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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 test our economic and financial systems. By applying significant stress, they show us both what parts of these systems work as intended and, perhaps more importantly, what parts do not.
That makes post-crisis evaluation an extraordinarily useful policy tool, highlighting areas in need of improvement. The success with which policymaking responds to a crisis determines the success of our future systems.
Three years ago, the global economy was subjected to such a test in the form of the Covid-19 pandemic. It highlighted an important fact: access to capital markets allows companies to overcome periods of significant stress.
In response to the pandemic and consequent acute sudden financing needs, companies around the world raised record amounts of funds on both equity and bond markets. This was a remarkable show of capital market resilience, and a timely reminder of the importance of maintaining their global functioning.
Good corporate governance is a pre-requisite for doing so. If we needed any reminder, the banking turmoil this year served as one. A strong corporate governance framework underpins a fundamental element of capital markets: investor trust. Mindful of this, major economies agreed to revise the G20/OECD principles of corporate governance. The two-year project was finalised this month as G20 leaders endorsed the update of the principles at a summit in New Delhi.
Between 2005 and 2022, more than 8,000 companies delisted from European exchanges, another 6,000 from US exchanges and around 1,500 from Japanese exchanges. The number of new listings has not been enough to offset that decline in many markets. That has left a smaller pool of companies with access to crucial long-term capital and crisis resilience.
This raises a serious concern that today’s capital markets are suited primarily to larger companies and not attracting enough smaller firms. More demanding disclosure and reporting requirements are only part of the explanation. Even on the investor side, there is a bias towards larger listed companies. The average share of institutional ownership in large companies is significantly higher than their ownership in smaller companies in all major markets. In the OECD area, on average 41 per cent of all shares in large listed companies were held by institutional investors in 2022 while for smaller listed companies it was only 13 per cent.
Stagnant capital markets are also a concern as they have a key role to play in the climate transition. Less resource-intensive and more sustainable growth will require enormous investment in nascent technologies, and governments cannot do this alone. In addition, as investors are increasingly focusing on the climate transition, they need reliable and comparable disclosure, best facilitated by public markets, to allocate resources adequately.
The agreement embodied in the G20/OECD updated principles of corporate governance represents the consensus among the world’s largest advanced and emerging economies on the issue of corporate sustainability, including that climate risks can be material for a company’s performance.
They recommend companies should disclose metrics when they set sustainability targets, and they should do so in line with internationally recognised standards. Having an agreement like this is crucial as sustainability-related disclosure begins to pick up pace. Companies representing 84 per cent of global market capitalisation (but only 19 per cent of the number of listed companies) now disclose some sustainability-related information.
The roles and rights of different market participants on sustainability also need to be clearer. For example, we need more transparency on the methodologies and potential conflicts of interest of ratings on environmental, social, and governance issues and index providers.
Having a single global standard will help ensure a common understanding in all areas of corporate governance, which will facilitate the global flow of capital through better regulatory coherence.
At the same time, we should ensure that national regulations remain flexible enough to meet the needs of companies of different sizes and models and operating in varied circumstances. Flexibility and proportionality that allow for lighter regulatory burdens, where appropriate, can support greater market access for smaller companies and increase efficiency.
The challenges facing our economies today are global in nature. That calls for globally co-ordinated solutions. With the revised principles of corporate governance, the OECD and G20 have put forward one piece of the puzzle.