As the fourth review of the OECD/G20 Principles of Corporate Governance gets underway, OECD’s Daniel Blume and Serdar Çelik take a look at what is in store for corporate governance frameworks, drawing on the findings in The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis, and the 2021 edition of the OECD Corporate Governance Factbook.
First issued 22 years ago and updated twice since then, the G20/OECD Principles of Corporate Governance are widely recognised as the leading global standard for guiding policy makers and regulators in devising effective institutional, legal and regulatory frameworks for the corporate governance of listed companies. Endorsed by all OECD and G20 member countries and the Financial Stability Board, 50 jurisdictions worldwide now adhere to this instrument. Because national corporate governance frameworks are constantly changing to respond to new realities, so too are the G20/OECD Principles. This is why the OECD, led by its Corporate Governance Committee and in close collaboration with the G20, is now embarking on a fourth review of the Principles.
Recent OECD research on implementation of the G20/OECD Principles that encompasses emerging developments, including the early impact of the COVID-19 pandemic, and longer-term trends, provides insights into some of the adaptations that will be required.
The report also highlights why national corporate governance frameworks need to make further adaptations to ensure that capital markets continue to serve their intended purpose of allocating substantial financial resources to support long-term investments underpinning economic growth and innovation.
The COVID-19 pandemic has exacerbated existing structural weaknesses in the corporate sector and capital markets. Without a robust policy response, the number of undercapitalised and underperforming firms will likely rise and remain high, while an increasing amount of productive resources will be tied up in non-viable companies, dragging down investment and economic growth. This means substantial financial resources will be needed for investment, and strengthening corporate governance policies and frameworks will help both existing and new companies access the capital they need.
While stock markets have provided record amounts of capital money to established companies, they have failed to support new companies. Since 2005, more than 30,000 companies have delisted from stock markets globally, equivalent to 75% of all listed companies today. These delistings have not been matched by new listings, leading to a sharp net loss of publicly listed companies. Many thousand fewer companies now use public equity markets, and a large portion of the money raised in 2020 went to fewer and larger companies.
Bond markets continued to be a significant source of capital for non-financial companies following the outbreak of the crisis. In 2020, non‑financial companies issued a historical record of USD 2.9 trillion of corporate bond debt. The volume of outstanding corporate bond debt reached an all-time high in real terms of almost USD 15 trillion at the end of 2020.
The declining quality of the outstanding stock is another concern. Between 2018 and 2020, the portion of BBB rated bonds—the lowest investment grade rating—accounted for 52% of all investment grade issuance. Between 2000 and 2007, that share was just 39%. Globally, debt has also accumulated, mainly in firms with lower debt servicing capacity.
Strong corporate governance frameworks will be essential for capital markets to function effectively in supporting a resilient recovery and longer-term growth. With the COVID-19 crisis preventing many companies from meeting some legal and regulatory requirements, governments around the world have taken steps to adjust these requirements. Although some of these measures are considered temporary, they may also have a lasting impact on how companies are governed, their capital structure, their ownership structure and how they manage their relationship with their shareholders and stakeholders. This gives new impetus to the discussions on a number of long-term developments that may call for corporate governance policies and regulations to be adapted to the post-COVID era.
To tackle these challenges, the report highlights four priorities for policy makers:
- Adapt the corporate governance framework to address some of the weaknesses revealed by the pandemic. Experiences from the pandemic call for improvements in the frameworks for risk and crisis management as well as related issues such as audit quality, stock price manipulation and insider trading. Countries should also benefit from their experiences in order to advance or clarify the regulatory frameworks for remote participation in shareholder meetings. Recent practices by some companies related to altering the terms for executive remuneration following the crisis also call for renewed scrutiny of the conditions and procedures for deciding and overseeing performance-related pay. Importantly, ownership concentration at the company level in global stock markets has increased significantly. Institutional investors have increased their assets under management considerably over the last 15 years. This trend, coupled with the decreasing number of listed companies in many advanced equity markets, has led to the allocation of growing amounts of money to a diminishing number of companies. The resulting re-concentration of ownership in the hands of large institutional investors can be seen in the United States, for example, where the three largest institutional investors now hold a combined average of 23.5% of the equity in listed companies. The concentration of ownership in some other markets reflects the importance of company group structures. For example, private corporations and holding companies in several Asian economies hold more than 30% of the total equity capital in publicly listed companies. The increase in ownership concentration can also be attributed to the presence of public sector ownership. Globally, the public sector, including central governments and sovereign wealth funds, owns USD 10.7 trillion of listed equity, which amounts to 10% of global market capitalisation.
