Corporate Governance, Value Creation and Growth OECD Corporate Governance Working Papers http://www.oecd.org/corporate
Economic Growth and Investment! Capital Formation 56% Labour Growth 20% Productivity 24% (Jorgenson, 2006 for G7 countries 2000-2006)
The 3 stages of the investment chain Access to Capital (connecting households and companies) Allocation of Capital (it not only about the amount of investment quality counts) Monitoring of Capital (keep up the heat)
Not all capital is equal Credit card Overdrafts Trade credits Bank loans Bonds Equity
What makes equity unique? It is the only standardized financial instrument that can handle entrepreneurial uncertainty. Taking on uncertainty is the only genuine source of economic progress. (As opposed to managing risk.)
Sources of equity Individual wealth Private pools of capital Public equity
The Economic Role of Stock Markets Serve as venue where growth companies 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.
A Changing Landscape Institutional ownership, new investment strategies and trading techniques Increased complexity of the investment chain and the use of service providers Increase in shareholder rights
A Changing Landscape Changes in corporate asset base Towards concentrated ownership at company level Changes in the functioning and business model of stock exchanges
Global: IPO numbers and volume Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock exchanges and companies websites. The recovery was fuelled by non-oecd companies. 40%. Non-OECD trend amplified after the financial crisis. 2008-2012, 60 % of all equity raised by non-oecd companies.
US: IPO numbers and volume Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock exchanges and companies websites. Fall in average number by 80 percent from 525 to116 Fall in average size by 50% from USD 65bn to USD 30bn Increase in average IPO size from USD 123m to USD 259m 25% free float gives an average market cap of about USD 1bn
UK: IPO numbers and volume Source: OECD calculations, based on data from Thomson Reuters New Issues Database, Datastream, stock exchanges and companies websites. More complex picture. During the recovery period 2004-2007 the annual amount of equity raised increased to USD 27 billion from USD 11 billion between 1993-2000. Dominance of non-uk companies in the second period, more than 61% of the funds raised. In the aftermath of the financial crisis, IPOs by UK companies has almost come to a halt.
Rise of alternative sources of finance: Private equity Total assets under management 2011: USD 3 trillion Dry Powder USD 927bn USD 2 trillion in assets, including real estate. Total invested about 4% of global market cap. 50 % of buy-out transactions in Europe 2011 were trade sales private to private. No net injection. (Bain & Company 2012). Important but expensive and has not replaced IPO and SPO in volume
Some Explanations Changing Business Model of Stock Exchanges A New Institutional Investor Landscape
The Investor Landscape Institutional Investors have more than doubled their assets under management in the last decade. 85 trillion in AUM 32 trillion in public equity
Their Equity Holdings Total assets under management and allocation to public equity by different types of institutional investors. Source: OECD Institutional Investors Database, SWF Institute, IMF, Preqin, BlackRock, McKinsey Global Institute Concerns about the accuracy of estimations in the data. Double counting The combined holdings of all institutional investors; USD 84.8 trillion in 2011. Traditional institutional investors; USD 73.4 trillion (USD 28 trillion in public equity). Alternative institutional investors; USD 11.4 trillion (USD 4.6 trillion in public equity).
The Role of Owners in the Market Economy A market economy relies on the self- interest of shareholders for efficient capital allocation and monitoring of corporate performance. That is why the equity instrument carries certain rights, for example to vote on major changes and the board. And in public markets are transferable to allow for exit.
Increased Complexity in the investment chain Increased complexity through crossinvestment among institutional investors. Increased complexity in trade practices technology, order types, etc. An increase in outsourcing of ownership and asset management functions.
Complexity The CalPERS Case CalPERS case (June 2012) Source: CalPERS Comprehensive Annual Financial Report, Financial Year Ended June 30, 2012 and CalPERs Annual Investment Report, Financial Year Ended June 30, 2012,
Ownership engagement is a choice Some shareholders are willing to carry the costs of ownership engagement. Others are not. Why? It is all about the business model.
Determinants of ownership engagement
Corporate governance taxonomy of institutional investors
Main messages and some food for thought Understanding ownership engagement requires an understanding of the owner s business model. Legal or regulatory requirements for voting may have little or even negative effect on the quality of ownership engagement. Institutions with the highest degree of engagement typically have no regulatory obligation with respect to ownership engagement. Instead, the public policy question is how to remunerate ownership engagement? Carrot rather than stick.