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2022 is upon us, and with it, comes a whole new set of governance trends. The corporate world is consistently evolving, influenced by factors such as shareholder activism, cybersecurity, bitcoin, and SEC regulation. This blog post presents a unique perspective on these trends, revealing their impact from a slightly higher altitude, but maintaining a clear runway visibility.
1. The Rising Commitment of the Director
The expectations for directors are surging as new concerns demand more attention at the board level. These concerns include derivative litigation, government investigations, and CEO perceptions of board effectiveness. There is an increasing call for directors to demonstrate stronger commitment to their fiduciary responsibilities and their role as a valuable sounding board for the management team. A director’s level of commitment is no longer measured just by attendance in meetings, but also by the quality of their involvement and their preparation for board service.
2. The Evolving Board/Management Relationship
External factors not only increase director fiduciary commitment but also put pressure on the relationship between the board and management. Having navigated through two years of crisis-induced shifts in leadership obligations, both directors and executives now need to redefine their respective roles, responsibilities, and authority boundaries. A more precise understanding of the board's ability to balance monitoring duties with serving as a valuable resource to management is crucial.
3. Organizational Resilience in Focus
With the lingering uncertainty from COVID-19 and economic factors, the push for improved corporate resilience is stronger than ever. It's clear that leaders must continue to address the near-term challenges of recurring COVID-19 surges. However, they also need to refocus their resilience planning to consider the possibility that coronavirus could become endemic. This paradigm shift in planning will require agility and foresight.
4. The Changing Face of Human Capital
The traditional relationship between employees and employers is being reshaped, and boards need to take note. This goes beyond just managing company culture and addressing workplace safety, job location, and social/political issues within the workforce. The ongoing "Great Resignation" and its impact on employee loyalty to the traditional work ethic pose significant challenges. Boards need to guide and support management's response to these emerging concerns.
5. The Persistent Importance of ESG Monitoring
Amid growing pressures from investors, customers, and governments, directors can't afford to overlook ESG-related concerns, specifically around climate change and human capital. Anticipating future ESG expectations, metrics, and disclosure requirements will be key. As the field of ESG continues to evolve, board members must strive to keep their knowledge up-to-date, even considering becoming certified ESG analysts.
6. The Rise of Artificial Intelligence
Artificial intelligence (AI) applications are spreading across industries at an astonishing pace, raising two oversight concerns for directors. First, their readiness to address AI application and implementation issues within their organizations. Second, keeping abreast of legislative, regulatory, and "best practice" changes that could influence board engagement with AI. Understanding AI is no longer an optional skill for directors but a necessity.
7. Code of Conduct: A New Balance
Enforcing the code of conduct in the current climate requires a delicate balance. Boards will need to ensure fair treatment for complainants, including those claiming whistleblower protections, while maintaining a heightened sense of justice for the accused. Striking an equitable balance between maintaining a healthy workplace culture and preserving an engaged executive team will be key.
8. Corporate Social Responsibility Amid Sociopolitical Turmoil
As political and social issues continue to divide opinions, boards face tough decisions about whether and when their corporations should take public stances. Boards need to navigate the tightrope between investor demands for greater political transparency, the ESG emphasis on corporate social responsibility, workforce political leanings, and consumer sentiment towards corporate social activism.
9. Mission-Critical Risks Deserve Attention
Delaware case law underlines the need for management-to-board reporting systems to focus on risks linked to "mission critical" operations. This necessitates that boards identify which corporate operations fall into this category and establish appropriate reporting structures. They should also confirm a shared understanding with management about the board's ultimate responsibility to intervene when mission-critical risks do materialize.
10. Compliance and Risk Supervision: A Renewed Focus
Under the Biden Administration, corporate fraud enforcement has intensified, prompting boards to reassess their internal control and reporting mechanisms. Directors should evaluate the management's ability and readiness to maintain appropriately structured risk and compliance systems. Checking the adequacy of compliance and risk reporting channels, and the board's ability to evaluate risk, are paramount. Risk management needs to be free from cultural influences that could undermine its effectiveness.
In conclusion, these ten trends will shape the corporate governance landscape in 2022. Boards should seize the opportunity to modernize their thought processes, operational strategies, knowledge, and practices in response to these shifts. Staying informed and proactive will be vital for boards to effectively perform their leadership responsibilities in this evolving landscape.
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