Global and Regional Trends in Corporate Governance for 2018
Jack "Rusty" O'Kelley III, Melissa Martin
The Harvard Law School Forum published a bylined article, “Global and Regional Trends in Corporate Governance for 2018,” authored by Russell Reynold Associates Consultants Rusty O'Kelley III and Anthony Goodman. The piece featured the firm's research, "Global and Regional Trends in Corporate Governance for 2018." The article is excerpted below.
At the end of each year, Russell Reynolds Associates interviews over 30 institutional and activist investors, pension fund managers, public company directors, proxy advisors, and other corporate governance professionals in five key markets regarding the trends and challenges that public company boards will face in the following year.
Across all of our interviews this year, an overriding theme was the importance of board quality and composition—and the components that go into both. Investors of all types (including institutional and activist) are continuing to ratchet up their focus on the quality of a company’s board of directors, both collectively and individually. The focus on quality and composition is even greater than in previous years. Investors are motivated to hold boards accountable for company performance and are willing to take action to ensure that boards are meeting governance standards. Governance expectations continue to rise across markets and industries. Investors and proxy advisors are relying on traditional metrics (e.g., tenure, overboarding) to assess board quality, but a number of investors have talked about needing to have greater insights into the board to assess quality.
Based on the events that have unfolded in 2017, it is likely that the world’s largest investors also will pay closer attention to cybersecurity, climate change risk, and corporate culture in 2018. This may require boards to revisit their approaches to risk oversight, including broadening their perspectives on what constitutes risk management and is therefore within the scope of a board’s oversight responsibilities.
Overview of Global Trends
Based on our interviews and research, we see seven key global trends in governance of which directors should be aware.
Better Investor Stewardship: An enhanced interest in investor stewardship by governments and investors is impacting corporate governance globally. Since the last financial crisis, there has been a drive for more investor accountability in how they use their influence and votes to steer the strategic direction of investee companies. This has combined with a dramatic increase in the popularity of, and cash flows into, index tracking funds, which have increased the voting power of the major asset managers. In 2017, the top five global asset managers controlled over $8.2 trillion of equity investments and that number continues to grow. A consequence of the emphasis on stewardship is that many of the world’s largest institutional investors are expanding the staff and resources dedicated to engaging with investee companies and proxy voting.
Board Quality & Composition: Institutional investors will continue to prioritize gender diversity, director skills and experiences, composition refreshment, and the appointment of directors who have enough time to dedicate to the company as key indicators of board quality. Boards and nominating and governance committees in certain markets should expect increased votes against directors where there are fewer than two women on the board. Activists and some institutional investors will pay close attention to the number of directors with direct industry experience when assessing composition and quality.
Compensation: Executive pay will continue to remain in the spotlight as investors are looking for additional engagement and/or disclosure around total compensation and its link to long-term strategic goals and business performance. Boards and compensation committees should expect more inquiries related to incentive compensation schemes and how they drive desired employee behavior.
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