Decision Quality According to the OECD

Ivan Jureta Corporate Governance, Decision Governance
  • The OECD corporate governance framework defines decision quality through four criteria which are transparency, accountability, fairness, and responsibility, each shaping how information and authority are used in corporate decisions.
  • While there are various other possible qualify criteria to consider, the ones from OECD can be considered a baseline when the aim of establishing decision governance is to improve procedural decision quality.

The OECD corporate governance framework specifies criteria that define when decisions can be considered acceptable in firms that operate with delegated authority, dispersed ownership, and formal monitoring structures. These criteria shape how information is produced and used, how authority is allocated, how stakeholder claims are evaluated, and how organizations demonstrate that decision processes follow established rules. They apply in any context where decisions allocate resources, create obligations, or influence the distribution of risks.

The OECD identifies the following criteria for decision quality.

  • Transparency. Decision makers disclose information that explains the purpose of the decision, the evidence used, the methods applied, and the expected effects. Transparency reduces information asymmetry and enables internal and external monitoring. Research shows that disclosure supports credible communication with shareholders, creditors, employees, and regulators, and that it influences market discipline and the cost of capital.
  • Accountability. Decision rights are linked to explicit authority structures. This defines who initiates, approves, and reviews decisions and clarifies the obligations connected to those rights. Research on agency relationships shows that accountability reduces the probability that decision makers act contrary to mandated interests because their actions can be observed and sanctioned. It also supports coordination by defining ownership of tasks.
  • Fairness. Decisions apply criteria consistently to all stakeholders with legitimate claims. Fairness requires equal access to information, uniform evaluation of alternatives, and avoidance of selective disclosure. Research on investor protection shows that fairness reduces the probability of conduct that transfers value from minority to controlling shareholders.
  • Responsibility. Decisions take into account broader economic and social effects. This includes assessment of long term consequences, compliance with relevant standards, and identification of externalities. Research shows that investors incorporate indicators of environmental and social risk management into their evaluations because these indicators reflect the firm’s capacity to manage uncertainty and regulatory exposure.

A well documented example illustrates the consequences of violating these criteria. The collapse of Wirecard AG in 2020 followed years of inaccurate financial reporting and failures in internal and external monitoring. Investigations by German authorities and the European Securities and Markets Authority showed that the firm had not provided transparent information about revenues, cash positions, and third party partners. This constituted a violation of the transparency criterion because decision makers inside and outside the firm operated with incomplete or misleading information. Weak internal controls and limited board oversight indicated a failure to meet accountability requirements because responsibilities for verification and risk assessment were unclear or not exercised. Differential access to information between insiders and the market raised concerns about fairness because investors could not assess the credibility of disclosures. The consequences extended to responsibility failures because decisions about strategic expansion and capital issuance did not reflect realistic assessments of operational risks.

This example shows how violations of decision quality criteria can propagate across governance processes and lead to loss of stakeholder trust, regulatory intervention, and destruction of firm value. It illustrates the role of these criteria as foundations for decision governance systems that structure analysis, documentation, oversight, and review.

Another View: Can Outcomes Be Bad If Governance Is Good?

A decision may satisfy the OECD criteria even when its outcomes are negative. The OECD framework evaluates the quality of the decision process, not the quality of the outcome. In settings with uncertainty, incomplete information, and interdependence, a decision can follow transparent procedures, respect formal authority, apply criteria uniformly, and take broader impacts into account, yet still lead to outcomes that are economically or operationally undesirable. This distinction is central in research on governance and risk because it separates procedural quality from outcome variance.

One documented type of situation involves firms whose decision processes met established governance criteria but whose outcomes were negative because external conditions shifted in ways that could not reasonably be foreseen. Several major airlines, including Southwest Airlines, Lufthansa, and Air France KLM, used structured risk management processes to hedge future fuel costs. These processes met the OECD criteria.

  • Transparency was satisfied because airlines disclosed hedging strategies, contract structures, and risk assumptions in financial reports and investor briefings.
  • Accountability was satisfied because hedging decisions followed defined mandates that linked authority to treasury and risk management functions with board oversight.
  • Fairness was satisfied because information about hedging positions was released through regulated disclosure channels that were accessible to all shareholders.
  • Responsibility was satisfied because hedging was intended to stabilise cost structures and limit exposure to volatile energy markets, which aligned with regulatory expectations for risk management in transport and energy intensive sectors.

Despite these conditions, outcomes were negative for firms with significant hedge positions when oil prices fell sharply during the 2008 financial crisis. Many airlines incurred substantial mark to market losses on hedging contracts. Research in corporate risk management documents that these losses did not reflect failures in information disclosure, authority structures, or procedural fairness. They reflected an external shock that moved fuel prices far outside historical ranges. Governance procedures did not fail. The outcome was poor because market conditions changed in ways that no reasonable decision process could have anticipated.

References

  • Healy, P., and Palepu, K. Information Asymmetry, Corporate Disclosure, and the Capital Markets. Journal of Accounting and Economics. 2001.
  • Shleifer, A., and Vishny, R. A Survey of Corporate Governance. Journal of Finance. 1997.
  • Aguilera, R., Rupp, D., Williams, C., and Ganapathi, J. Putting the S Back in Corporate Social Responsibility. Academy of Management Review. 2008.
  • European Securities and Markets Authority. Assessment of the Events Surrounding the Collapse of Wirecard AG. ESMA Report. 2020.