Methodology for Assessing the Implementation of the G20/OECD Principles of Corporate Governance 2025

B. The corporate governance landscape

Part B outlines the type of information that a reviewer will need both to form an assessment about the importance of individual principles for the corporate governance framework in a jurisdiction, and to identify questions relevant for a judgement about the essential criteria. A requirement of the Methodology is that a reviewer has a good understanding of the corporate landscape which provides the necessary market and institutional information for both comprehensive reviews and more focused reviews against the Principles. The information collected under Part B can be used by the reviewer to conduct the assessment under Part C under relevant principles. Rather than relying solely on anecdotal evidence to form a general judgement about a jurisdiction, a reviewer might be able to underpin a judgement through the judicious use of statistical indicators. The availability of such statistics varies widely across jurisdictions, and comprehensive data should not be considered as a necessary pre-condition to carry out an assessment. Lack of data for some of the indicators specified in this section should not necessarily negatively influence the reviewer’s assessment, although the absence of such data in some cases may be relevant, for example with respect to an assessment of Chapter IV’s recommendations on disclosure.

Overview of the economy and capital markets

The first step to understand the capital markets of a jurisdiction is to look at key economic indicators and compare them with those of peer jurisdictions.1 It is also important to assess the size of the stock and corporate bond markets and the use of market-based financing. An analysis of past corporate failures can also be included to allow the reviewer to understand the historical factors and experiences that have shaped the current corporate governance system and that may still play an important role.

The assessor should review quantitative data on:

(i) trends in real gross domestic product (GDP) growth and per capita GDP

(ii) trends in inflation and unemployment

(iii) total market capitalisation as a percentage of GDP (including all companies listed on different markets in the jurisdiction)

(iv) total outstanding amount of corporate bonds as a share of GDP

(v) the use of market-based financing vs. bank financing in the jurisdiction.

Capital market functioning and market structure

Well-designed corporate governance frameworks will enable capital markets to function properly, and, therefore, an assessment of the functioning of capital markets will reflect on the corporate governance framework in place.

The reviewer may want to start by identifying the main stock exchange(s) and trading facilities. An understanding of the history of the jurisdiction’s market structure can contribute to explaining the evolution of capital markets and their development. Therefore, a reviewer should collect information on the available stock exchange(s) and trading facilities to list and trade, and their initial and current requirements for listing securities.

The reviewer should also collect information on public equity markets dedicated to growth companies, such as Multilateral Trading Facilities (MTFs) in Europe and Alternative Trading Systems (ATS) in North America, and some other growth segments which allow flexible offering methods. This would support an understanding of their structure, requirements, and reporting obligations, as well as the companies traded on these segments. This information is key to understand the use of proportional requirements in segments targeted to growth companies.

When analysing the information and data collected, the reviewer should clearly distinguish between the information concerning regulated markets and that concerning alternative market segments, if any.

The reviewer should seek to collect the following information:

(i) number of publicly listed companies (equity) on the regulated market segment(s) of the stock exchange(s), their market capitalisation, their size and industry composition

(ii) number of publicly listed companies on the alternative market segment(s) (when established), their market capitalisation, their size and industry composition

(iii) number of corporate bonds listed on the regulated market segment(s) of the stock exchange(s) and outstanding amounts

(iv) number of corporate bonds listed on the alternative market segment(s) (when established) and outstanding amounts

(v) trends in initial public offerings (IPOs) and de-listings on the regulated market(s) of the stock exchange(s) and on the alternative market segment(s)

(vi) trends in secondary public offerings (SPOs) on the regulated market(s) of the stock exchange(s) and on the alternative market segment(s).

Stock exchanges or other sources of data may provide the above-mentioned information. Trends would be assessed over the past five to ten years and, to the extent possible, be compared with peer jurisdictions.

Trends in IPOs and de-listings and changes across listing segments (if applicable) may help the reviewer in evaluating whether the market structure of the stock exchange(s) and/or trading facilities is sufficiently clear and, from a regulatory perspective, whether companies have incentives to go public. A review of listing-related trends may also help to discern if companies initially listed in an alternative segment have the incentive to transfer to the regulated market. Importantly, that information will also help to understand if companies are improving their corporate governance over time (assuming that higher listing segments establish stricter corporate governance standards).

Specific initiatives at the jurisdiction level aiming to develop and support capital markets should also be included in the evaluation. Their effectiveness may be analysed based on empirical data and results achieved since their implementation, with data and results collected from all relevant authorities involved in such initiatives as well as publicly available information and the feedback of market participants and stakeholders.

Secondary market liquidity

After evaluating the functioning of primary markets, the reviewer should aim to understand the functioning of secondary markets.

