Corporate governance is an ever-evolving subject. It can never be perfect and it needs to adapt continuously to the Global Corporate Governance trends. CG also needs to keep up with the changing regulatory landscape and changing demands of various stakeholders. Below is a compilation of leading CG trends that should grab your attention this year-
1. Board Quality
Board quality consists of components such as board skills, board diversity, board composition, board qualification and board knowledge. With stakeholders becoming more educated and aware, their scrutiny of board performance is bound to increase. The inextricable connection between board performance and board quality is well-known. Thus stakeholders will examine board quality in much more detail.
Countries all around are facing pressures from stakeholders to improve board qualities. For example, shareholders in the US are emphasising director qualifications and disclosures. The focus of India is to make companies include more Non-Executive Directors. Brazil is witnessing a push for gender diversity and independence at the board level. The stakeholders of European companies are asking for an upgrade in board skills and structure, especially for foreign companies. The news of them wanting German companies to have a minimum of two financial experts along with a sustainability expert is quite doing the rounds.
2. The limelight on the CEO
The CG landscape is also affected by turbulent markets and economic situations worldwide. The recent events in the near past and ongoing like post-COVID-19 recovery, the Russia-Ukraine war and the ever-increasing inflation have made companies vulnerable to uncertainties. This has strained the leadership of the company. The management would look up to the action plans of the CEO to tackle any kind of situation. Thus, the board’s oversight of CEO performance will increasingly be emphasised. Experts believe that CEO succession planning and executive compensation will also share an equal limelight.
The word ESG has already taken everyone by storm. Despite repulsive opinions from many on the theme, one just cannot ignore the term. Sustainability reporting is high on the agenda of global investors in general. And this will tremendously compel companies to inject sustainability into their core and cater to sustainability disclosures. Many companies have already started their ESG journey and many will have to kick-start it soon. As ESG reporting directives are gaining a strong foothold, they will soon become an integral compliance requirement for a lot of companies. Stakeholders are also highly recommending ESG skills to be part of board skills as that would probably ensure that the company is on its way to running on sustainable lines.
In addition to adoption and disclosures, a suitable control and check mechanism should also be in place to reaffirm the accuracy of the disclosed ESG data. As ESG disclosures are at the forefront today, they are subject to strict inspections not only by the regulatory authorities but also by stakeholders and competitors.
4. The increased interaction between the board and executive leadership
A lot of stakeholders will have their eyes glued on the relationship between the two. As CG is strengthening, the participation of directors in corporate affairs will see a rise. Also, as compliances and fiduciary expectations increase, the pressure on directors to cope with these challenges shall escalate. The board will thus tailor the roles and responsibilities of the executive leaders carefully and ensure constant cooperation with them.
5. Informed Risk-Taking
Thoughtfully conceived risks are worth taking and should rather be taken. It is rightly said that a big business is not built without risks. Times demand that business leaders do not refrain from taking bold decisions. They should take up innovative initiatives. The presence of a risk management committee is always encouraged as it helps in formulating action plans after carefully assessing the risks diligently. Informed risk-taking gives a competitive edge to a company and helps it stay ahead in the game. The surrounding uncertainties will push companies to take more informed risks to obtain financial and organisational growth.
6. Artificial Intelligence (AI)
The regulatory landscape for AI which is already in the form of drafts in many countries is expected to include laws this year which will significantly increase compliance with the use of AI systems. For example, the AI Bill of Rights in the US, a cross-sectoral AI regulation by the European Commission etc. are all draft regulations on AI which will soon receive a green signal. The companies and boards will have extensive tasks in their hands as the use of technology will be at the forefront of the majority of companies with the world moving towards digital transformation.
7. Redefining ethical standards
Ethics is the essence of governance and unethical conduct by boards is simply unacceptable. Unethical behaviours have led to numerous business meltdowns. It also results in a permanent stain on an organisation’s reputation. The heavy fines and onerous penalties are nothing less of a nightmare for a company. Ethical expectations have also changed over time and companies are thus required to redefine ethical standards in consonance with the expectations.
8. Improving the corporate culture
This refers to addressing the ‘S’ of ESG. Employees are increasingly being intolerant towards a toxic and unpleasant work culture. Thus a company is required to take measures for the well-being and development of its workforce and make sure that they have a good work-life balance. Or they will surely be on a losing end.
You can learn more about this topic by opting for our recognised courses — ESG Expert Certification from Directors’ Institute- World Council of Directors.