Global and Regional Trends in Corporate Governance for 2017
The Harvard Law School Forum featured Russell Reynolds Associates' research, "Global and Regional Trends in Corporate Governance for 2017." The research, co-authored by Anthony Goodman and Jack "Rusty" O'Kelley III, identified the key trends in corporate governance that public companies will face in 2017. The article is excerpted below.
Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations 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. Political uncertainty and the surprise results of the US Presidential and “Brexit” votes may require that boards take a more active role in scenario planning and helping management to navigate increasingly costly risks. 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.
Higher Expectations and Greater Alignment Around Corporate Governance Norms
Continuing the trend from last year, large institutional investors and pension funds are pushing for more aligned approaches to corporate governance across borders to support long-term value creation. Regulators are responding, particularly in emerging economies and those with nascent corporate governance regimes. Recent reforms in Japan, India and Brazil have borrowed heavily from the US or UK models. Where regulators have not yet caught up to or agreed with investor expectations, institutional investors are engaging companies directly to advocate for the governance reforms they want to see. These investors also expect more from their boards than ever before and are increasingly 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 the UK, the Conservative government has signaled potential support for shareholder influence over executive pay and disclosure of the CEO-employee pay ratio. In the US, President-elect Trump has demonstrated a willingness to “name and shame” specific companies that he perceives 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 BlackRock, 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, Mr. Fink specifically called for increased board oversight of a company’s strategy for long-term value creation, noting that BlackRock’s corporate governance team would be looking for assurances of this oversight when engaging with companies.
Global and Regional Trends in Corporate Governance in 2017
Based on our global experience as a firm and our interviews with experts around the world, we believe that public companies will likely face the following trends in 2017:
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 particular attention being paid to directors’ skill profiles, the currency of directors’ knowledge, director overboarding, 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 in particular those related to climate change and sustainability, as industries beyond the extractive sector begin to feel investor pressure in this area.
We explore these trends and their implications for five key regions and markets: the United States, the European Union, India, Japan and Brazil.
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