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2020 Global and Regional Corporate Governance Trends

 


Harvard Law School Forum on Corporate Governance | January 18, 2020



The Harvard Law School Forum on Corporate Governance article, "2020 Global and Regional Corporate Governance Trends," was written by Russell Reynolds Associates Consultants Rusty O'Kelley and Anthony Goodman, based on their paper of the same name. The article is excerpted below.

Introduction and Background
For the first time, in 2020, we see the focus on the “E” and the “S” of environment, social and governance (ESG) as the leading trend globally, including in the United States, where it traditionally has not received as much attention by boards. Indeed, many of the key global trends for 2020, such as board oversight of human capital management (HCM), can be seen as subsets of ESG.

This year, as in the previous four years, Russell Reynolds Associates interviewed over 40 global institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals to identify the corporate governance trends that will impact boards and directors in 2020. This year we have recognized that the UK is expected to leave the EU on January 31, 2020 and we have also added Australia to our global survey.

1. Greater focus on the E&S of ESG. Beyond the global emphasis on good governance, environmental and social issues appear to be taking the greatest precedence for investors, moving from being a national or regional focus to being a truly global phenomenon. Boards and management alike are mostly playing catch-up on how best to define, integrate and oversee the E&S issues that are material to their business. In 2020, boards will be expected to strengthen their oversight and knowledge of material E&S matters and disclose their connection to the business in the form of risks and opportunities. We expect to see a consensus emerge around reporting frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) to help guide companies when reporting on E&S criteria.

2. Increasing importance of corporate purpose. Corporate purpose and stakeholder considerations have been business norms in various parts of the world for decades. In August 2019, 181 out of 188 member CEOs of the US Business Roundtable signed on to an amended Statement on the Purpose of a Corporation, putting aside the traditional view that maximizing shareholder returns is priority one. This was followed by a December announcement from the World Economic Forum updating their 2020 Davos Manifesto (last published in 1973) to center on principles that guide companies into the Fourth Industrial Revolution. The manifesto—like the Business Roundtable’s statement—challenges companies to put stakeholders at the heart of a company’s purpose. There remains a great deal of skepticism concerning the practical application of these documents, but public opinion in many countries appears to be shifting against shareholder primacy.

3. Better board oversight of corporate culture and HCM. Investors are asking what the board is doing to ensure the culture is robust and can withstand transformation and change. Investors would like more transparency on board involvement in culture and HCM to determine whether boards are providing adequate oversight. Data and analysis on corporate culture will play a key part in this oversight by boards. Directors in 2020 should appreciate the impact of culture on hiring, retention and productivity. Management will need to satisfy the board that the company has the culture and talent needed to successfully execute on strategy. (For more information, see our white paper on this topic here.)

4. More expansive view of board diversity that includes ethnicity and race. Considerable strides have been made globally around board gender diversity. As institutional investor voting power grew dramatically, so did demands for gender diversity. In 2020, boards will begin to experience additional pressure to consider ethnic and racial diversity. This phenomenon will vary by country. In the United States, it will be driven by investors such as Vanguard. In the UK, it will be as a consequence of the Parker Review. In Japan, the push to add more international directors will also broaden board diversity. In Canada, it will be the Business Corporations Act legislation that will require federally incorporated companies to disclose detailed information on the diversity of board directors and senior management. There will continue to be jurisdictions around the world where it will be harder for this trend to gain traction because the collection of data on ethnicity and race is illegal or highly regulated.

To read the full article, including regional trends for 2020, click here.





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2020 Global and Regional Corporate Governance Trends