2019 OECD Business and Finance Outlook – Self-declared top-down approaches will not deliver trust

On Monday 9 September, the OECD released its annual report “The OECD Business and Finance Outlook” (BFO). The focus of this year´s edition is on public trust as the key to well-functioning of institutions, markets and trade.

This general orientation should be welcome, in as far as it would help promote reforms for a better regulation and supervision of corporate behaviour. Eleven years after the 2008 financial crisis, clearly a lot of work remains in order to boost trust in business and finance. However, much emphasis in the report is put on private sector self-regulation, too little on mandatory requirements and regulation. In this sense, the ongoing work to increase trust in business risks becoming a shallow PR campaign not addressing the root causes for the lack of trust.

This year’s BFO focusses on five areas: financial markets, financial institutions, such as banks and pension funds, company liability, state owned enterprises and online markets. This edition of the BFO is meant to be the first outcome of a new OECD “Trust in Business” initiative.

The BFO explores potential risks that could erode trust in business and the financial sector. Examples include the abundant issuance of sovereign, corporate and bank debt, which has supported post-crisis growth but also raised concern over potential risks of excessive debt as the credit cycle matures. The BFO concludes that policy makers should step up their efforts to bolster public trust in finance to reduce the risks of contagion if economic growth and financial returns continue to fall.

The TUAC agrees with the OECD that societal trust in finance and business is an important component for sustainable and inclusive economic growth. Finance and business values must be re-aligned with broader societal values related to environmental, social, and labour. The OECD leads on these values and yet this edition of the BFO fails to properly address them.  The root causes of the lack of business trust – i.e. dubious corporate behaviour and top-down business models – are missing from the analysis, as are the importance of due diligence, social dialogue and corporate accountability as ways to build trust.

On trust in financial markets, the BFO considers risks linked to the abundant issuance of sovereign, corporate and bank debt, which has supported post-crisis growth but has raised concern over potential risks of excessive debt as the credit cycle matures. The Outlook also considers financial market developments and innovations—including high-frequency trading and crypto assets – that can make financial markets both more efficient and inclusive, but also exposes them to volatility and loss.

These findings echo a previous OECD report[1], which expressed concerns over the increased reliance on low quality corporate debt. The BFO recommends that policy makers take action to mitigate risk in the management of public debt.  From the perspective of TUAC, the BFO offers key takeaways for monetary policy makers who should seriously reflect on how current quantitative easing is delivering unconditional support to financial markets and the rise of low quality securities.

There are also policy lessons to be drawn on corporate governance. A key area of concern is whether the rise of corporate bonds is transmitting into the economy into real investments. Previous OECD reports suggest that there is no such take up. By contrast, business expenditures in share buy-backs and in dividends have been booming. Rather than investing in the real economy, business are taking advantage of the ultra-low bond yields to borrow heavily, “take the cash” and transferring it shareholders via buybacks.

The chapter on corporate liability highlights the virtues of self-regulation. We are told that 100% of self-reported cases yields sanctions and accordingly, self-reporting is sufficient. Doing so, the report fails to acknowledge the role of mandatory rules and of whistle-blower protections in both legal and corporate policies.

Voluntary corporate initiatives cannot be considered as an adequate substitute for law-making. Whilst the BFO underlines the role of governments in introducing compliance incentives, it does not stress the primary role of democratic governments in safeguarding public interest by designing strong legal standards and enforcing them. As far as corporate law is concerned, limited liability should be considered as a privilege and much more attention needs to be paid to the requirements governing the registration and licensing of companies (e.g.: solvency, directors’ liability, risk of regulatory arbitrage). Furthermore, employees and their representatives are missing from the BFO. Again, whistle-blowers’ legal protection and rights to workers’ participation have a strong role to play in promoting transparency and integrity.

A key element in the BFO is the call for further data. The chapter on investment for example, cites the need for data to enable investors and companies to meet responsible business conduct objectives.  The availability issue of data should not prevent broad policy action however.  Instructive data is widely known and available.

When it comes to trust in financial institutions such as the pension funds, the BFO does list a number of more substantial issues including an ageing population, low returns on retirement savings, less stable employment careers and insufficient pension coverage among some groups of workers. These are key factors that have eroded the belief that pension systems are managed with workers’ best interests in mind and that they will deliver on their promises, once workers reach retirement age. The findings are another dire reminder that pension reforms should do a far better job at balancing financial sustainability objectives with the prime objective of fulling people’s right to adequate, decent and secure pension. Even though the financial sustainability has improved in recent years, pension systems across the OECD are struggling to provide affordable and adequate pension for all workers.^[2] This applies especially for women and people in non-standard forms of work who more often find themselves left with an inadequate pension scheme due to lower contribution accumulations or left out of pension schemes all together.

Certainty that you can retire after a long work-life and still maintain a decent income is pivotal for workers and should be so for governments as well. TUAC therefore calls on governments to ensure robust pension systems with a fair risk-sharing between workers, employers, and government.

The chapter on state-owned enterprises (‘SOEs’) reports a sharp increase in the number of SOEs, in particular in China and notes their widespread presence in the shipbuilding and steel markets.  For the OECD, such SOEs raise concerns with respect to fair competition with their private competitors, corruption and other irregular practices, and lesser profitability. These comments have to be read in the context of publicly owned companies operating in the private sector. The introduction rightfully states that there is a rationale for SOEs in case of market failure to meet public policy objectives. More considerations on the importance of public services in the reduction of inequalities would have been welcome in this chapter.

The last chapter of the BFO discusses the benefits and risks associated with online markets from the perspective of trust. Here, the OECD lists as a key concern that online markets cannot reach their potential if consumers are unable to trust them and advices adequately enforcement and increased cooperation between competition, data and consumer protection authorities. These are indeed important elements of consumer protection and for technology to be used for public good. However, in the discussion of trust in online markets, the BFO should also address the link between excessive corporate concentration, online platforms, the rise of non-standard and precarious forms of work, and the need to review competition rules and objectives beyond defending the interests of consumers in the short term taking into account e.g. the effects on employees.

An urgent discussion on long-term business models is required in order to shift away from corporate short-termism – corporations under-investing in productive assets & R&D, the workforce (job quality, skills & training), and low-carbon transition, while payments on dividends, share buybacks and executive compensation spiral out of control. On that, this edition of the BFO is a missed opportunity.

The private sector is an essential engine for growth and wealth creation. However, this is only realised when corporations are governed and regulated appropriately and held to account for their impact on, and contribution, to economic and social prosperity. In this sense, several key components work together to build business trust. The OECD’s own Responsible Business Conduct instruments would themselves help to build trust, ensuring all companies are playing on the same, level playing field. As would social dialogue and collective bargaining. It is therefore regrettable that the BFO ignores the positive contribution of social dialogue and collective bargaining to trust in business. The TUAC will work actively to ensure that all these issues are taken into account in the upcoming OECD “Trust in Business” initiative.

Read the OECD Business and Finance Outlook here.

[1] https://tuac.org/news/oecd-report-on-corporate-debt-vulnerabilities-exposes-the-dangers-of-unconditional-monetary-support-and-the-need-to-take-action-for-long-term-business-models-and-wage-led-growth/

[2] OECD Pensions Outlook 2018; http://www.oecd.org/pensions/oecd-pensions-outlook.htm