Why Crises Illuminate the Urgent Need for Enhanced Corporate Governance

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The writer is Japan’s vice-minister of finance for international affairs and chair of the OECD Corporate Governance Committee

Crises put our economic and financial systems to the test. By subjecting them to significant stress, crises reveal what parts work as intended and what parts need improvement. Post-crisis evaluation is an invaluable policy tool that identifies areas in need of enhancement. The way in which policymaking responds to a crisis determines the success of our future systems.

Three years ago, the Covid-19 pandemic presented a formidable test for the global economy. It underscored the importance of access to capital markets in helping companies navigate periods of extreme stress.

In response to the pandemic, companies worldwide raised record amounts of funds through equity and bond markets. This demonstrated the resilience of capital markets and served as a timely reminder of the need to maintain their global functioning.

Effective corporate governance is crucial in achieving this. The recent banking turmoil has reminded us of this fact. A robust corporate governance framework is the foundation of investor trust, a fundamental element of capital markets. Recognizing this, major economies have revised the G20/OECD principles of corporate governance. The update, finalized this month, received endorsement from G20 leaders at a summit in New Delhi.

Between 2005 and 2022, over 8,000 companies delisted from European exchanges, 6,000 from US exchanges, and approximately 1,500 from Japanese exchanges. The number of new listings has not been enough to offset this decline in many markets. As a result, there is a limited pool of companies with access to crucial long-term capital and crisis resilience.

This raises concerns about the suitability of today’s capital markets primarily for larger companies, with smaller firms not being adequately attracted. The explanation for this extends beyond more demanding disclosure and reporting requirements. There is also a bias towards larger listed companies on the investor side. Institutional ownership in large companies is significantly higher than in smaller companies across major markets. In the OECD area, institutional investors held an average of 41% of shares in large listed companies in 2022, compared to only 13% for smaller listed companies.

Stagnant capital markets also pose a concern for the climate transition. Achieving less resource-intensive and more sustainable growth requires significant investment in emerging technologies, which cannot be solely done by governments. Additionally, as investors increasingly focus on the climate transition, reliable and comparable disclosure is necessary for proper resource allocation. Public markets are best equipped to facilitate this.

The updated principles of corporate governance agreed upon by the G20/OECD represent a consensus among the world’s largest advanced and emerging economies regarding corporate sustainability. This includes acknowledging the materiality of climate risks to a company’s performance.

The principles recommend that companies disclose metrics when setting sustainability targets, aligning with internationally recognized standards. This agreement is crucial as sustainability-related disclosure gains momentum. Currently, companies representing 84% of global market capitalization (but only 19% of the number of listed companies) disclose some sustainability-related information.

There is also a need for greater clarity regarding the roles and rights of different market participants in sustainability. Transparency is necessary concerning the methodologies and potential conflicts of interest of environmental, social, and governance ratings, as well as index providers.

A single global standard will promote a common understanding of all aspects of corporate governance, facilitating the global flow of capital through regulatory coherence. However, it is important to ensure that national regulations remain flexible enough to accommodate companies of different sizes, models, and operating in diverse circumstances. Flexibility and proportionality in regulations can support smaller companies’ market access and increase efficiency.

The challenges facing our economies today are global in nature, necessitating globally coordinated solutions. With the revised principles of corporate governance, the OECD and G20 have contributed one piece to the puzzle.


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