2019 looks set to be another significant year in the world of corporate governance, so we’ve compiled a bird’s-eye view of six key trends for boards to keep in mind for the year ahead, in the UK and abroad.
Though by no means an exhaustive list, these trends touch upon some of the major debates occurring in governance now. Not all of these trends point in the same direction, illustrating the diversity of perspective on what good governance actually means.
- Increasing emphasis on private companies’ governance
Ever since the publication of the very first corporate governance code in the UK in 1992, the Cadbury Code, governance codes, regulations and best practices have tended to focus on listed companies, which tend both to be more prominent, and to require greater safeguarding of shareholders.
But collapses of high-profile private companies triggered debate in the UK, eventually leading to the creation of the Wates Principles – which the IoD helped draft – and the requirement for large private companies to report on their adherence to a recognised corporate governance code in their annual report for the first time.
- Listed company governance frameworks risk a ‘race to the bottom’
In the competitive battle between global stock exchanges, pressure is mounting on regulators to loosen governance rules to accommodate the demands of capital raisers.
The UK-listing authorities created a new category in 2018 for sovereign-controlled entities, which is not subject to the same safeguards demanded of privately-controlled issuers, such as independent shareholder votes on related party transactions.
Meanwhile, in Hong Kong and Singapore, long-standing requirements for ’one-share, one-vote’ are being loosened to accommodate the demand of many Chinese technology companies to issue shares with unequal voting rights. Similarly, the Trump Administration has sought to make its jurisdiction more attractive for issuers, including through the JOBS ACT.
- Growing influence of passive fund managers
According to one projection, Blackrock, Vanguard, and State Street alone could own half of US-listed companies by 2030.
Such a concentration of the global investment management industry places huge power in the hands of these big players, but how will they use that power remains unconfirmed, particularly as they tend to invest long-term and could become leading guarantors of a patient and responsible capitalism.
Spokespeople like Larry Fink of Blackrock talk a good talk about their plans to encourage corporate responsibility, including with regards to environmental and social impact, and board diversity.
But currently the relatively limited scale of their internal resources dedicated to governance relative to the size of their portfolios is a concern, although they are expanding their global governance teams.
- More demand for more personal accountability for directors
Since the financial crisis, the UK’s new Senior Manager Regime for financial institutions also extends personal responsibility to board members as well as senior executives and risk managers.
GDPR similarly allocates personal responsibilities to boards, as does a range of other legislation that has emerged of late covering issues such as bribery law, competition law, health and safety law, and insolvency law, to name but a few.
This may seem perfectly reasonable. There was huge public outcry that more leading bankers did not end up in prison or facing hefty sanctions after the financial crisis. But let’s not forget that the board of directors is inherently meant to be a collective decision-making body.
Loading liabilities onto individual directors risks making directorship an impossibly risky activity – ultimately not a desirable state of affairs for anyone.
- Increasing role of stakeholders
Historically this has not been a feature of jurisdictions like the UK and the US, which have tended to be shareholder-oriented.
There is a growing call from various quarters, however, to shift boards toward one taking a longer-term approach to value creation, taking into account or even promoting the other stakeholders’ interests.
The new Corporate Governance Code will encourage boards to incorporate employee perspectives through employee directors, workforce advisory councils, or through a designated NED to understand and channel employees’ perspective to the board.
Similarly in the US, Senator Warren’s proposed ‘Accountable Capitalism Act’ would require 40% of board members to be employee-elected.
- Brewing controversy over the role of external auditors and audit committee
A number of recent scandals in companies like Tesco, Autonomy, HBOS and Carillion, have seen accounting judgements – made by boards and signed off by auditors – failing to reflect a true and fair view of the underlying reality.
Many no longer see audit as fit for purpose, and the accounting regulator and Big 4 are in the firing line.
The debate rages on a variety of levels. Some blame international accounting standards, particularly relating to revenue recognition and goodwill accounting, as allowing too much subjective judgement. For others, the problem is that audit firms are conflicted due to their revenues from consulting activities, while another view argues the accounting regulator needs to be more active and robust.
The problem with this debate, as with so many others in corporate governance, is that it is relatively easy to point out the problems, but less easy to come up with viable solutions.
IoD support for non-executive directors
Your value as a NED will be largely determined by the experience and abilities you already possess. But it is important to understand that being responsible for the governance of a business is increasingly a specialist occupation which requires knowledge of the UK corporate governance code and the unique position the role of director (both executive and non-executive) occupies in the law.
IoD Professional Development
IoD Professional Development offers a range of courses, including many open to non-members, which concentrate on the role of NED (see Role of the Non-Executive Director) or enhance a particular aspect of the NED’s role.
IoD Professional Development courses can also round out your knowledge, for example:
Finance for Non-Financial Directors
For the most committed, there is IoD Chartered Director – a unique programme which provides experienced business people with the complete toolkit to add value to any board they join. The CDir qualification is awarded under the IoD’s Royal Charter.
Did you know that IoD members can also access interactive CPD content via the IoD Academy? From polls to podcasts, read, watch or listen on the go to enhance your knowledge and skills.
IoD Directors Advisory Service
The IoD Directors Advisory Service is exclusive to IoD members and provides access to lawyers, accounts, career advisers and more. The DAS is an ideal sounding board for members intent on becoming a NED. Sessions held at 116 Pall Mall, by phone or Skype.
IoD Business Information Service
The IoD Business Information Service is a team of researchers working exclusively for IoD members. Request due diligence checks on the accounts and media performance of companies you may be talking to. Obtain a template NED Letter of Appointment. Increase your knowledge of corporate governance matters through the IoD Factsheet Collection.
IoD Directors Law Express legal helpline
IoD Directors Law Express provides confidential legal advice - especially when you need a rapid response.