Corporate Governance 2022

Governance: Adapting to the "New Normal" 

As the restrictions adopted in response to the COVID-19 global pandemic ease around the world, there is talk of a shift to a "new normal" in the post-pandemic world. Whilst the impact of the virus on many areas of life is still being assessed, there are signs that it may have brought about changes which could help address another pressing global crisis. Climate change is an issue of enormous and immediate concern for governments, the business community and civil society alike. The manner in which companies in all sectors and jurisdictions are responding to this challenge is an area of considerable scrutiny. How businesses are governed is a crucial part of this response.   

In addition, ESG issues and considerations remain at the fore. Far from being eclipsed by COVID-19, ESG issues appear to have only risen in significance as the impact of the pandemic has become clearer. 

Embracing the Climate Challenge 

ESG issues remain ever present on the agenda for regulators, companies and investors. If anything, the focus on these issues is growing in the post pandemic world, and many governments have adopted ambitious environmental targets in the knowledge that achieving these will, in large part, depend upon support from, and action by, the business community. For businesses, addressing environmental and wider ESG concerns forms a key part of corporate strategy, as boards are increasingly aware of the potential costs (financially, reputationally and otherwise) of failing to align the company's future development with environmentally and ethically sustainable goals.  

A common issue for all market participants (companies, investors and asset owners), as well as other stakeholders and interested parties, is the need for reliable, comparable and transparent reporting on climate and broader sustainability matters. A plethora of guidance, recommendations and standards have emerged from various national and international bodies, creating a fragmented and confusing landscape for ESG reporting. This situation creates challenges and obstacles for all market participants, and results in what one commentator labels "alphabet soup" – an unappetising and increasingly challenging menu of abbreviations and acronyms.   

Support for the recommendations and recommended disclosures of the Taskforce on Climate-related Financial Disclosures and the establishment by the International Financial Reporting Standards Foundation of the International Sustainable Standards Board may be signs that there is growing acceptance of the need to coalesce behind a unified approach to ESG reporting, as has happened in relation to financial reporting. Much of this work is still in its infancy but with many around the world sounding the alarm on the need for immediate and profound action on climate change, this work is being expedited. Companies should therefore anticipate a comprehensive global baseline of sustainability disclosure requirements to be adopted in fairly short order, first in relation to climate-related matters and then with regard to further sustainability issues. 

Flexing the Investor Muscle on ESG Issues 

Investors, in part driven by increased regulation in this area, are increasingly cognisant of their stewardship responsibilities in this area, accepting a need to balance shareholder returns against the interests of a wider range of stakeholders, measured over a longer time scale. Increasingly, investors are proactively pushing for change now.   

Energy companies have long been in the spotlight for their environmental impact. This activism is moving beyond industries viewed as having contributed directly to these issues to business which finance and service these industries. Investors are, for example, turning their attention to banks, calling for divestment from high-carbon and other environmentally damaging industries. Across the globe, there have been investor-led campaigns targeted at the banking sector to push for a shift towards financing clean energy. In the past, institutional investors have demonstrated their willingness to use their voting power to encourage change on governance issues, in keeping with their stewardship responsibilities. Companies whose business strategies leave them susceptible to activism on environmental and sustainable issues should anticipate that institutional investors will continue to take an active interest in pressing for change on these issues.   

Looking Beyond Shareholder Returns 

As the global business community emerges from the COVID-19 pandemic, it is clear that there still remains a range of social issues to which boards are to respond. The economic stress caused by the current global inflation increases and supply chain challenges has put this into sharper focus and may lead to increased pressure on companies to ensure that they are mindful of the interests of a more diverse range of stakeholders. With many jurisdictions facing labour shortages in the aftermath of the pandemic (and due to changing demographics), workforce engagement is likely be an important area for boards. Executive remuneration proposals may be subject to greater scrutiny, particularly when viewed against general workforce pay conditions.  

Addressing these issues in a timely, diligent and sustainable fashion will require strong governance procedures and practices, resilience, and – if the unprecedented events of the last two years are anything to go by – a growth mindset. 

Is Virtual Communication Here to Stay? 

Another aspect of the "new normal" is the process by which boards exercise their governance and oversight responsibilities. There was widespread adoption of virtual communication solutions at the start of the COVID-19 outbreak as governments across the globe imposed lockdown restrictions to contain the spread of the virus. Virtual meetings, both at board and shareholder level, became for a time not only the standard, but also in some circumstances, the only means of gathering together to manage and interact with companies. This required all those involved to learn new skills in order to navigate meetings – both to adapt to the technology used to conduct meetings virtually and to translate communication skills from in-person meetings to the online world.  

However, over time it became apparent that there were some advantages to be gained from conducting meetings virtually. The speed and ease with which boards could be called together meant that directors could respond rapidly to evolving situations. For boards with members spread across numerous jurisdictions, this was a particular bonus, eliminating the need for time-consuming (and greenhouse gas emitting) long-distance travel. Being forced to meet virtually also presented the opportunity to question potential past resistance to conducting meetings online and to reconsider the need to incur some of the economic and environmental costs of business travel. There is undoubtedly still a need to meet in person at times. However, with an increased focus on corporate carbon emissions, companies can demonstrate their green credentials by opting for virtual, over in-person, board meetings where possible.  

For shareholders, there are legislative and practical restrictions which prevent the flexibility and ease of virtual meetings from being fully embraced. There are certain formalities which need to be observed for shareholder meetings, which may not apply in the case of board meetings. There are also legitimate concerns about limiting the ability of investors, particularly retail investors, to engage directly with the management, at least on an annual basis. However, there may be innovations from the pandemic which companies can explore when considering their interaction with shareholders. Some jurisdictions have introduced measures to facilitate virtual or hybrid shareholder meetings, allowing shareholders to choose how to attend, which facilitates attendance for a geographically dispersed investor base with many companies embracing this option as a way of enhancing shareholder democracy.  

The lessons learnt and strategies developed during the COVID-19 global outbreak will hopefully strengthen the governance toolkit when addressing any future unforeseen events.