Minister Franco, Dear colleagues,
I am delighted to be in Rome to launch The Future of Corporate Governance in Capital Markets following the COVID-19 Crisis and the 2021 edition of the OECD Corporate Governance Factbook publications.
Let me begin by thanking the Minister of Economy and Finance, Daniele Franco, for hosting us on the occasion of Italy’s G20 Presidency.
The OECD and Italy have a long-standing history of strong cooperation and partnership in the areas of corporate governance and capital markets.
Good corporate governance is a key pillar of open and market-based economies, a global level playing field, and a rules-based international order. All essential ingredients to optimise the strength and the quality of our economic recovery, with stronger cleaner, fairer growth, prosperity and general well-being.
Indeed, when combined with well-functioning capital markets, good corporate governance is central in supporting the recovery of our economies following the COVID-19 crisis.
The prospects for the global economy continue to improve. While the recovery is uneven, and downside risks remain, we are expecting economic output to grow by 5.8% in 2021, an upward revision of more than one and a half percentage point since our last projection last December.
However, as our report, The Future of Corporate Governance in Capital Markets touches on some of the important risks which remain.
We must ensure that policy frameworks incorporate and adequately anticipate the risks and transformations occurring in the corporate sector and capital markets.
For example, debt has been an important source of financing to help sustain our economies through the pandemic, but it has also continued to accumulate to record levels.
In 2020, a record USD 2.9 trillion in corporate debt was issued globally by non-financial companies. As a result, the volume of outstanding corporate bond debt reached an all-time high of almost USD 15 trillion at the end of 2020.
More worryingly, the quality of this debt has also declined. Between 2018 and 2020, the portion of BBB rated bonds – the lowest investment grade rating – accounted for 52% of all investment grade issuance, compared to just 39% during the period of 2000 to 2007.
Stock markets also provided record amounts of capital to support established companies during 2020, although not to new upstarts. This adds to an increasing trend of funding for fewer but larger companies.
Part of the explanation lies in the lower cost of debt financing and better access to private capital.
Since 2005, more than 30,000 companies have delisted from stock markets globally, notably in the United States and Europe. This is equivalent to losing 75% of all listed companies today. These delistings have not been matched by new listings, leading to a considerable net loss of publicly listed companies.
Unfortunately, not all companies are delisting or not listing because of better alternatives, but rather because of structural challenges in the capital markets ecosystem. These include the bias towards large established companies, high listing costs, and the systematic acquisition of smaller growth companies.
Without a robust policy response, there is a real risk that the already high number of under-capitalised and under-performing firms will increase, while potentially productive resources will increasingly be tied up in non-viable companies, dragging down investment and economic growth.
The global economic recovery from the COVID-19 crisis provides a unique opportunity to address these issues and update some of our policies for capital markets, including through the review of the G20/OECD Principles of Corporate Governance.
A strong corporate governance framework is essential for a well-functioning capital market. It fosters an environment of market confidence and business integrity.
Let me highlight four priorities for development:
First, it is crucial that the corporate governance framework is adapted to address some of the weaknesses revealed by the pandemic, such as the management of health and supply chain risks.
Corporate governance frameworks must also be strengthened to better address issues of audit quality, increased ownership concentration and complex company group structures.
Second, we need to improve the management of environmental, social and governance risks, notably by developing comprehensive frameworks for producing consistent, comparable, and reliable climate-related disclosure.
Third, insolvency frameworks should support recovery and resilience. Crisis response policies have been holding back bankruptcies, which would otherwise have happened, and these will re-emerge as business support is wound down.
We must also keep in mind the accumulation of low quality debt in our economies before the pandemic. It will be crucial to develop fit-for-purpose insolvency regimes that are coherent across jurisdictions.
And fourth, facilitating access to equity markets for sound businesses should be an overarching policy objective. This will help strengthen the balance sheets of viable corporations and the emergence of new business models, which are essential for a sustainable recovery and long-term resilience.
The Corporate Governance Factbook, which we are also launching today, offers systematic and comparable information on how the G20/OECD Principles of Corporate Governance are implemented across all OECD and G20 countries.
The Factbook highlights the latest trends and regulatory approaches to corporate governance based upon experience across 50 jurisdictions. In doing so, it supports informed policy-making to achieve its main purpose of helping governments and regulators to translate the G20/OECD Principles into their own national legal and regulatory frameworks.
I am certain it will serve as a crucial evidenced-based tool to inform the review of the Principles.
Dear Minister, dear colleagues,
Solid corporate governance frameworks and well-functioning capital markets will play a crucial role in supporting the recovery of our economies coming out of the COVID-19 crisis.
They will help make the business sector more dynamic and resilient to possible future shocks, and support its contribution to the net-zero transition.