It has been a confronting year for directors worldwide with constantly evolving external challenges and rising community expectations. So what does 2022 hold?
Company Director talks to several experts with different perspectives on the trends they’re seeing that boards will need to be across.
Return to the office
Next year will be about “growing into” the COVID-19 pandemic and recovering from it, says director of policy and corporate governance at the Institute of Directors (UK) Roger Barker. “The question will be what to keep from the way things operated during the pandemic and what to change?”
Barker expects directors to be focused on motivating staff to return to the office in a way that works for everyone. “It’s a challenge and the details are yet to be worked out,” he says. “Remote working has many advantages, but many companies have also expressed the need for face-to-face interaction to promote innovation and teamwork and build the corporate culture.”
He notes diversity in organisations is broadening in scope. “There’s been a strong focus on gender diversity, especially at board level over the past 10 years. There is still a big emphasis on it, but the diversity agenda is becoming more of an inclusion agenda. Companies are starting to think about other dimensions of human characteristics such as ethnic, neuro, nationality and age diversity.”
Global supply chains
Barker stresses that COVID-19 has had a big impact on global supply chains. “We were living in a very globalised world and this is definitely an issue causing a lot of discussions around the boardroom table for many types of companies,” he says. “Some companies are starting to question whether they should reorganise their resources and perhaps have more local production. There’s more stockpiling and ensuring there is less vulnerability to other markets.”
COP26, investors and ESG
In the wake of the 2021 United Nations Climate Change Conference (COP26) and government commitments to zero-carbon targets, Barker believes climate change is firmly back on the boardroom agenda. “Investors are very active in demanding transparency over how the business is going to be affected by climate change, what the strategy is to address it, what commitments the company is making to achieve net zero by a certain date, and how it’s going to achieve that,” he says. “They are also looking at the composition of boards and whether companies have the right people on boards to understand the issues.”
Barker believes activism will get louder and stronger in 2022. “There are real signs of that,” he says. “While some activists criticise them for not doing enough, the world’s biggest asset managers, such as BlackRock, Vanguard and State Street, are slowly but surely increasing their use of voting to influence companies.”
He adds there is also a lot of money being mobilised under the banner of ESG and believes shareholders will put more ESG-related motions forward at AGMs. “Interestingly, companies are trying to mirror that by setting up ESG committees of the board. That may also be a way that policy develops. Governments and regulators may move to allow shareholders to put ESG motions forward in the same way as they have a say on pay in many countries.”
Stabilising monetary policy
Different financial centres are examining how to make themselves more attractive to investors and the innovators of the future, and whether to change listing rules, says Barker. “We are still very much in a phase where capital markets are competing very strongly to win business. There’s no doubt we’ve been living through an era of very loose monetary conditions. You have low interest rates around the world and quantitative easing. That has helped financial assets and private equity. But people are now starting to think about rising interest rates and inflation, and the need to start withdrawing those loose monetary conditions. It’s hard to know what impact that will have on the market and capital availability. Markets are difficult to predict.”
Richard Fields / Alvin Chiang
Expanded board remit
Richard Fields, head of the board effectiveness practice at Russell Reynolds Associates in Boston, notes much more boardroom attention being paid to issues such as workplace health and safety, diversity, inclusion and retention following COVID-19. “In the US, there’s been a trend to expand the scope of the remuneration committee to include more talent development and people oversight issues,” he says. “That trend is only going to accelerate. It will be something that just stays with us — just like annual COVID-19 booster shots.”
Alvin Chiang, corporate governance advocate and board adviser at Russell Reynolds Associates in Singapore, observes: “At the national level, there are climate-related targets, but the question is how do you translate that from government to governance. That’s what boards are struggling with.”
Chiang believes it will be a challenge for boards to navigate the different reporting standards and frameworks until they are harmonised. “There’s also the assurance side,” he says. “How will you gain comfort that whatever is reported is indeed what’s being done? Will the auditors have the skillsets to ensure that reports are true and fair?”
Shareholders and activism
When COVID-19 began, the focus was on ensuring everyone was safe and taken care of, says Chiang. “As we open up, shareholders are starting to become a priority and are pushing their agendas again. Boards need to work out how they will deal with their current expectations.”
Fields thinks stakeholders will produce more reasons to vote against directors. “The list will grow and could include governance practices, not being responsive enough to shareholders or not having enough diversity on the board,” he says.
Costs of hybrid meetings
Hybrid virtual board meetings aren’t perfect, says Fields. “There are real costs and consequences if there’s a particular issue you’re dealing with or if you have new participants. It’s also really hard to figure out how someone’s style will translate between an in-person and virtual board meeting. As long as it’s safe to do so, there will always be a place for in- person meetings. It’s more likely that some types of meetings or board events will move to virtual — those more focused on targeted or compliance- related issues There might be a blend to save the time, hassle and expense of getting everyone together every time. But I don’t think I’m working with a single company that says it will go virtual.”
“One of the big challenges coming out of COVID-19 is whether leaders are able to retain or revive their sense of the big picture,” says Professor AJ Brown, on the board of Transparency International and director of the public integrity and anti-corruption research program at Griffith University’s Centre for Governance and Public Policy. “Early in COVID-19, there was a period where the whole word was locking itself down. It made everybody think of the big picture, the long term and what really matters when it really comes to the crunch. That’s when the language of building back stronger started. Since then, things have become a lot more fractious.”
Brown says big-picture challenges include social equity, the resilience of the entire community and the broad sense of social responsibility and responsible business conduct that goes with doing the right things. “Boards should not take it for granted that regulatory decisions and regimes will protect them against integrity risks,” he adds. “They basically need to think for themselves.”
Brown expects the upcoming federal election to affect governance “fairly dramatically”. “This will be the election where public integrity, governance and corruption will be much more significant than for many previous elections, and possibly ever,” he says. “That’s because of the debate over creating a national Independent Commission Against Corruption (ICAC) and the fact that this has now moved from what Prime Minister Scott Morrison described not long before the last election as a fringe issue to being one that is so important.”
Brown says a federal ICAC will get the public sector to start confronting some big issues around the quality of its governance. “That obviously affects interactions between the private sector, companies and boards and government — and in many ways, should be a bit of a relief for directors and people who work in corporate governance. Many in the private sector are conscious public sector integrity has been playing catch-up with what we regard as being normal and standard for good governance.”
He notes companies have had to grapple with the problem of money in politics and the need to spend money on donations or to buy access to government. “Most big companies are now withdrawing from it completely. Others obviously still participate in that game and until we reform the political finance system, it’s going to be a headache for good governance in the corporate sector. On the political finance side, most states have already started to introduce one or more of the key reforms and have shown they work perfectly well.”
Former Human Rights Commissioner and now industry professor for responsible technology at University of Technology Sydney, Ed Santow is seeing more rigorous assessments of environmental, social, and governance (ESG) issues that go beyond marketing. “Over the past 12 months, I’ve been much more frequently consulted by companies big and small on ESG issues. It is not solely a matter of money and ensuring you have a good image, but also about ensuring that what you say is closely aligned what the reality is.”
From a government perspective, Santow says there’s a greater willingness to ensure through regulation, enforcement and policy that companies are being socially responsible. “I’m not anticipating a heap of new laws. There will be some reform, but not major, just more consistent enforcement of existing rules there to protect the community.”
“In a social, economic and political sense, one of the most important affirmations from the past two years is that, as a community we’ve said we care more about human life than we do about the ordinary conduct of our economy,” says Santow. “That may sound obvious, but in my view, it’s profound. It will endure beyond the pandemic.”
He says that instead of merely assessing the economic impact of actions, boards will also look at the social and human impact.
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