Trends and challenges that Public Company boards are bound to face in 2018.
The Conversations have yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape. The changing pressures and dynamics that boards will face in the coming year are diverse and significant in their impact. Institutional investors will continue their push for more uniform standards of corporate governance globally, while also increasing their expectations of the role that boards should play in responsibly representing shareholders.
Boards must take a more active role in scenarios of planning and helping management to navigate increasingly costly risks due to political uncertainty. The movement for companies and investors to adopt a more long-term orientation has gained momentum, with several large institutional investors now pressuring boards to demonstrate that they are actively involved in guiding a company’s strategy for long-term value creation.
Expectations and Alignments around Corporate Governance
The recent reforms in Japan, India and Brazil have borrowed heavily from the US or UK models. The regulators have not yet caught up to or agreed with investor expectations, institutional investors are engaging companies directly so as to advocate for the governance reforms they want to see. The investors look for more from their boards than ever before and are willing to intervene when they do not feel they are being responsibly represented in the boardroom.
Corporate Governance in an Era of Political Uncertainty
Populist political movements have gained broad support in several countries around the world, contributing to uncertainty about the future regulatory and political environments of two of the world’s five largest economies. In United Kingdom, Conservative government signaled support for shareholder influence over executive pay and disclosing of the CEO employee pay ratio. In the United States, the president-elect Trump has shown a willingness to “name and shame” specific companies that he tends to have benefited unfairly from trade deals or moved jobs overseas. Boards must be prepared to navigate these new reputational risks and intense media scrutiny, and review management’s assumptions about the political implications of certain decisions.
Increasing Board Accountability for Long-Term Value Creation
Efforts to encourage a more long-term market orientation have intensified in recent years, with several prominent business leaders and investors, most notably Larry Fink, Chairman and CEO of Black Rock, urging companies to focus on sustained value creation rather than maximizing short-term earnings. In his 2016 letter to chief executives of S&P 500 companies and large European corporations,
Trends in Corporate Governance In 2018
Based on global experiences as public companies will likely face the following trends in 2018:
- Increasing expectations around the oversight role of the board, to include greater oversight of strategy and scenario planning, investor engagement, and executive succession planning.
- Continued focus on board refreshment and composition, with attention being paid to directors’ skill profiles, the currency of directors’ knowledge, director over boarding, diversity, and robust mechanisms for board refreshment that go beyond box-ticking exercises.
- Greater scrutiny of company plans for sustained value creation, as concerns increase that activist settlements and other market forces are causing short-term priorities to compromise long-term interests.
- Greater focus on Environmental, Social and Governance (ESG) issues, and those related to climate change and sustainability, as industries beyond the extractive sector begin to feel investor pressure in this area
These trends and their implications for five key regions and markets: African Countries, the United States and the European Union.
The surprise election of Donald Trump has increased regulatory and legislative uncertainty. Certain industries, such as financial services, natural resources and healthcare, may face less pressure and government scrutiny. We expect nominees to the Securities and Exchange Commission (SEC) to be less supportive of the increased disclosure requirements around executive pay and diversity. However, public pension funds and institutional investors will continue to push governance issues through increased specific engagement with individual companies.
On the many countries in Europe, the push for board and management diversity have continued to pace in 2017. Proper payment has continued to be the focus of government, investors and media attention with various proposals in competition. The work being done in the UK on board oversight of corporate culture has the potential to spill across European borders and travel farther afield over the next few years.
Africa, as a continent emerging from the transatlantic slave trade and the colonialism legacy, has been facing governance challenges since the early years of the independence of its countries. African leaders began working for the development vision of Africa in the end of the 1950s and the start of the 1960s, convening to work as unique and common groups to be able to overcome the challenges facing Africa and their fragile states. As on average, the region has made tremendous gains over the last 25 years. In the freedom house 2016, majority of the people in sub-Saharan Africa lived in countries that have been set as either free or partly free. Among those countries the majority have a history of civil conflict; and the remaining proportion missed the political transitions that regional peers have gone through beginning in the mid-1990s.
In Kenya and Senegal, competitive general and legislative elections, respectively, will likely lead to greater levels of intra-elite political accountability and democratic consolidation. In conclusion, the regional forecast that anticipated positive economic outcomes may lack the need among the more autocratic African governments to revert to coercion, as opposed to good performance, as a way of staying in office. There have been more governance changes occurring in the last five years than in generation. WorldCom, Enron and other implosions in 2001-2002 differ from the global financial crisis of 2008-2009. There are more governance changes are expected to happen in 2018
By: Kennedy K. Irungu
Digital Marketer: Indepth Research Services