A series of high-profile controversies at leading global companies has forced a re-evaluation of corporate governance. Tensions between corporate boards and investors persist, as seen during 2023’s AGM season, with notable disagreements at companies like Disney, Ocado and Smith & Nephew.

Internal corporate leadership struggles, such as OpenAI’s brief dismissal and reinstatement of CEO Sam Altman, have further underscored the need for better governance. According to a Harvard report, these events reflect a growing consensus that many of these issues stem from poor corporate governance. McKinsey research supports this, showing that around 70 percent of recent activist investor demands have focused on governance reform.

Addressing these governance issues, especially complex topics like executive pay, isn’t straightforward. However, adopting best practices can help rebuild trust between boards and investors. Here are several key areas where corporate governance can be improved.

Focus on regulation
One crucial step for companies is ensuring they fully understand and comply with industry regulations. Failures in this regard have led to significant scandals, such as the collapse of the cryptocurrency exchange FTX, where poor due diligence and asset handling were partly to blame. FTX’s CEO, Sam Bankman-Fried, later admitted ignorance of many regulations, highlighting the need for boards to ensure compliance at all levels.

Board accountability is vital in preventing scandals and ensuring proper governance

Boards cannot rely solely on legal departments to handle regulations. They need a comprehensive strategy that covers regulatory monitoring, compliance programmes, regulatory engagement, and risk management. With new regulations like the Corporate Sustainability Reporting Directive (CSRD) on the horizon, boards must prepare by understanding the requirements, developing data reporting systems, and adopting frameworks like the Global Reporting Initiative. Proper preparation will help companies avoid the pitfalls of ‘greenwashing’ or ‘greenhushing’ as they navigate sustainability efforts.

Board accountability is vital in preventing scandals and ensuring proper governance. Recent years have revealed numerous examples of companies faltering due to a lack of clear roles and transparency. One notable example is the UK Post Office scandal, where the board repeatedly failed to address management issues. Similarly, the Federal Deposit Insurance Corporation (FDIC) faced allegations of employee mistreatment that went unaddressed by its board. To improve accountability, boards should include experts in key areas like supply chains and environmental, social, governance (ESG). They must clearly define roles and responsibilities for board members, ensuring they can effectively oversee management, regulatory compliance, and transparency.

Upgrade communication
Improving communication with shareholders is another key area for reform. The use of outdated communication methods, such as paper-based ballots, has caused friction between investors and corporate leadership. For instance, Marks & Spencer’s chairman, Archie Norman, has pointed out how these methods hinder effective dialogue.

A lack of communication has led to misunderstandings, with investors accusing companies of secrecy. ExxonMobil shareholders, for example, criticised management in 2023 for not disclosing the financial impact of its net zero proposals. Digital investor relations should become standard practice, allowing for more transparent and efficient communication. This would enable boards to share documents and proposals with shareholders, while also facilitating early feedback ahead of AGMs. This approach would reduce conflicts, especially as many proxy disputes are resolved before AGMs.

As cyberattacks become a regular threat, corporate boards must prioritise data security. Cybercriminal groups like Scattered Spider and ShinyHunters have increasingly targeted private companies, making it essential for boards to focus on data integrity, confidentiality, and system resilience. Companies need to protect sensitive information and ensure that their cybersecurity measures are robust enough to maintain stakeholder trust.

Executive compensation continues to be a contentious issue. While there is a strong business case for competitive executive pay, boards must be transparent and communicate the benefits of attracting top talent to investors. Benchmarking executive pay against competitors can help ensure compensation is appropriate, and clear communication can reassure shareholders that these decisions benefit the company long-term.

While ESG policies have faced backlash, they still play an important role in corporate governance, particularly as regulations increasingly require sustainability initiatives. Boards should set company-wide ESG targets, bring in experts, and ensure compliance. At the same time, it’s essential to clearly communicate the fiduciary impact of ESG measures to avoid shareholder dissatisfaction, as seen in several revolts from 2023–24.

Finally, increasing board diversity has often been handled on an ad hoc basis, but formalising this process is essential. Boards should set diversity targets and appoint members to promote inclusivity throughout the company. Creating subcommittees dedicated to this goal can ensure that diverse voices contribute meaningfully to corporate decision-making. While issues like executive compensation and ESG will continue to spark debate, the broader challenges surrounding corporate governance are solvable. By adopting straightforward reforms, companies can significantly enhance their governance practices and meet the demands of today’s business environment.