Current global trends in corporate governance

Current global trends in corporate governance

Corporate governance is evolving rapidly the world over. It’s therefore very important that the governing boards keep track of the developments in corporate governance to ensure that investors do not “migrate” to those countries where good corporate governance is the norm. Boards are therefore under intense pressure to improve on their corporate governance. Shareholders are key influencers of governance improvement. Institutional investors are raising their expectations of public company boards by demanding for board quality, board effectiveness and accountability to shareholders. Boards of companies have to respond proactively by improving governance without having to be pushed by governments’ regulatory requirements.

This article covers those global trends that are already or will likely impact developments in corporate governance which boards should monitor or place on their radar. Failure to do so might result in companies experiencing capital flight. Some of these developments are discussed below although they are not exhaustive since conditions in different countries will determine how the corporate governance landscape should develop.

The quality of the board is becoming a key element in the board. As a result business bodies in developed countries are encouraging more companies to disclose a board matrix, setting out the skills, experiences and demographic profile of directors. That practice is fast becoming the norm. Many more institutional investors want richer disclosures around director competencies and a clearer, more direct link between each director’s skills and the company’s strategy. These demands will place a lot of pressure on nomination committees to ensure that they recruit directors with relevant skills and industry knowledge.

Directors will be expected to confront the economic volatility which is having a great impact on the performance of companies. The board of directors would need to be aware of and discuss strategic implications of economic and regulatory volatility. Issues like the impact on the economy of geopolitical stand-off between America and China are some of the issues that will need to be considered.

Boards have to analyse effects on performance of divided governments, economic growth, trade conflict, significant market fluctuation, and many more. The board will have to be committed to look at these issues and should have close interaction with management as they analyse the impact on company performance.

The call for board quality is gaining traction and this has impact on issues of whether the board is truly independent, whether its composition is deliberate and under regular review, and whether board competencies align with and support the company’s forward-looking strategy.

The nomination committee should be very intentional in appointing directors by emphasising industry knowledge and other relevant skills. To ensure that the quality of the board is high, institutional investors are pushing to further encourage robust, independent, and regular board evaluation processes.

There is a plea for board of directors to focus on corporate culture. It has become apparent that if the enterprise value has to be properly determined then intangible assets like human capital, organizational culture and reputation, are important aspects of enterprise value, as they directly impact on the ability to attract and retain top talent and customers. Investors are therefore keen to learn how boards are engaging with management on these issues and how they go about understanding corporate culture. Boards need to reflect on whether they really understand the company culture and how they plan to assess hot spots and potential issues. Some human resources and nomination/ remuneration committees are including culture and broader human capital issues as part of their responsibilities.

Issues of gender equality in the board composition are becoming very topical issues. In South Africa there is already a call for a certain quota set aside for female directors. Investors in other countries want to see an increased diversity of gender, thought and experiences to better enable the board to identify risks and improve company performance. This issue is quickly evolving into a serious discussion point and boards have to do something with regard to gender diversity within the organisation. This issue has come to the forefront of boardroom discourse in many countries so boards must be prepared to address internal issues associated with the promotion of women in both management and board positions.

Information Technology has become the norm in almost every company because of the internet’s impact on marketing and consumer interaction. It’s normal now to say every company must now be considered a “tech company” because of the impact of new technology trends (e.g. the mobile internet, connectivity, automation and artificial intelligence) which is spreading across industry sectors. Investors regard technology disruption and cybersecurity as major business risks and so investors want to understand how boards are providing adequate oversight of technology disruption and cyber risk. There are now calls for directors to be technology-literate and to be keeping pace with digital transformation if they have to ensure effective governance.

The increasing individual responsibilities of individual directors are placing undue pressure on directors to the extent where they are excessively self-protective in performing their responsibilities to reduce risk. The board should recognise, and address, the looming tension between the pursuit of legitimate corporate strategic goals, and the concerns of directors and executives who perceive themselves at increased personal legal risk for corporate wrongdoing and might not take the necessary risks when making decisions. Insurance should be extended to cover these issues to allow directors to take reasonable risk.

Corporate Social Responsibility has become a key issue for the boards as the public has become very vocal on issues of the environment and its sustainability. As society is calling for more company involvement in corporate social responsibility the board may be called to relook at the balance between corporate social responsibility initiatives and responsibilities to shareholders and other stakeholders.

The stance of executives to focus more on serving social purposes and responding to the perceived expectations of consumers, may require closer oversight of, and involvement by the board. It’s going to be a situation of walking on a knife edge as the public and the government will expect much while the shareholders might say that the corporate social responsibility issues are not their concern as long as they are providing employment and contributing to the fiscus.

In other countries asset managers and asset owners are integrating environment, social and governance (ESG) issues into investment decisions, some under the framework of sustainability or integrated reporting. The priority for investors will be linking sustainability to long-term value creation and balancing ESG risks with opportunities. Investors would therefore like to understand how ESG issues are built into corporate strategy.

There is now a trend where activist investors are using various strategies to achieve their objectives and impact the operation of the boards. Boards should be proactive by devising ways of working with these activist investors. Already institutional investors are increasingly open to activists’ perspectives and are deploying activist tactics to bring about desired change. Activists continue to pay close attention to individual director performance, board oversight lapses and board composition.

Institutional investors being permanent capital providers view governance not as a compliance exercise, but as a key component of value creation and risk mitigation. They are therefore engaging more frequently with companies to ensure that their board and management are taking the necessary actions and asking the right questions. They want to understand the long-term value creation issues and see disclosure showing the right balance between the long term and short term. They want greater focus on long-term, sustainable results.

The constant shifts and volatility in the economies might call for the board to be taking radical decisions. These economic volatilities present boards with consequential strategic choices that often involve greater risk and huge mission shifts. The suitability of the board’s traditional approach to making major decisions is increasingly falling short as there are short windows of opportunity which the board has to exploit quickly before the opportunity expires or is grabbed by the competition. This therefore requires a more aggressively structured decision-making process although still grounded in the key tenet of duty of care.

There is a greater scrutiny on executive compensation and investors are looking for better-quality disclosure around pay based performance measurement metrics especially those linked to risk management and strategy. In the US, institutional investors may vote against pay plans where there is misalignment and against compensation committees where there is “excessive” executive pay for two or more consecutive years.

Some investors are uncomfortable with stock performance being a primary driver of CEO compensation since it may not reflect real leadership impact. The board has to address these issues. Boards should take a cue from the skewed executive compensation schemes in the period before 2008 financial crisis which resulted in the serious financial crisis.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship.  For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

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