This document summarizes a presentation on new approaches to economic challenges related to corporate governance. It discusses how stock markets can support economic growth by facilitating access to equity capital for businesses and participation in profits for households. However, there are emerging policy concerns, such as decreased trust in markets, an uneven playing field for household participation, and reduced access to risk capital for growth companies. Institutional investors have also shifted toward indexing and outsourcing voting, which can impact how company performance is monitored. The document argues for policies that help markets better fulfill their functions of allocating capital effectively and engaging shareholders in oversight.

1. New Approaches to Economic Challenges
Friday 10 January 2014
Corporate Governance,
Value Creation and Growth
Corporate Governance Committee
Mats Isaksson
Corporate Affairs Division, OECD

2. Background Reports
• The Bridge Between Finance and Enterprise
• Who Cares ? Corporate Governance in
Today’s Equity Markets
• Institutional Investors as Owners: Who Are
they and What Do They Do
• Making Stock Markets Work to Support
Economic Growth
• Corporate Governance and Emerging
Markets
2

3. Corporate Governance: a multifaceted issue
• Business Level Dimension
• Public Policy Dimension
3

4. The Public Policy Dimension
“…to contribute to economic efficiency,
sustainable growth and financial stability”
(CGC mandate from Council)
4

5. Corporate governance policies shall:
• Facilitate the process of channelling savings into
equity capital and productive investments.
• Provide households with opportunities to hold
equity and participate in the profits and wealth
creation of the private sector.
• Ensure that promising business ventures get
access to equity capital.
• Build trust and confidence in stock markets.
5

6. So…
• What makes equity capital (or stocks) so
different from other types of capital?
• What are the criteria for an efficient stock
market?
6

7. Equity
• The only standardized financial
instrument that can support
entrepreneurial uncertainty.
• It is “eternal” and doesn’t demand a fixed
return (as opposed to bonds and loans).
• A necessary cornerstone for raising
additional capital.
7

8. What we should expect from stock markets
• Serve as venue where growth companies
effectively can access equity capital.
• Produce information from many
independent sources so that capital is
allocated effectively among competing
ends.
• Engage shareholders in the monitoring of
corporate performance.
8

9. OECD countries: IPO numbers and volume
Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock
exchanges’ and companies’ websites.
•
•
•
•
Downward since 1990’s. Both in numbers and volume.
“Recovery” before the financial crisis.
Average annual Volume 1993-2000: USD 134.3 bn
Average annual Volume 2001-2012: USD 69.8 bn
9

10. Number of listed companies
Source: World Bank World Development Indicators
• Some of the largest OECD stock markets have lost half of
their publicly listed companies in the last 10 years.
10

11. • But the amount of capital and investment
is not the whole story.
• Equally important for economic growth is
how the money is allocated and how the
use of the money is monitored.
(These were the second and third stock
market functions on my list.)
11

12. Financial assets under collective management has
doubled in the last decade
Source: OECD Institutional Investors Database
•
Assets under management has more than doubled in the last decade. 2000:
36 trillion, 2011: 73,4 trillion
12

13. What do institutional investors do when they
invest in stocks?
• Increase in indexing (play safe – collect fees)
• Exchange traded funds (increased in volume by
• 1 500 % in last decade)
• High Frequency Trading (where the fast beat the
smart)
• Co-location (jump the queue)
13

14. What do institutional investors do when they
monitor the companies they own?
Option 1: Abstain from voting
Option 2: Minimize costs by outsourcing

ISS has 1 700 institutions as clients

They cover 40 000 shareholder meetings

They cover 100 countries

160 researcher
14

15. Complexity – the case of CalPERS
Source: CalPERS Comprehensive Annual Financial Report, Financial Year Ended June 30, 2012
and CalPERs Annual Investment Report, Financial Year Ended June 30, 2012,
15

16. Emerging Policy Concern #1
Decreased trust in stock markets
Source: The Chicago Booth/Kellogg School Financial Trust Index
16

17. Emerging Policy Concern #2
• Uneven playing field for households to
participate in the profits and wealth
creation in the private sector.
At a time when policies encourage increased
personal responsibility for retirement
savings.
17

18. Emerging Policy Concern #3
• Reduced access to risk capital for growth
companies that are costly to evaluate and
of little interest for indexed investors,
ETFs, high frequency traders and stock
exchanges.
Average size of IPOs has doubled, from USD
123m to USD 259m
18

19. Emerging Policy Concern #4
Share of US companies 5 years or younger
Source: U.S. Department of Commerce
•
•
Lack of equity can mean less opportunities to develop and grow
independently
On average, Google has acquired more than one company every
week since 2010 (Business Insider).
19

20. Thank you for your attention!
20