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Men in Suits

A "Unique perspective" on the Leading Ten Governance Trends

A slightly alternative perspective on the trends that are likely to affect corporate governance in 2022. The absence of shareholder activism, cybersecurity, bitcoin, and SEC regulation.

Following are perspectives presented from a little higher height but with runway visibility.

1. Commitment of the Director

The growth of new concerns requiring board attention will force directors to be more committed to their fiduciary responsibilities and their position as a sounding board for the management team. In the context of derivative litigation, government investigations, and polls examining CEO perceptions of board effectiveness, there are growing concerns regarding director commitment. These issues will force board members to reevaluate the amount of time and preparation they devote to board service.

2. The Board/Management Relationship

The same external factors that demand greater director fiduciary commitment will likewise exert pressure on the board's relationship with management. After nearly two years of crisis-level adjustments to leadership obligations, directors and executives will be pushed to reconsider their relevant roles, responsibilities, and lines of authority. Particular clarity can be achieved regarding the board's ability to balance its monitoring duties with its function as a resource to management.

3. Organizational Resilience

Boards will push management to increase the responsiveness of corporate resilience activities. Obviously, leaders will maintain the near-term organizational response to recurring COVID increases and economic uncertainty, and they will undertake "reimagining" projects. However, they will also need to refocus their resilience planning to account for the prospect that coronavirus will become endemic, a fundamental risk that businesses and consumers may have to live with for many years.

4. Human Capital

The board will need to address the ongoing realignment of the conventional connection between employee and employer. This goes beyond the supervision responsibility for worker culture as an organizational asset and addresses workplace safety, job location, and social/political issues within the workforce. Its most difficult extension will be guiding and supporting management's response to the causes of the "Great Resignation" and their effect on employee loyalty to the traditional work ethic.

5. Continuation of ESG Monitoring

In response to investor, customer, and government pressures, directors will continue to pay close attention to ESG-related concerns (particularly climate change and human capital). Board members should anticipate and be prepared to collaborate with management in response to the anticipated future clarification of ESG expectations, measurements, and disclosure obligations. These are expected to result from a combination of new rulemaking, legislation, derivative litigation, and instructions from investment/asset managers. Board members are expected to be ESG experts and should go an extra mile to be a certified ESG analyst.

6. Artificial Intelligence

As the application of artificial intelligence across industries continues to expand at a rapid pace, directors should be cognizant of two oversight concerns. First is their readiness to confront AI application and implementation concerns within their own organisations, as well as the internal mechanisms they develop to provide board education, oversight, and risk mitigation. The second factor is the likelihood of legislative, regulatory, and "best practices" changes that have the potential to directly impact board contact with AI.

7. Code of Conduct :

Greater sensitivity will be anticipated for complainants (including those whose claims shield them as whistleblowers) and a heightened sense of due process and justice will be expected for the accused. In the enforcement of the code of conduct, boards will be required to strike a more equitable balance between the interests of the workplace culture and an engaged and loyal executive team.

8. Corporate Social Responsibility

Highly contentious political and social issues that are projected to develop in 2022 will provide boards with increasingly tough decisions regarding whether and under what conditions their corporations should take public views. Boards will need to strike a balance between pressures exerted by investors seeking greater political transparency and the ESG emphasis on corporate social responsibility, workforce segments that may be highly political, and consumer elements with which corporate social activism is not well received.

9. Risks that are crucial to the mission

Delaware case law reflects the assumption that management-to-board reporting systems will emphasize advising the board about risks associated with "mission critical" corporate operations. In response, boards should examine which aspects of corporate operations meet this standard, establish the form and structure of such reporting from management, and confirm a joint understanding with management regarding the board's ultimate responsibility to "weigh in" when mission-critical risks do materialize.

10. Compliance and Risk Supervision

Boards will reevaluate the adequacy of internal control and reporting mechanisms as a result of the Biden Administration's significantly intensified enforcement of corporate fraud. Boards of directors should review the management's willingness and capacity to operate suitably organized risk and compliance systems. The adequacy of vertical compliance and risk reporting channels, as well as the board's capacity to assess risk, should be confirmed. Risk prevention must be liberated from cultural factors that marginalize it.

These and other factors are expected to affect how boards operate and perform their leadership responsibilities. In the new year, boards may reshape their thought processes and operational strategies, as well as modernize their knowledge and practices.

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