- Improve the management of environmental, social and governance (ESG) risks. Investor attention to ESG risks and their disclosure has been accelerated by the COVID-19 pandemic. Policy makers and regulators need to ensure that investors have access to consistent, comparable, and reliable material information when managing their savings and assets. This would also help the corporate sector to meet increased expectations when it comes to recognising and appropriately balancing the interests of all stakeholders and their contribution to the long-term success of corporations.
- Facilitate access to equity markets for sound businesses. A number of structural weaknesses in the stock market ecosystem currently impair such access. First, the shift from retail direct investments to large institutional investors has created a bias towards large listed companies as the average share of institutional ownership in large listed companies is significantly higher than their ownership in smaller companies. Second, the structure of investment banking activity is an important factor behind high listing costs where high underwriting fees and stock price discounts have discouraged companies from going public. The systematic acquisition of smaller growth companies—especially by large technology companies—may be contributing to the drying up the IPO pipeline of smaller independent companies that could potentially increase competition and challenge the status quo. Addressing such weaknesses will help strengthen the balance sheets of viable corporations and the emergence of new business models that are essential for a sustainable recovery and long-term resilience.
- Ensure insolvency frameworks support recovery and resilience. Crisis response policies have been holding back bankruptcies which otherwise would have happened, and these will re-emerge as business support is wound down. Keeping in mind the accumulation of low-quality debt in our economies, fit-for-purpose insolvency regimes that are coherent across jurisdictions will be essential.
The legal and institutional frameworks across OECD, G20 and FSB member jurisdictions
The 2021 edition of the OECD Corporate Governance Factbook serves as a second, important foundation for the review, highlighting the different ways in which the Principles are implemented across all OECD, G20 and FSB member jurisdictions. It also provides policy makers and regulators with an easily accessible and up-to-date, factual underpinning to compare their own frameworks with those of other countries, or to obtain information about policies and practices in specific jurisdictions. Published at two-year intervals, the 2021 edition features 63 figures and 42 tables comparing 50 jurisdictions, and is divided into four parts:
Global trends – Covering stock markets and the corporate ownership landscape, this section provides context for the following sections on legal and regulatory provisions.
Corporate governance and institutional frameworks – Jurisdictions have been active in reviewing and amending their frameworks since the 2015 update of the G20/OECD Principles, with 90% amending either their company law or securities law, or both. Nearly all jurisdictions have established comply or explain corporate governance codes, while a growing percentage of jurisdictions (62%) now issue national reports on how companies are implementing and reporting on such codes.
In addition to covering requirements related to the notice, disclosure and voting for shareholder meetings, the Factbook also provides detailed coverage of frameworks for the review and disclosure of related party transactions, takeover provisions, and requirements for institutional investors to address and disclose how they deal with conflicts of interest, as well as various measures related to investor engagement and voting. A new review of similar provisions related to proxy advisors shows that while such regulations are increasing, they remain far less common than they are for institutional investors.
Boards of directors – This section finds that risk management has been one of the most dynamic fields for market regulation in recent years, with provisions for companies to assign a risk management role to board level committees growing from 62% of jurisdictions in 2015 to 90% by the end of 2020. Provisions for internal control and risk management systems have grown even more sharply since 2015, from 62% to 96%. Another area where there has been a substantial increase in regulation is with respect to requirements or recommendations for disclosure of board and executive remuneration at least at aggregate level, with 88% of jurisdictions also requiring or recommending such disclosure for individual remuneration.
A new section on the oversight of audit finds that all jurisdictions require an external auditor to be appointed to perform an audit of the financial statements of listed companies, while 98% of jurisdictions require or recommend the audit committee to play a role in the selection and appointment or removal process of the auditor. Nearly all jurisdictions also require the rotation of the audit firm or individual auditors after a given period.
Gender diversity on boards – The Factbook reviews trends with respect to the gender composition of boards and senior management. Three-fifths of jurisdictions have established requirements to disclose gender composition of boards, up from 49% as of the end of 2018, while only 28% of jurisdictions require such disclosure with respect to management. About a quarter of jurisdictions have adopted mandatory quotas for listed companies requiring a certain percentage of board seats to be filled by women. A slightly higher and growing share (30%) have established more flexible mechanisms such as voluntary goals or targets, and 8% have introduced a combination of both.
These reports provide the OECD Corporate Governance Committee, OECD and G20 governments and other stakeholders with a solid base of evidence to draw upon as they embark on the task of adapting the G20/OECD Principles of Corporate Governance to these changing realities.