Investors have high expectations for the companies in which they hold a stake. It is no longer enough for a board to sit back and relax while a business pumps out profits: as hot-button issues gain prominence, a successful company can only stay at the top of its game by employing strong corporate governance.
Corporate social responsibility has moved from a niche buzzword to a pillar of a strong corporate governance framework
Many firms still fail to recognise this, however, and in 2018, corporate scandals occurred left and right. From some of the biggest data breaches in history and tales of corporate fraud to the rippling fallout of the #MeToo movement, numerous companies were embroiled in cases of corporate misconduct.
Scrutiny over these issues is only expected to intensify as 2019 progresses. As the Harvard Law School Forum on Corporate Governance and Financial Regulation said in its 2019 global trends list: “The demand for board quality, effectiveness and accountability to shareholders will continue to accelerate across all global markets.”
Investors are seeking boards with a strong sense of leadership and an equally solid moral alignment. The 2019 World Finance Corporate Governance Awards recognise the companies that have gone above and beyond to prioritise transparency and inclusivity.
Environmental awareness and sustainability have risen to the top of the corporate agenda in recent years. Law firm Hogan Lovells’ Corporate Governance Outlook 2019 report said that, for publicly traded companies, environmental and social issues have dominated shareholders’ corporate governance proposals since 2014. In 2018, they were still the most popular proposal topic.
Over the past few years, it has become clear just how multifaceted a challenge climate change has become and how extensive the role of businesses will be in shaping the planet’s future. Asset managers and owners are increasingly interested in integrating environmental and social issues into their investment decisions, but to do this, businesses must provide quantitative data on their environmental impact. Unfortunately, most companies still fail to disclose this vital information, and investors will invariably prioritise the companies that do over those
that leave them in the dark.
Sustainability in business goes beyond the environment. Corporate social responsibility has moved from a niche buzzword to a pillar of strong corporate governance frameworks. With the Millennial generation just as interested in a company’s morals as its profits, CSR reports are now booming in popularity.
According to a 2015 study of Millennials and CSR conducted by Cone Communications, more than nine out of 10 Millennials would switch brands to one associated with a worthy cause. Millennials, who are now aged between their early 20s and late 30s, were also prepared to make personal sacrifices to have an impact on the issues they cared about, including paying more for a product or taking a pay cut to work for a company whose ideals better aligned with theirs.
Achieving sustainable growth is now at the forefront of governance issues in many countries. Although short-termism still dominates the corporate agenda, more investors are looking down the line to see whether the companies they invest in are purely prioritising profits or playing the long game to achieve sustainable growth in the years and decades to come.
In 2018, a large number of high-profile executives were ousted from their top positions due to issues of misconduct, including Carlos Ghosn, the former chairman of Nissan, and Leslie Moonves, the ex-CEO of CBS Corporation. In 2019, the issue of accountability will continue to dominate corporate governance issues as the public’s intolerance for misconduct heightens.
Amy Freed of Hogan Lovells wrote in the firm’s 2019 report that boards will be judged on their ability to respond quickly and effectively to allegations of executive misconduct. “These incidents are costly to companies both in terms of direct costs of response including litigation and settlement, as well as indirect costs of distraction of management from strategic objectives,” Freed wrote. “When violations occur, boards must ensure that they are transparent about oversight failures and the steps that are undertaken to remedy those gaps.”
Beyond those very serious allegations, a number of corporate brands also became tangled up in disastrous social media incidents in 2018. Companies such as Snap and Lockheed Martin both took a reputational hit as a result of poorly thought out social media or advertising campaigns. Social media missteps may be part of the internet’s short-lived and fast-paced news cycle, but they magnify quickly and spread like wildfire if they are not dealt with swiftly. Each company’s crisis management processes must be updated to include their top social media risks so that responses can be prepared and delivered quickly.
This all influences a company’s corporate culture and reputation, which are vital contributors to their overall value. Boardrooms should cultivate this culture in order to protect their employees, shareholders and the company’s future.
Strength in diversity
Investors will not only scrutinise the actions of boards in 2019, but they will also dissect their composition. Diversity in the boardroom – in terms of gender, ethnicity, socioeconomic background and age – remains a top issue for smaller shareholders and institutional investors alike.
In today’s rapidly changing and multifaceted business environment, investors want to ensure the boardroom – and the pipeline of candidates that leads up to it – is equipped with the skills to meet any challenges that could arise. Hosting a diverse range of voices from different backgrounds is one way businesses can strengthen their board considerably. According to Harvard’s Forum on Corporate Governance and Financial Regulation, institutional investors will push for robust, independent and regular board evaluation processes in 2019 that could
result in “board evolution”.
Going forward, it will be key for every board to have strong digital leadership and knowledge of technology and social media. Members of the board must be able to identify the technologies that will directly impact their businesses, as well as understand how the company fits into the wider digital landscape. As such, boards are increasingly likely to recruit younger directors who have not necessarily been CEOs before.
What’s more, the #MeToo movement, which took off in late 2017, extended from the entertainment world to nearly every other sector, including business, in 2018. The issue of sexual discrimination and harassment in the workplace will continue to take a front seat this year, and investors will expect organisations to have an answer for how they will improve gender diversity in their business.
The main issues that are expected to dominate corporate governance agendas in 2019 centre on transparency and inclusivity. Investors will also continue to expect board members to contribute to more than just a company’s financial success. Many businesses will struggle to prosper under this tough scrutiny, but the few that forge a socially responsible path to success are celebrated in the 2019 World Finance Corporate Governance Awards.
World Finance Corporate Governance Awards 2019
Banco de Fomento Angola
Bank of Cyprus
Jordan Islamic Bank
PKO Bank Polski
Credit Bank of Moscow