The assessor should review quantitative data on:

(i) trends in the volume of stocks traded (e.g. total dollar amount traded, turnover ratio)

(ii) an estimation of the free-float at the company level

(iii) the frequency of trading and whether trading is concentrated among a few or many companies (e.g. % of total trading volume accounted for by top 5 or top 10 companies)

(iv) other relevant indicators that may depend on each jurisdiction

(v) importantly, these data should be analysed over the past five to ten years to understand the trends and development in capital markets.

It is often useful for the assessment of both the operation of capital markets and the use of control arrangements to know the proportion of shares that could be traded on the market. Many jurisdictions have restrictions on the minimum level of a free float for both an IPO and to remain listed on a stock exchange or one of its specific listing segments. The most general definition is that the free float factor is the percentage of shares remaining after the block ownership and restricted shares adjustments have been applied to the total number of shares. Information on how free float can be measured is provided in Box 1.

Box 1. Measuring the free float

Free float can be calculated as:

Free float factor (%) = 100% – [Maximum (block ownership (%); restricted shares adjustment (%)]

The free float market capitalisation is the portion of a stock’s total market capitalisation that is available for trading:

Free float market capitalisation = free float factor ● full market capitalisation

The adjustment for block ownership of shares is applied if blocks of at least 5% of a company’s total stock are held in:

• cross-ownership: stock owned either by the company itself, in the form of treasury shares, or owned by other companies

• government ownership: stock owned by either governments or their agencies

• private ownership: blocks of shares owned by either individuals or families and therefore not likely to be available for trading.

This block ownership adjustment is not applied if:

• The blocks comprise less than 5% of the total stock as these might be small enough to be tradeable.

• The blocks are held by — but not limited to — custodian nominees, trustee companies, mutual funds and pension fund holdings, investment companies with short-term investment strategies and pension funds.

In addition, the total number of shares is also adjusted by the restricted shares, i.e. either those that cannot be traded during a certain period or those that have a foreign ownership restriction. Either the block ownership adjustment or the restricted shares adjustment is applied, whichever produces the higher result.

Alternatively, a simpler approach may be utilised:

Floating = Average voting block held by the market (100 - Call) (simple average and weighted average)

where:

Call = Average of the sum of the voting blocks held by all major shareholders (simple average and weighted average)¹

Considering that it is difficult to obtain information about restricted shares, this is a good proxy of a free float. For each company the free float is 100- sum of “relevant” voting blocks where a “relevant” voting block is one exceeding 5% of voting capital. If it is possible, a “relevant” voting block should not include those exceeding 5% but held by custodian nominees, trustee companies, mutual funds and pension fund holdings, investment companies with short-term investment strategies and pension funds, since they are considered not stable and therefore tradable.

Note: 1. Weighted averages are calculated by “weighting” direct stakes and voting blocks with the market value of the ordinary share capital for each company.

The structure of ownership and control

The structure of ownership and control in each market is key to understand the agency issues at play. Policy makers and regulators are expected to have the structure of ownership and control in mind when designing corporate governance frameworks. To fully understand the structure of ownership and the control of publicly traded companies, three specific aspects need to be considered: (i) the structure of ownership and its concentration; (ii) the instruments of control; and (iii) the exercise of control.

Structure of ownership and its concentration

The reviewer should start by identifying the owners of publicly traded shares and bonds. The distribution of ownership among different categories of owners provides useful information about the corporate governance landscape of a jurisdiction. The owners of direct stakes and voting blocks of stocks should be classified according to a standard categorisation of investor categories.

A categorisation often used by the OECD for comparative data distinguishes between:

• private corporations (listed and unlisted private companies, their subsidiaries, joint ventures); strategic individuals and families (physical persons that are either controlling owners or members of a controlling family or block-holders); public sector (direct ownership by central/local governments, public pension funds, state-owned enterprises and sovereign wealth funds); institutional investors (pension funds, insurance companies, mutual and hedge funds); and other free float, including retail investors (shares in the hands of investors that are not required to disclose their holdings) (De La Cruz, Medina and Tang, 2019[1]). It is also important to distinguish between domestic and foreign investors where possible.

An alternative categorisation is the following:

• domestic investors; families/individuals; non-financial companies; financial intermediaries of which: banks, insurance, collective investment companies (including mutual funds, pension funds and other collective financial investment companies); public sector (including government, local authorities and others public sector bodies); foundations; and foreign investors (aggregate value or same distribution adopted for domestic investors).

These data should prompt the reviewer to determine whether one or more categories are predominant (especially when this is the case for the public sector) and whether some categories are not developed or widespread, including in comparison with peer jurisdictions. For example, if the presence of institutional investors is rather low, the assessor may wish to investigate further what the reasons may be. Another important indicator is the percentage of public sector holdings.

