Date: October 19, 2020
Dear all, it is my great pleasure today to deliver a special address to this digital symposium.
Let me first thank, personally and also on behalf of the OECD and the Corporate Governance Committee, David Gerald for his invitation, the third in a row.
SIAS continues to play a key role in the growth of capital markets in Singapore and is an active and reputable player in the international corporate governance dialogue, being also a member of the OECD Asian Roundtable on Corporate Governance.
Last year, I delivered the opening address to the Global Corporate Governance Conference, whose objective was to discuss the impact of technology on corporate governance.
I concluded that technologies would inevitably have had an impact on regulation, supervision and enforcement of corporate governance standards in the near future; nevertheless, it was still hard to affirm with certainty that new technologies would be able to reshape corporate governance structures and overcome inherent corporate governance bodies, eventually replacing a key actor such as the board.
I said goodbye hoping to meet each other in person this year, and not only artificially intelligent algorithms-directors.
Actually, today, we are not meeting in person but we are attending the Symposium remotely, but for a different reason. Few months after the GCGC the Covid-19 pandemic took everybody by surprise and has imposed severe constraints to human activities.
As a result, companies have faced liquidity problems and difficulties to meet their regulatory and financial obligations. Many jurisdictions have taken steps to adjust certain regulatory requirements, such as the organization of shareholders’ meetings and the filing of audited financial reports, which are deemed particularly important at the moment for investors. International and national governments and regulators tried to accommodate populations and the economy at large, including companies and investors. An excellent synthesis of the measures relevant for corporate governance issues, including those from Singapore, was published by the OECD at the end of May 20201. I always encourage you to consult the OECD website on corporate governance and corporate finance issues, full of important information and analysis2.
Nevertheless, Covid-19 has created a unique opportunity for all companies to reshape their role and their organization, going beyond financial performances and increase weight of ESG dimensions in corporate governance and asset management.
Today, we are facing a challenging scenario: the point is no longer only the opportunity of internal reorganization of companies to take advantages from applying new technologies, but also the need to rethink the role of companies in the society. Such a shift requires a successful and sustainable recovery, that in turn implies a strong commitment to support financially resilient and dynamic business sector. The Covid-19 crisis, indeed, has revealed the need to anticipate and manage unpredictable systemic threats and the need to support the development of a resilient business sector built on adaptability, innovation and flexibility. Those topics will be tackled in the first panel today.
State aids in many countries have provided companies with emergency liquidity through credit guarantee schemes, but in the short term they are bound to become new corporate debts; the huge increase in corporate indebtedness will require companies to rebalance their capital structure by means of material equity raising. The effective access to market-based finance should serve, in the short-term, to strengthen the balance sheets of companies whose financial positions have been hurt by the economic slowdown and, in the long term, to build resilience and secure capital for new investments that will contribute to new jobs and an increase in productivity and sustainable growth.
A high quality and more robust corporate governance is a way to prevent corporate misconduct creating an environment of trust, transparency and accountability necessary for obtaining long-term investment, financial stability and sustainable growth. This will be tackled in the second panel tomorrow. Actually, an even stronger corporate governance is needed in companies where the State is the owner or the major investor as a result of State intervention to avoid companies collapse following Covid-19 pandemic; there is the risk that “the State” lacks the expertise to act as an entrepreneur, which in turn may undermine the economic recovery.
In the last few years we have faced a shift from the shareholder primacy approach to a more modern standard for corporate responsibility since the market has called on businesses to refocus corporate governance around a multi-stakeholder and long-term sustainability perspective. Companies willing to raise equity and/or long-term debt need to support ambitions with a well-defined internal structure of responsibilities, accountability and reporting. The board of directors should ensure that internal structure and practices remain updated and are effectively implemented in order to meet the companies’ new intentions.
Why the Board? Because Corporate culture starts at the top.
The G20-OECD Corporate Governance Principles, already five years old but always up-to-date as if they were published yesterday, state that: “VI. The responsibilities of the board. The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests. Boards are expected to take due regard of, and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities. Observance of environmental and social standards is relevant in this context”. The role of stakeholder in corporate governance is also emphasized by Principle IV. “The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises”.
If a clear commitment to sustainability needs to be embedded in the duties of company directors and into the governance rules related to company management, supervision and incentive structures, policy makers may use some tools to align board behaviour to the “long-term” purpose of the company: for example (i) requesting companies to link part of the remuneration packages of board members, notably the executives, to sustainability goals, (ii) tailoring the requirement to publish interim management report, possibly interchanging them with even more frequent press releases detailing the eventual price sensitive information, in order to strike the right balance between providing real time material information to all stakeholders but avoiding to flood the market with too much information where the important one is lost among other.
Both these tools may reduce short-term pressure on issuers and encourage sustainable value creation, giving managers an incentive to adopt a longer-term vision. Recent studies show that companies performing well on sustainability factors are more competitive and resilient in crisis periods.
A “sustainable pay” aligns executive incentives to risk management policies (pushing them to a close monitoring of non-financial performance included in the remuneration package). However, the inclusion of non-financial criteria is not simple because metrics for sustainable pay are often non-strategic, inconsistent, backward looking and not standardized. Top areas are employee health and safety (injury incidence) and environment (spills and leaks) but are aimed mainly at risk mitigation and regulatory compliance; most metrics focus only on improvement on past performance (injuries and environmental damages); many boards tie compensation to inclusion on third-party CSR lists or indexes, relying on third-party rating criteria and trustworthiness.
In order to refocus corporate governance around a multi-stakeholder and long-term sustainability perspective the board need to be efficient. But what makes a board efficient? Various elements: size, composition, functioning.
With regard to composition it is clear that diversity adds value to the board. Gender diversity has a pivotal role in assessing board diversity, as will be discussed in the third panel; to this end some jurisdictions have enacted laws that require listed firms to have a specific % of women on board of directors, for example in Italy, with an increasing quota, a transitory period and the application to the whole board of directors.
A final point deals with supporting efficient, competitive and sustainable companies is the key element underpinning post Covid-19 recovery; it ensures healthier markets and investor confidence. The availability of sufficient funding in the form of equity capital will be crucial for companies and it is necessary to put in place measures to facilitate access to market funding. The availability of information is a necessary, though not sufficient, condition to communicate effectively with stakeholders (as will be discussed in the fourth panel): effective engagement is needed. To this end, in the EU, the European Commission strongly supports measures to make companies more visible to cross-border investors such as the creation of a EU-wide platform (European single access point) that will provide investors with access to financial and sustainability-related company information (which reflect the needs of investors and the interests of a broader range of users). This instrument is deemed to be able to deliver the right balance between providing relevant and comparable digital information about investment opportunities to investors and minimising the burden for companies to report this information.
Furthermore, in order to maintain the (cross-border) investors’ engagement, companies should strengthen the digitalization process since new technologies could address information asymmetries, allowing information to be accessible to the public in a permanent and totally transparent way.
We rely on your valuable inputs – and expect that the issues discussed here at the Symposium will feed into OECD future work with Asia and will be shared with the wider OECD Corporate Governance community. For this reason, I encourage you all to participate actively in the discussions and bring your best ideas to the table.
I hope to be there in person next year, possibly doing the same thing of last year: wearing a Ferrari hat after the victory the night before in the Singapore Formula 1 Grand Prix!