Events of the past two years have fundamentally shifted the business landscape and changed the way that organisations operate. The COVID-19 pandemic has increased our awareness regarding public health challenges. The climate crisis has reached a point where it requires immediate action, as illustrated by theCOP26 conference in Glasgow in the autumn of 2021. At the same time, there has been a greater focus on social justice movements, including the rise of the Black Lives Matter movement following the murder of George Floyd. All of these factors have had a bearing on the priorities of shareholders and, therefore, the way in which boards develop their strategies.
“The new environment is characterised by an increasingly complex set of pressures and demands from various stakeholder groups, heightened expectations for societal engagement and corporate citizenship and radical uncertainty about the future.”
Against this backdrop, we explore the emerging trends in corporate governance that will help you prepare for the challenges and opportunities you might encounter in 2022.
These corporate governance trends will shape the rest of the year and beyond.
1. ESG is here to stay
Sustainability and good governance are linked nowadays. Reporting on environmental, social and governance factors is gathering momentum, under pressure from investors who want issuers to promote sustainability. In fact, many jurisdictions already require certain issuers to report non-financial performance in these ESG areas, with the scope widening over time. The European Union has a number of pieces of legislation in place regarding ESG reporting.
Large public interest entities (PIE) with more than 500 employees and who have either a balance sheet of more than €20,000,000 or net turnover of more than €40,000,000 must report on their ESG strategy and its development, performance and impact.
The EU passed a proposal in April 2021 to widen the scope of the NFRD with the Corporate Sustainability Reporting Directive. The new directive includes all companies on regulated markets and requires them to report using mandatory standards in a more detailed manner. They should also have their ESG reporting externally audited.
The SFDR affects financial service businesses and creates a standard framework by which investors can compare their sustainable products. Financial market participants (FMPs) must make firm-level and product-level disclosures on how they integrate sustainability risks, promote ESG factors and assess adverse sustainability impacts. They should also report on their sustainable investment objectives.
Currently, it is only mandatory for those businesses with 500 or more employees. However, all FMPs are advised to report, and regulators can oblige them to explain why they do not.
Outside of the EU, theUK government introduced legislation, requiring both public companies and private companies with more than 500 employees and £500 million in turnover to report on climate-related risks and opportunities from April 2022. The estimated more than 1,300 companies are mandated to report climate-related financial information in line with recommendations from theTask Force on Climate-Related Financial Disclosures (TCFD).
Wherever you are based, your ESG metrics are of increasing importance to investors, regulators and other stakeholders. This demand for disclosure shows the time for greenwashing is over and it is essential that companies report accurate data to an agreed standard to make it easier for external parties to compare issuers against the market on ESG performance.
2. Human capital concerns
An overwhelming majority ofhuman resources leaders told Gartner that they expected at least some employees will work remotely even after the pandemic is over. These 95% believe that the hybrid model of work, where some employees are office-based and others work from home, is the future and that you must factor this into your strategy development.
Major corporates such as Google and Apple are already punching back dates by which they expect employees to return to the office after the COVID pandemic and, although many Wall Street giants campaigned to get their workers back on site, the majority are still working remotely. This is symptomatic of the desire to embrace the ‘new normal’ with many employees demanding more flexibility.
Other human capital concerns include increasing gender diversity, racial diversity, equity and inclusion across the company, from the board down. Not only is this key for social responsibility, but a corporate culture that embraces people from different locations, races, genders, backgrounds, experiences and mindsets also allows for more rounded thinking and decision making. This shows diversity on boards is as essential as anywhere else in the organisation.
3. Hybrid and virtual board and shareholder meetings
The online and hybrid models do not need to be limited to the office. Going virtual orhybrid in the boardroom allows you to save money on travel and related expenses, increases attendance and allows your board to spread the net wider to find the best new talent to join your team. Board meetings with an online element help you cut the use of fossil fuels and allow for more corporate board diversity, as there are fewer barriers to attendance.
Similarly, you can increase shareholder engagement by offering a chance for investors to attend remotely. AGMs are the perfect opportunity to bond with investors and make them feel truly connected to the company. But, as the Financial Times reported, before COVID, “critics argued the event was outdated, with many attended by just a few shareholders.”
There are numerous reasons why an in-person-only annual shareholder meeting might struggle to attract investors. Principally, many were held during the workday. This limited the number who were free to attend, particularly those who lived a long distance from the venue and who would have to book time off from work, whilst spending money on travel and, potentially, accommodation. For institutional investors and funds with multiple AGMs to attend during the season, it meant a lot of time on the road and maybe even having to prioritise which events to attend.
With the pandemic came the relaxation of rules across many jurisdictions in Europe,allowing virtual AGMs to take place. Now, shareholders need only clear a window in their schedule for the running time of the meeting, attending at their desk. As long as you use the rightAGM webcasting software, they can feel included as they interact, engage and vote online.