The reviewer should continue by assessing the degree of ownership concentration. The latter provides a measure of the distribution of power between major shareholders and dispersed shareholders, and provides indications of whether some shareholders can influence company management and whether control is contestable. Concentration of ownership can be computed with reference both to direct stakes and to voting blocks. A useful measure of ownership concentration is the percentage of publicly traded companies in which the three largest shareholders hold more than 50% of the equity base (De La Cruz, Medina and Tang, 2019[1]). The reviewer should examine quantitative data produced by relevant authorities on:

(i) the share of stock market capitalisation and outstanding corporate bonds owned by different categories of investors

(ii) average free float of listed companies

(iii) number of majority owned state-owned publicly traded companies

(iv) a measure of concentration (e.g. the percentage of publicly traded companies in which the three largest shareholders hold more than 50% of the equity base, the average holdings of the largest three shareholders).

An overall picture will need to be drawn from a number of sources, including qualitative assessments by the relevant authorities, investors, academics, etc. and a review undertaken of the legal framework to understand whether there are any restrictions or incentives, for example impacting on foreign ownership or on retail vs. institutional ownership. The statistical base is, however, not always sound and this would have to be taken into consideration by the reviewer (e.g. taking into account whether the data are drawn from company corporate governance statements or from dated declarations to the authorities such as the securities regulator or a company registrar). Often, the ownership records do not reflect the beneficial owner and therefore statistical indicators of concentration and the identity of the owners might be distorted. The reviewer could also consult country indicators of the structure of ownership and ownership concentration reported in the OECD Corporate Governance Factbook which is updated every two years (OECD, 2023[2]).

Instruments of control

Instruments of control over companies used by shareholders include block shareholdings formed either alone or through shareholder agreements. With respect to statistical indicators, thresholds would have to be examined for their relevance to corporate control in the jurisdiction, reflecting the wide-ranging possibilities for control that are often available, both de jure and de facto (e.g. key patents and brands effectively transferring control outside the company). Controlling blocks may also be formed through instruments such as multiple voting shares, caps on voting rights and by shares with special powers such as the ability to appoint the board. The use of shares with different voting rights should not be perceived as intrinsically negative by the reviewer, who should monitor whether multiple voting rights are allowed, what their incidence is across publicly traded companies, and whether they appear to have been used abusively (which may be assessed more specifically in relation to Chapter 1, Principle I.B. containing recommendations dealing with the effectiveness of the enforcement framework and Chapter II dealing with the rights and equitable treatment of shareholders). For a number of jurisdictions, information about the overall use of such instruments is available from different sources including rating agencies, and in some cases the extent to which cash flow rights and voting rights differ might also be available. Where not available at least in a general form, there is a prima facie case that disclosure aspects of the Principles might not be implemented.

Another widespread instrument of control concerns company groups (which is also analysed under Principle I.H.) and especially those that are organised in a pyramid where the difference between voting and cash flow rights can be particularly acute. A reviewer should understand whether publicly traded companies within company groups are a common feature of the market and whether they are generally domestic company groups or groups operating across borders. Cross-border operations of publicly traded companies within company groups increase the importance of having in place cross-border enforcement co-operation agreements as called for in Principle I.G.

Indicators that a reviewer should look for include:

(i) incidence of block and controlling shareholdings, the ratio between cash flow and voting rights, types of control mechanisms such as shareholder agreements

(ii) the share of listed companies with different classes of shares, voting and ownership ceilings, etc.

(iii) indicators of company groups and the potential problems associated with them: ratio of cash flow rights to control rights, average number of layers in company pyramids.

It is important that cross holdings of companies in the group, including the existence of private companies, are also taken into account in order to know the type of principle/agent incentive structure the corporate governance framework will have to address.

Exercise of control

With respect to the exercise of control, several indicators such as the number of companies controlled through shares with special rights and staggered boards could be used by the reviewer. Rating agencies and analysts have also found it informative to examine the percentage of the free float (i.e. excluding controlling shareholders) that participates in the general meeting of shareholders and they have also constructed indicators of shareholder rights. These should be used with care. The incidence of voting/participation is often regularly monitored by stock exchanges and regulators so that a great deal of aggregate information could be available which might be indicative of how the corporate governance system is functioning. Other indicators point more to the consequences of corporate governance arrangements but, although widely used, they rely on a number of critical assumptions so should be used judiciously. For example:

(i) The use of different types of board structures, incidence of board members not appointed at the general meeting of shareholders (i.e. based on staggered terms).

(ii) The percentage of average free float participating in general shareholder meetings.

The legal and regulatory framework

As part of the institutional information considered for the corporate governance landscape, it is also important to present a general overview of the legal framework that goes beyond the civil law/common law distinction.

