Credit: Christina Morillo and Nbsp
Author: Neil Shah, Director of Content and Strategy, Edison Group
A series of very publicized controversies in the main global companies has forced a reassessment of corporate governance. Tensions between business boards and investors persist, as we have seen during the 2023 AGM season, with notable disagreements in businesses such as Disney, Ocado and Smith & Nephew.
The difficulties of management of internal companies, such as the brief dismissal of OpenAI and the reintegration of the CEO SAM Altman, also stressed the need for better governance. According to a Harvard report, these events reflect an increasing consensus according to which many of these questions arise from poor corporate governance. McKinsey Research supports this, showing that around 70% of recent demands for activist investors have focused on governance reform.
Tackling these governance problems, in particular complex subjects such as the remuneration of executives, is not simple. However, the adoption of best practices can help rebuild confidence between boards of directors and investors. Here are several key areas where corporate governance can be improved.
Focus on regulations
A crucial step for companies is to ensure that they understand and fully comply with industry regulations. Failures in this regard have led to important scandals, such as the collapse of the exchange of FTX cryptocurrency, where poor diligence and the manipulation of assets were partly to blame. The CEO of FTX, Sam Bankman Fried, later admitted the ignorance of many regulations, stressing the need for boards of directors to guarantee compliance at all levels.
The responsibility of the board of directors is vital to prevent scandals and ensure good governance
Advice cannot be based solely on legal services to manage regulations. They need a complete strategy that covers regulatory monitoring, compliance programs, regulatory engagement and risk management. With new regulations such as the directive on corporate sustainability (CSRD) on the horizon, advice must prepare by including requirements, developing data report systems and adopting executives such as the Global report initiative. Good preparation will help companies avoid the traps of “greenwashing” or “greenhushing” as they sail in sustainability efforts.
The responsibility of the board of directors is vital to prevent scandals and ensure good governance. Last years have revealed many examples of companies that are hungry due to a lack of clear roles and transparency. A notable example is the scandal of the British post office, where the board of directors has failed to solve management problems. Likewise, the Federal Deposit Insurance Corporation (FDIC) has faced allegations of ill -treatment of employees which are not treated by its board of directors. To improve responsibility, boards of directors should include experts in key areas such as supply chains and the environment, social, governance (ESG). They must clearly define the roles and responsibilities of the members of the board of directors, ensuring that they can effectively supervise management, regulatory compliance and transparency.
Communication upgrade
Improving communication with shareholders is another key area of reform. The use of obsolete communication methods, such as paper ballots, has caused friction between investors and business leadership. For example, the president of Marks & Spencer, Archie Norman, underlined how these methods hinder effective dialogue.
A lack of communication has led to misunderstandings, investors accusing companies of secrecy. The shareholders of Exxonmobil, for example, criticized management in 2023 for not having disclosed the financial impact of its zero net proposals. Relations with digital investors should become a standard practice, allowing more transparent and effective communication. This would allow advice to share documents and proposals with shareholders, while facilitating the first comments before the AGMs. This approach would reduce conflicts, especially because many proxy disputes are resolved before the AGMs.
As cyber attacks become a regular threat, works councils must prioritize data security. Cybercriminals groups like Spander Spider and Shinyhunters have increasingly targeted private companies, which makes the boards of directors to focus on data integrity, confidentiality and system resilience. Companies must protect sensitive information and ensure that their cybersecurity measures are robust enough to maintain the confidence of stakeholders.
The remuneration of leaders continues to be a controversial problem. Although there is a strong profitability analysis for compensation of competitive executives, advice must be transparent and communicate the advantages of attracting the best talents to investors. Comparative analysis of the remuneration of leaders against competitors can help guarantee that remuneration is appropriate, and clear communication can reassure that these decisions benefit the company in the long term.
Although ESG policies have been confronted with a counterou, they still play an important role in corporate governance, especially because regulations are increasingly requiring sustainability initiatives. Boards of directors must set the ESG objectives on the scale of the company, call on experts and ensure compliance. At the same time, it is essential to clearly communicate the fiduciary impact of ESG measures to avoid the dissatisfaction of shareholders, as shown by several revolts of 2023-2024.
Finally, the increase in the diversity of the board of directors has often been treated on an ad hoc basis, but the formalization of this process is essential. Boards of directors must set diversity objectives and appoint members to promote inclusiveness throughout the company. The creation of sub-commies dedicated to this objective can guarantee that various voices contribute significantly to corporate decision-making. While questions such as the remuneration of managers and the ESG will continue to trigger a debate, the wider challenges surrounding corporate governance are resolved. By adopting simple reforms, companies can considerably improve their governance practices and respond to today’s commercial demands.