Overview of Global Trends
Based on this article, published by Russell Reynolds Associates there are seven global trends that boards should be aware of. This article will explore these seven trends and the implications they will have on corporate governance in five key markets across the globe. The key markets consist of the United States, the European Union, Japan, India, and Brazil.
Seven Trends of Corporate Governance
- Better Investor Stewardship
- Board Quality & Composition
- Activist Investing
- Environmental, Social, and Governance Risks
- Human Capital
Seven Trends of Corporate Governance Explained
Better Investor Stewardship: There has been a push for more investor accountability in how they use their influence and votes to sway the direction of investee companies since the last financial crisis. In 2017, the top five global asset managers controlled $8.2 trillion of equity investments. Many of the largest institutional investors are focusing more on expanding engagements with investee companies and proxy voting.
Board Quality & Composition: Institutional investors’ key indicators for board quality are likely to remain as gender diversity, board skills and experiences, composition refreshment, and the appointment of directors who have enough time to dedicate to the company. In certain markets boards and committees should expect to see more votes against directors where there are fewer than two women on the board.
Compensation:Investors are seeking additional engagement and/or disclosure around total composition and the impact it has on long-term strategic goals and business performance. Boards should expect more inquires on incentive compensation schemes and if they achieve the desired employee behavior.
Activist Investing: Many boards feel trapped by competing demands. Institutional investors are interested in long-term value creation whereas, activist investors usually want short-term value enhancement. The boards that will be successful are the ones that ae willing to have a meaningful dialogue with activists to achieve a resolution.
Environmental, Social, & Governance Risks:Investors now consider climate change and sustainability to be mainstream priorities. The Financial Stability Board Task Force has laid out guidance on Climate-related Financial Disclosures which will increase investor focus on recommendations such as the use of the two-degree scenario planning to meet the Paris Accord goal.
Cybersecurity:Cyber risks continues to be an area of concern due to security breaches. Institution investors will use 2018 to form their policies on cyber risks and what the role of the boards will be.
Human Capital: Institution investors will focus on effective succession planning at the C-suite level and beyond, the impact of corporate culture on performance, and gender pay disparity.
Corporate Governance Trend Implications on the Five Markets
- New York City Pension Funds’ Accountability Project 2.0 will continue to put a spotlight on enhanced disclosure of the board composition through the request for disclosure of a formal board matrix.
- Large institutional investors including State Street Global Advisors are willing to vote against the chair and entire nominating committee of companies with only one or no female directors if they previously tried to secure change through engagement.
- Investors continue to promote relevance of climate change and broader sustainability risks and opportunities as areas of focus.
- Investors interested in having a cyber-competent board rather than adding specific expertise in a new director regarding cyber security.
- 2018 will see first disclosures around the CEO pay ratio mandated by The Dodd-Frank Act.
- Climate change and sustainability remain investor-driven and governmental focus, will be demand for more sustainability reporting, particularly around two-degree scenario planning.
- The Financial Reporting Council is charged with strengthening voices of employees and other non-shareholders at the board level through changes to the Corporate Governance Code.
- Consultation on the Stewardship Code for investors will begin in 2018.
- Investors looking to engage on chairman independence as data suggests an increase in combining chairmen and CEO roles.
- Concept of independence is new and not understood in a Western Context.
- Investors are ensuring no members of the board were former executives for the same company.
- 60% of companies have a former CEO or president serving as “special advisor.”
- Companies can expect efforts to encourage cultural alignment, accountability, and transparency.
- Firms are more willingly engaging with investors, and investors are becoming more active.
- Kotak Committee calls for all listed companies to have six directors on the board and half be independent.
- Kotak Committee recommends separating CEO and chairmen roles when the more than 40% of the company is owned by outsiders.
- Kotak Committee recommends that at least one of the independent directors is to be a woman.
- Calls for a minimum of five board meeting per year.
- Ensuring minority shareholders have board seats reserved and the election process is fair remains a priority for investors.
- Growing expectation that boards will become more transparent and accountable.
- Board taking steps to reduce government control and politically-driven appointments which are challenges for state-owned enterprises.
- Gender diversity has not become an actionable priority for institutional investors.
In summary, there are seven global trends in corporate governance that boards should focus on in 2018. The implications of these trends will have a different impact on a company based on the market in which that company is located. Therefore, different trends will be more important to different companies based on their location for example, board composition will have less impact on Brazil due to the lack of importance put on gender diversity. Whereas, board composition will have major impact on India as more than half of their public companies’ boards will need restructured for chairmen independence in companies where 40% of the company is owned by outsiders.