The legal framework is generally comprised of company law or commercial code and securities law, procedural laws and, in some cases, relevant provisions may also be included in the civil code. Important principles for economic activity may be included in the constitution. Other pieces of legislation which should be collected for the assessment may include audit and accounting laws, internationally recognised standards consistent with a jurisdiction’s laws and regulations, and non-financial disclosure requirements (e.g., related to information on sustainability); bankruptcy and insolvency legislation; takeover laws; etc.

Regulations issued by the authority in charge of capital market supervision and the listing rules of the stock exchange(s) are also relevant. This list does not aim to be comprehensive as other pieces of law/regulation may also be analysed by the assessor based on the specificities of the framework being reviewed, including more technical laws/regulations when conducting a more focused thematic review. A better understanding of the legal and regulatory framework will allow a reviewer to assess whether there are any gaps in the framework, lack of clarity and/or overlap between different pieces of law/regulation.

The preamble of Chapter I of the Principles underlines that legislative and regulatory elements of the corporate governance framework can be complemented by soft law elements such as corporate governance codes or equivalent instruments. This section of the assessment should therefore also include information about codes and principles and other complementary mechanisms and their evolution in the jurisdiction. When there is no soft law mechanism or alternative mechanism in the jurisdiction, an assessor should evaluate whether the corporate governance framework is adequately addressed in other instruments.

It is important to underpin an understanding of the institutional setting and context with background information. For example, an awareness of the following elements is also relevant: how soft law mechanisms have developed in the jurisdiction, how often they are revised and according to what procedures, the types of compliance mechanisms, the companies that are subject to soft law mechanisms reporting, and the authority responsible for reviewing companies’ reporting. Importantly, the degree of compliance by companies represents a core element of the corporate governance landscape as it allows to understand the efficacy of soft law elements as a complement to legal and regulatory requirements and voluntary practices adopted by companies. The criteria to assess compliance with soft law mechanisms are provided under Principle I.B. in Part C.

The institutional framework for corporate governance

An overview of the institutional framework allows the reviewer to identify the authorities, ministries, and other agencies with responsibilities for corporate governance. These authorities typically include the supervisory, regulatory and enforcement authority in charge of capital markets and corporate governance, and ministries responsible for capital markets, audit supervision (the ministry of finance or equivalent) and those that have under their purview the legislation for corporate governance and other judiciary matters (typically the ministry of justice or equivalent). Stock exchanges and other self-regulatory organisations as well as company/court or trade registries that provide corporate information are also part of the institutional framework. Moreover, an advanced and effective market infrastructure that supports the functioning of the public equity market is of critical importance for the issuance, trading, clearing and settlement of securities. The organisation of the judiciary and a solid understanding of which courts are competent for commercial/corporate governance disputes are also an important element.

The review should consider a list of relevant authorities, ministries, institutions and bodies, together with the law/regulation establishing them (where relevant) and their main governance characteristics. Their key functions and contribution to corporate governance should also be identified together with the extent of their supervisory and enforcement roles. For example, the assessor should ascertain whether the stock exchange(s) has/have the authority to enforce its/their rules and whether they impose market protection measures in practice. Second, a reviewer should identify the public authority/authorities in charge of the supervision of capital markets and corporate governance, understand its/their statutory objectives, and the extent of its/their relations and interactions with other relevant authorities and ministries. Third, the reviewer should understand the role of the different ministries with responsibilities for corporate governance and its enforcement, and for developing and monitoring laws in this area. To understand the judiciary’s efficiency and functioning, the reviewer should first develop a solid understanding of how the judiciary is organised and whether there are specialised courts/sections of courts competent to adjudicate commercial/corporate governance disputes.

The institutional framework should also rely on a solid market infrastructure. The reviewer should therefore also identify the body carrying out the issuance, trading, clearing and settlement of securities. The processes used as well as recent technical improvements and other initiatives can provide valuable information. Importantly, the reviewer should also understand the stock exchange(s)’ ownership structure and how it may have evolved since its establishment. Concerning the rules and conditions for stock and bond market listings on the regulated market(s), the assessor’s analysis should address whether these are clearly defined and coherent, including in light of the statistics collected as part of the capital market section of this Methodology.

References

[1] De La Cruz, Medina and Tang (2019), “Owners of the World’s Listed Companies”, OECD Capital Market Series, https://www.oecd.org/corporate/Owners-of-the-WorldsListed-Companies.htm.

[2] OECD (2023), OECD Corporate Governance Factbook 2023, OECD Publishing, Paris, https://doi.org/10.1787/6d912314-en.

Note

← 1.  Peer jurisdictions can include comparisons to other jurisdictions in the same region, OECD averages, or similar sized markets.