The global pandemic will require a governance response to ensure the corporate landscape can be rebuilt sustainably, according to the OECD.
And that response will include better disclosure of risk, beefed up audit structures, more equitable treatment of smaller shareholders, more transparency of group structures, an enhanced range of environmental, social and governance (ESG) disclosures and more attention to executive pay.
The warnings come in a new report, the Future of Corporate Governance in Capital Markets Following the Covid-19 Crisis, and considers how the governance landscape will best adapt to aid recovery of companies and stock markets.
The advice follows a number observations during the pandemic, including a steep rise in the value of corporate bonds and outstanding corporate debt; the falling number of listed companies on capital markets; and the increasing concentration of share ownership among a small number of institutional shareholders.
According to OECD secretary-general Mathias Cormann, governance makes business more “dynamic” and competitive. It also bolsters resilience against “shocks”.
“Good corporate governance,” he says,“ and well-funded capital markets play a crucial role in supporting the recovery of our economies coming out of the Covid-19 crisis.”
The pandemic has triggered lawsuits based on the quality of risk-related disclosures, the OECD observes, and while many are still playing out, the fact they happened means “monitoring and disclosures” of risk needs to improve.
National frameworks must also get to grips with the complexity of group companies and the disclosures needed as a result, including the shareholdings of directors, approval of related-party transactions, information flows and the responsibilities of members on parent boards.
“Renewed scrutiny” is needed to ensure executive pay is linked to long-term performance after concerns some corporate leaders appeared to receive pay despite missing targets.
Management of ESG risks also needs to be improved, says the OECD. Companies require the expertise and tools to manage the risks, policy leaders should push for better reporting and board members have a role to play too.
“Corporate boards should demonstrate a leadership role to ensure that effective means of [ESG] risk oversight are in place, establishing clear lines of responsibility and accountability for the quality and integrity of the monitoring and disclosures systems through the company and its subsidiaries.”
The UK has made some strides in these areas. The government is working on mandatory climate change risk reporting, while a reform of the audit regime under way. There are even reforms in the works for measures to attract more tech listings to the London Stock Exchange. In Europe, there are plans to introduce “sustainability” corporate governance, while the US, President Joe Biden is working towards mandatory ESG disclosures.
But the OECD’s advice does not apply to the just a handful of countries. If the global economy is to recover, many jurisdictions will need to work on reform.