What Will Dominate Future Corporate Governance Agendas?

Now, more than ever, businesses are under pressure to ensure that environmental, social, and governance (ESG) issues are being managed effectively. Indeed, the coronavirus pandemic has exposed the need for resiliency—heightening the necessity for effective crisis management and board engagement. And, while 2020 was eventful in terms of regulation and policy reform, the pandemic is expected to further accelerate change in the future.

Mounting Pressure for Board-Level Change

Investors are pushing for greater diversity at the board level. Despite gradual improvement, progress remains slow and is not uniform across jurisdictions. For instance, while female representation on boards has reached 33% and 40% in the UK and France, respectively—the latter being aided by the 2011 Copé-Zimmermann law—in 2020, not even 8% of Fortune 500 CEOs were women. What’s more, while, over recent years, several countries have introduced policies aimed at increasing female representation on corporate boards, these often only apply to publicly listed companies.

As such, investors are increasingly voting against boards that lack women at annual general meetings (AGMs). For instance, in 2019, the New York City Comptroller launched the Boardroom Accountability Project 3.0, aimed at improving companies’ diversity at board and management levels. And, as the issue of gender inclusion continues to gather traction, we expect diversity related to age, experience, and ethnicity to follow suit—helping to reduce complacency and groupthink.

Additionally, investors remain focused on boards’ effectiveness. Indeed, as boards’ responsibilities continue to increase, and directors face an ever-broadening range of issues, it is critical that corporate leaders are not overextended. As such, there is strong impetus from investors and proxy advisors to limit overboarding. Doing so not only improves board quality and accountability, but also helps increase director renewal and diversity.

ESG Competency Crucial

As the world continues to reel from the pandemic—and ESG-related disruptions continue to mount—the case for ESG competency at the board level is now stronger than ever. Interest in ESG is growing fast, but so is the risk of competence greenwashing. In a recent study, New York University Stern Business School confirmed a severe lack of ESG expertise on U.S. boards. Meanwhile, investors, such as Legal & General Investment Management in the UK, have been voting against directors for failing to adequately report on their companies’ environmental strategy.

Resultantly, a growing number of businesses are appointing sustainability experts to their boards and setting up dedicated board-level committees to oversee ESG risks. We expect to see this trend continue—particularly as, moving forward, boards that are perceived to be failing to provide a clear climate strategy and transition plan may face greater scrutiny and challenges.

Corporates are also facing mounting pressure from investors to disclose details of their plans to address climate change and meet the requirements of the Paris Agreement. In January, the UK Investor Forum announced its support for annual mandatory non-binding votes on climate at AGMs, following the UK Financial Conduct Authority’s proposal to implement a Task Force on Climate-related Financial Disclosures (TCFD)-aligned disclosure requirement for listed companies. Meanwhile, in the U.S., investor advocacy groups have called on the Securities and Exchange Commission to make it easier to submit environmental and social proposals.

Fairer Executive Pay and ESG Integration

2021 looks set to be a test case for executive pay restraint. With the pandemic bringing earnings pressure, stagnant employee pay levels, and dividend cuts in 2020, scrutiny of executive pay is expected to ramp up as the year progresses. Certainly, with the most economically vulnerable losing jobs or facing barriers to salary progression, the disconnect between executive and employee pay presents a growing reputational risk.

Thanks to the pandemic, some businesses have revised executive pay policies and reduced bonuses—and we expect calls for further restraint to continue. In addition, while few executive pay packages currently include ESG metrics, we expect to see a better integration of ESG factors in executive remuneration.

Tax Transparency Gathers Momentum

Taxation policies, too, are drawing the attention of investors, and there are increasing calls for fairness and transparency amidst ballooning public deficits. In the aftermath of the Luxleaks scandal, the European Commission stepped up its efforts to combat tax avoidance—though its planned directive to mandate multinational companies to disclose how much profit and tax they pay is yet to be approved. Additionally, in February, the United Nations published a report calling for the establishment of a global minimum corporate tax rate of 25%–30% in a bid to combat tax evasion.

The remainder of the year is set to see boards balance secular changes to how they operate, with the broader societal pressures created by the pandemic, as well as financial upheaval, contributing to short-term pressures. Looking ahead, the transition to a more stakeholder-focused economy—and one that is adept at addressing systemic crises—will likely require a more significant rethink of governance, leading to the better alignment of corporate, environmental, and societal needs. ■

Bruno Bastit is a director with S&P Global Ratings.

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