need to learn lessons from other sectors, and the importance of high ethical standards are among the Organisation of Economic Co-operation and Development (OECD) recommendations to beef up corporate governance across state-owned enterprises (SOEs).

First issued in 2005, the OECD’s Guidelines on Corporate Governance of SOEs set out to offer advice to their 38 ‘advanced economy’ member countries on more effectively managing their responsibilities as company owners, as well as helping to make SOEs more competitive, efficient and transparent. Many other countries also adopt OECD guidelines as a basis for their own rules.

The guidelines were last updated in 2015 and the OECD’s latest review through 2023 reflects almost a decade of experience and evolving best practices. Draft revisions to the guidelines were published for public consultation in September. The review is expected to be completed with revised guidelines published in 2024.

Sustainability, economic security and resilience 

This update to the guidelines is timely given the increased global focus on climate change and ESG. Just like private sector businesses, it is right that SOEs also report on ESG metrics and climate goals. At the same time, audit committees should have oversight of all material reporting, both financial and non-financial. Therefore, we agree with new language around the board’s responsibility to ensure the effectiveness of the SOE’s risk management, internal controls and internal audits, given that these mechanisms are crucial to any company’s long-term health – whether state-owned or not. 

Chapter VII (State-owned enterprises and sustainability) of the guidelines rightly integrates the new Chapter VI of the G20/OECD Principles of Corporate Governance on ‘Sustainability and Reporting’. We are in favour of a top-down approach to sustainability reporting, especially in light of the two new ISSB standards that are likely to apply to most SOEs in some form. 

Acknowledgement of the increasing similarities between public and private sectors

Rules and regulations for SOEs should not be more stringent than those in place for the private sector, given that private and state enterprises are increasingly mirroring each other in their operations. 

At present, the UK has no public sector corporate governance code, although there is a governance template that public sector organisations can refer to and proposed best-value duty guidance for local authorities that focuses on corporate governance

However, thanks to the Council of Europe’s Centre of Expertise for Good Governance, there is an argument to say that state-owned enterprises are sometimes better governed than corporates. Chapter V of the draft OECD guidelines, previously titled ‘Disclosure and Transparency’, has now been amended to ‘Disclosure, transparency and accountability’. This increased emphasis on the need for accountability at the heart of governance structures is welcomed.

Boards need to ensure they have the right depth and breadth of expertise needed to run the company effectively. However, ‘over-boarding’ can be more of an issue in the public sector as the same people are often reappointed to multiple public sector boards. From that perspective, greater board diversity is to be encouraged as captured in Chapter V of the revised draft guidelines. Again, this is an area where we hope the UK corporate governance landscape will follow suit. 

Ethics and compliance must be front and centre 

To boost economic security and resilience, company directors – both individually and collectively – must always apply high ethical standards and set the right tone from the top. Accountability is key. The foundations for an ethical company culture can include a code of conduct and/or supporting statements in the annual report and setting remuneration policies that encourage the right behaviour and do not inadvertently encourage unethical behaviour. 

Staff must also feel able to raise concerns without fear of reprisal and there should be consequences for breaches of codes of conduct at all levels of an organisation. To this end, we agree with the OECD’s proposals for SOEs to set up ethics and compliance programmes.

In our response to the FRC’s consultation on the UK Corporate Governance Code, we stressed our desire to see companies implementing ethics and compliance programmes. Bearing in mind that companies will approach risk management systems from different angles, such programmes would address the need for internal audit and risk management functions to provide oversight of internal control frameworks and assurance of both financial and non-financial reporting.

Transparency, diversity and equity are the areas most strengthened in the revisions made to the OECD principles. The practical approach provides detail around areas including remote and other participation in shareholder meetings. The high-level and flexible standards set out by the OECD are needed because different countries have different approaches to governance. However, we would have liked to have seen more detail included on whistleblowing mechanisms and potential sanctions. 

The UK government recently scrapped its proposals to introduce similar measures in the UK Corporate Governance Code; more than half of the FRC’s original proposals, including those relating to the role of audit committees on ESG, and modifications to existing code provisions around diversity, over-boarding and committee chairs engaging with shareholders, will not be taken forward. This is disappointing and we hope the government will address these important issues elsewhere, perhaps in the Code’s accompanying guidance due to be published early 2024.

We also agree with the new language around the opportunities and risks of greater use of digital technologies in the supervision and implementation of corporate governance regulatory requirements and practices. We hope to see UK corporate governance policy move in a similar direction. ICAEW is actively working in this space to help the UK address the opportunities and risks presented by emerging tech and artificial intelligence.

ICAEW believes the comprehensiveness and clarity of the updated guidelines will effectively achieve the aim of helping to ensure that SOEs contribute to sustainability and economic security and resilience.

Audit committees have a central role to play in ensuring good governance of enterprises and stating this expressly is a positive step forward. The guidance rightly encapsulates that a strong ethics and compliance culture that complies with laws and regulations from the top is necessary for all other governance functions in an enterprise to work. 

The OECD’s revised guidelines are raising the bar on corporate governance and we hope that corporate governance in the UK keeps up. Given that the substantial reforms to the UK Corporate Governance Code were dropped bar the changes to internal controls and risk management, more needs to be done if the UK is to maintain its status as a world leader in corporate governance best practice.

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