4. Data privacy regulations
In addition to the ongoing requirements documented in theGeneral Data Protection Regulation (GDPR), there are a number of data privacy shifts expected that EU companies must remain compliant with during 2022.
This act covers hosting companies, online platforms (everything from online marketplaces to social media sites) and intermediaries, such as internet service providers. It looks to tackle the delivery of illegal content, eradicate disinformation and ensure that advertising is transparent. Platforms would have to be more transparent about how they deal with illegal content, how their algorithms work and more.
The EU intends to use the DMA to level the playing field online and prevent platforms from gaining an unfair advantage in the market. It identifies big tech “gatekeepers” and puts the onus on them to increase competition in the digital space and allow new players onto the scene.
The ePR means that there will be a single set of rules regarding online privacy for all businesses and consumers across the EU. It will also ensure that relatively new online communication tools like WhatsApp and Facebook Messenger adhere to the same privacy rules as established communications firms. In addition, consumers can enjoy additional privacy in online communications as well as simplified rules regarding cookies.
Any company that does business in the EU and which utilises artificial intelligence or machine learning must adhere to this act. It prevents activities that could lead to AI causing physical or mental harm or exploiting vulnerable people.
5. Increased shareholder accountability
Shareholders scrutinised executive pay closely during the COVID-19 pandemic. The FTSE 100 in the UK saw the number of companiesreceiving low votes (under 80% of shareholding) on director remuneration packages more than double between 2020 and 2021.
Around the world, investors warned companies who had taken state aid, made redundancies and took advantage of furlough schemes against making payments to executives that seemed out of step with the times. And this level of accountability for remuneration committees will continue, even as we move away from the regular lockdowns.
In the spirit of prizing true sustainability over greenwashing and empty platitudes on inclusion and diversity, investors will expect their boards to deliver real, tangible results in order to earn their rewards. Indeed, the 2021Institutional Investor Survey showed an increase in shareholder activism and that two-thirds of shareholders would support an activist investor if the issuer failed to respond to an ESG shareholder resolution on executive and CEO pay.
6. “Tone in the middle” culture
Developing a strong “tone at the top” culture is important because the executives and top management should be seen as exemplary ambassadors for the company. Butit is not enough to spread the word of compliance throughout the whole organisation.
If you want to do all you can to avoid compliance risks, you also need to address the “tone in the middle” culture. This is driven by middle management, and the benefit is that regular employees in your business generally have more contact with this tier of management than they do with board members, for example.
If middle management buys into the compliance efforts of the business, they can more easily create an environment in which employees feel comfortable speaking up when they spot someone acting in an unethical manner.
With the EU Whistleblowing Directive now in operation, a good example of this “tone in the middle” culture is when middle managers show that they welcome and value whistleblowing reports, rather than treat them as irritation or as a result of troublemaking.
Implementing a confidential, automatedwhistleblowing tool like IntegrityLog shows that you want to make it easy and seamless to take a whistleblowing report and assures reporting persons that you will take their complaints seriously.
What is good governance?
Good corporate governance is delivered by the board proactively seeking to produce the best outcomes for all stakeholders, rather than simply aiming to stay compliant. It is an ethical and transparent approach to solving operational issues in a manner that helps the company reach clear, defined goals aligned with its vision and principles.
What is ‘shareholder democracy’?
Shareholder democracy aims to provide investors with more of an influence over the governance of the organisation. It could be in terms of executive remuneration, more say over the appointment of directors, board composition, demanding more accountability from boards of directors, guiding the critical direction of the firm or any similar aim.
Do board members need ESG expertise?
With the continuing rise of the importance of ESG matters, having people with ESG competencies on the board is essential. Without members who truly understand what it is to be a sustainable business, you run the risk of being accused of greenwashing and only paying lip service to the important environmental, social and governance matters at hand.
Environmental issues and social issues require expert guidance. They will form a significant part of your key business metrics going forwards, so they should always be factored into the decision-making process.
The world-changing events of the past two years, including the COVID-19 crisis, have also affected the way the corporate landscape looks. Investors have seen the best and worst of boards and issuers during this time, watching the more agile companies tackle extraordinary issues with confidence and less prepared companies struggle to keep up.
The above emerging trends in corporate governance show where your priorities must lead as we move away from the damaging pandemic, and the future looks like a more collaborative and transparent space. The key is to understand and engage your shareholders. They are the people who will work with you to achieve your goals, but they are also the people who can cause you problems if you fall short of your aims.
Shareholder Analysis from Euronext Corporate Services helps you develop effective investor relations strategies by providing a multi-dimensional report of your shareholding structure and guidance on attracting the right shareholders.Book a demo of Shareholder Analysis for your business today.