Credit score: Christina Morillo 
Creator: Neil Shah, Director of Content material and Technique, Edison Group
A collection of high-profile controversies at main international corporations has compelled a re-evaluation of company governance. Tensions between company boards and buyers persist, as seen throughout 2023’s AGM season, with notable disagreements at corporations like Disney, Ocado and Smith & Nephew.
Inside company management struggles, similar to OpenAI’s temporary dismissal and reinstatement of CEO Sam Altman, have additional underscored the necessity for higher governance. In keeping with a Harvard report, these occasions replicate a rising consensus that many of those points stem from poor company governance. McKinsey analysis helps this, displaying that round 70 p.c of current activist investor calls for have centered on governance reform.
Addressing these governance points, particularly complicated subjects like govt pay, isn’t easy. Nonetheless, adopting finest practices may also help rebuild belief between boards and buyers. Listed here are a number of key areas the place company governance might be improved.
Deal with regulation
One essential step for corporations is making certain they absolutely perceive and adjust to trade laws. Failures on this regard have led to vital scandals, such because the collapse of the cryptocurrency trade FTX, the place poor due diligence and asset dealing with have been partly responsible. FTX’s CEO, Sam Bankman-Fried, later admitted ignorance of many laws, highlighting the necessity for boards to make sure compliance in any respect ranges.
Board accountability is significant in stopping scandals and making certain correct governance
Boards can’t rely solely on authorized departments to deal with laws. They want a complete technique that covers regulatory monitoring, compliance programmes, regulatory engagement, and danger administration. With new laws just like the Company Sustainability Reporting Directive (CSRD) on the horizon, boards should put together by understanding the necessities, growing knowledge reporting methods, and adopting frameworks just like the World Reporting Initiative. Correct preparation will assist corporations keep away from the pitfalls of ‘greenwashing’ or ‘greenhushing’ as they navigate sustainability efforts.
Board accountability is significant in stopping scandals and making certain correct governance. Latest years have revealed quite a few examples of corporations faltering because of a scarcity of clear roles and transparency. One notable instance is the UK Publish Workplace scandal, the place the board repeatedly failed to handle administration points. Equally, the Federal Deposit Insurance coverage Company (FDIC) confronted allegations of worker mistreatment that went unaddressed by its board. To enhance accountability, boards ought to embrace specialists in key areas like provide chains and environmental, social, governance (ESG). They have to clearly outline roles and tasks for board members, making certain they’ll successfully oversee administration, regulatory compliance, and transparency.
Improve communication
Enhancing communication with shareholders is one other key space for reform. Using outdated communication strategies, similar to paper-based ballots, has prompted friction between buyers and company management. For example, Marks & Spencer’s chairman, Archie Norman, has identified how these strategies hinder efficient dialogue.
A scarcity of communication has led to misunderstandings, with buyers accusing corporations of secrecy. ExxonMobil shareholders, for instance, criticised administration in 2023 for not disclosing the monetary influence of its internet zero proposals. Digital investor relations ought to change into normal observe, permitting for extra clear and environment friendly communication. This could allow boards to share paperwork and proposals with shareholders, whereas additionally facilitating early suggestions forward of AGMs. This method would scale back conflicts, particularly as many proxy disputes are resolved earlier than AGMs.
As cyberattacks change into a daily menace, company boards should prioritise knowledge safety. Cybercriminal teams like Scattered Spider and ShinyHunters have more and more focused non-public corporations, making it important for boards to concentrate on knowledge integrity, confidentiality, and system resilience. Corporations want to guard delicate data and make sure that their cybersecurity measures are strong sufficient to keep up stakeholder belief.
Govt compensation continues to be a contentious concern. Whereas there’s a sturdy enterprise case for aggressive govt pay, boards should be clear and talk the advantages of attracting prime expertise to buyers. Benchmarking govt pay towards rivals may also help guarantee compensation is suitable, and clear communication can reassure shareholders that these choices profit the corporate long-term.
Whereas ESG insurance policies have confronted backlash, they nonetheless play an vital position in company governance, significantly as laws more and more require sustainability initiatives. Boards ought to set company-wide ESG targets, herald specialists, and guarantee compliance. On the similar time, it’s important to obviously talk the fiduciary influence of ESG measures to keep away from shareholder dissatisfaction, as seen in a number of revolts from 2023–24.
Lastly, growing board variety has typically been dealt with on an advert hoc foundation, however formalising this course of is crucial. Boards ought to set variety targets and appoint members to advertise inclusivity all through the corporate. Creating subcommittees devoted to this purpose can make sure that various voices contribute meaningfully to company decision-making. Whereas points like govt compensation and ESG will proceed to spark debate, the broader challenges surrounding company governance are solvable. By adopting easy reforms, corporations can considerably improve their governance practices and meet the calls for of right this moment’s enterprise setting.
