All signs point to a corporate governance deficit

5 mins read

Crises, those unforgiving litmus tests of economic and financial systems, have a unique ability to unveil the hidden strengths and fragilities lurking within. These crucibles of adversity, more than mere trials, serve as invaluable instruments of introspection for policymakers and financial experts alike, affording a rare glimpse into the operational efficiency and resilience of our global financial infrastructure.

In the wake of the seismic upheaval brought about by the Covid-19 pandemic three years ago, the world witnessed an unprecedented stress test of the global economy. This tumultuous period underscored a fundamental truth: access to capital markets is a lifeline that enables companies to weather storms of profound magnitude.

Responding to the pandemic’s acute and unforeseen financing exigencies, companies worldwide demonstrated remarkable resilience by raising record-breaking sums from both equity and bond markets. This feat illuminated the robustness of capital markets and, more importantly, underscored the imperative of safeguarding their uninterrupted functionality.

The bedrock of such resilience lies in sound corporate governance—a prerequisite that the recent banking turmoil firmly reiterated. A robust corporate governance framework forms the very bedrock upon which capital markets rest, nurturing and sustaining investor trust. In light of this, the world’s major economies embarked on a transformative journey to revise the G20/OECD principles of corporate governance. Culminating in the endorsement of these updated principles by G20 leaders at a summit in New Delhi, this two-year project holds the promise of fortifying the global financial ecosystem.

However, beneath these optimistic developments lies a disconcerting reality: the shrinking pool of companies with access to long-term capital and crisis resilience. Between 2005 and 2022, over 8,000 companies delisted from European exchanges, with similar trends observed in US and Japanese markets. The number of new listings has failed to offset this decline, raising concerns that today’s capital markets predominantly favour larger corporations, with smaller firms struggling to gain a foothold.

Stringent disclosure and reporting requirements account for only part of this predicament. A pronounced bias towards larger listed companies prevails among investors, with institutional ownership in large enterprises significantly outpacing that in smaller counterparts across major markets. In 2022, the OECD area saw institutional investors holding an average of 41 percent of all shares in large listed companies, compared to a mere 13 percent in smaller firms.

Compounding this issue is the stagnation plaguing capital markets—an impediment to their pivotal role in facilitating the global transition to a more sustainable and resource-efficient future. Massive investments in emerging technologies necessitate the active participation of the private sector, and public markets offer a reliable platform for investors to allocate resources effectively, especially in response to growing climate concerns.

The G20/OECD updated principles of corporate governance signal a global consensus among advanced and emerging economies on corporate sustainability. Notably, they emphasise the imperative for companies to disclose sustainability metrics in alignment with internationally recognised standards as they set their sustainability goals. In an era where sustainability-related disclosures gain momentum, this consensus is pivotal.

Furthermore, clarifying the roles and rights of market participants in the realm of sustainability is imperative. Greater transparency is needed regarding methodologies and potential conflicts of interest related to environmental, social, and governance (ESG) ratings and index providers.

The adoption of a unified global standard promises to enhance regulatory coherence, fostering a shared comprehension of corporate governance that paves the way for the efficient flow of capital across the globe.

Nonetheless, amidst this pursuit of harmonisation, it is essential to retain regulatory flexibility to accommodate companies of varying sizes and operating models across diverse circumstances. Balancing uniformity with proportionality is key to facilitating market access for smaller companies while enhancing overall market efficiency.

In confronting the multifaceted challenges of our global economy, the call for coordinated solutions resonates louder than ever. The revised principles of corporate governance, jointly championed by the OECD and G20, represent a significant piece of this intricate puzzle—offering hope for a more resilient and sustainable financial future.