Mats Isaksson

Corporate Affairs Division, OECD

New Approaches to Economic Challenges

Friday 10 January 2014

Corporate Governance,

Value Creation and Growth

Corporate Governance Committee

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

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Corporate Governance: a multifaceted issue

• Business Level Dimension

• Public Policy Dimension

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The Public Policy Dimension

“…to contribute to economic efficiency, sustainable growth and financial stability”

(CGC mandate from Council)

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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.

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So…

• What makes equity capital (or stocks) so different from other types of capital?

• What are the criteria for an efficient stock market?

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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.

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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.

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OECD countries: IPO numbers and volume

• 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

Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock

exchanges’ and companies’ websites.

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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.

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• 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.)

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• Assets under management has more than doubled in the last decade. 2000: 36 trillion, 2011: 73,4 trillion

Financial assets under collective management has

doubled in the last decade

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Source: OECD Institutional Investors Database

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)

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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

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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,

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Emerging Policy Concern #1

Decreased trust in stock markets

Source: The Chicago Booth/Kellogg School Financial Trust Index

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• 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.

Emerging Policy Concern #2

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• 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

Emerging Policy Concern #3

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• 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).

Source: U.S. Department of Commerce

Share of US companies 5 years or younger

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Emerging Policy Concern #4

Thank you for your attention!

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