PROPOSED revisions to the Organisation for Economic Co-operation and Development’s (OECD’s) principles of corporate governance need to be sharpened for local context to have an impact in Asia, panellists said on Monday (Oct 10) at the launch of the 2022 Corporate Governance (CG) Conference organised by the Securities Investors Association (Singapore), or Sias.

“I think we all recognise that, by their very nature, the (OECD principles) are global principles, and they’ve got a wide number of situations to which they’ve got to apply – that, by their very nature, is kind of an averaging process,” said Jan Du Plessis, chair of the Financial Reporting Council (FRC) in the United Kingdom.

“Can we think of encouraging, through the OECD principles, the adoption of much more specific, much more demanding CG codes, on a country-by-country basis, in a manner that is appropriate to that country? And that is not to downplay the importance of the principles. It’s just to recognise that, in order to have global application, they need to be genuine.”

The proposed revisions to the Group of 20/OECD Principles of CG were announced in November 2021, and take into account growing concern about environmental, social and governance (ESG) issues. They are open for public comment until Oct 21.

First issued in 1999, the principles are a policy tool intended to lay the foundation for a sound CG framework that would give investors, executives, corporate directors and stakeholders the tools and incentives needed to ensure companies can access the capital they need.

To ensure that they remain fit for purpose – with challenges such as climate change, the Covid-19 pandemic and geopolitical conflicts – proposed changes to the principles reflect 10 priority issues, including the management of climate change and other ESG risks, the growth of digital technologies, and corporate ownership and increased concentration.

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Professor of accounting Mak Yuen Teen of the National University of Singapore Business School, who was a panellist in the discussion, observed that the principles were timely for Asia when they were first issued; but their need to remain global and generally non-prescriptive has limited their use to being more of a reference or tool for identifying pertinent issues.

“They are more aspirational than a single set of standards to converge to, unlike what financial reporting or sustainability reporting standards aim to achieve.”

He added that, while he agreed with the priority areas, he felt they could further widen the gaps in adherence among countries amid differing views on which areas should be priority areas for reform. One such area is that of executive remuneration, where rules and practices in many Asian countries remain “woefully inadequate” in protecting minority shareholders from abuse by controlling shareholders. Prof Mak specified Principle 1, relating to the effectiveness, transparency and consistency in regulation and enforcement; and Principle 2, relating to shareholder rights and investor protection, as core principles that are lacking in many jurisdictions.

“I think many countries, including Singapore, are not in compliance with key aspects of certain core principles... We should not lose sight of the fact that some of the foundational elements of good CG remain lacking in many countries and some may even have regressed,” he said.

A separate panel discussed the meaning and purpose impelling ESG investing that may be missed by investors.

ESG investing is not about chasing the returns, but about using the capital to compel companies to make better choices, said Tay Woon Teck, managing director of professional services firm RSM Singapore’s Business Consulting division. He noted that companies with laudable ESG initiatives and programmes may not necessarily be the ones with high stock-market returns.

In the debate about whether investors should exclude non-green companies or engage them, Tay advocated engagement.

Citing corporate finance and valuation professor Aswath Damodaran from New York University, Tay said: “The idea here is not about chasing after returns. The idea here is for the investor to invest in companies with high (greenhouse gas) emissions and to force them to change their practices... It’s about engaging the board and getting them to make those necessary changes.”

It was a point that Amar Gill, managing director and head of APAC Investment Stewardship at BlackRock, said he strongly agreed with.

“We are engaging with companies, we’re not divesting from companies,” he said of the American multinational investment company’s approach. “And we believe that the journey to green is through various shades of brown. And so, we are trying to engage with the companies to see how they get to lighter shades of brown and, eventually, green in the longer term.

“If you want to determine how good the suspension of a car is or how good its braking system is – and you measure that by how fast the car can go, you’re measuring it the wrong way. Similarly, if you’re determining what is good governance or good ESG by how well the companies’ stocks do, then you’re measuring it the wrong way.”

Both panellists agreed that the consideration of ESG issues in evaluating a company’s well-being is no longer optional, but necessary.

Gill said, “For long-term value creation, you need to take sustainability seriously. You need to take environmental and social issues seriously. You need to be measuring those criteria, and you need baseline reporting, to get management on track. And to make sure that management is delivering on sustainability.”