Six corporate governance trends

The pandemic has laid bare the resiliency, or lack thereof, of companies when it comes to facing a crisis and being responsive and adaptable, notes S&P as it predicts the six major trends in corporate governance for the coming year.

six key trends dominating corporate governance in 2021 are seen to be:

Board Diversity – whether in terms of gender or other criteria, the makeup of the board seems to be major issue both within corporates and to investors.

ESG Competent Boards – the pandemic has created a desire for more skilled, better rounded, and more resilient boards that are well equipped to deal with emerging risks and systemic challenges, including mounting ESG-related disruptions, such as climate change. ESG expertise and risk assessment are now being sought, both as a real measure and, of course, in some cases to shore up their boards' sustainability credentials.

Board Effectiveness - directors are expected to consider an ever-broadening range of issues such as climate-related risks, social risks, and cybersecurity, it is essential that corporate leaders remain focused and not overextended. As such S&P is expecting stricter stances on limiting overboarding--sitting on too many boards--to remain a key governance trend this year.

Executive Remuneration – S&P expects even more scrutiny of executive pay, both in the level and in terms of greater linkage to ESG metrics.

Increasing ESG Activism – S&P sees more action from investors at AGMs. About 15 years ago, the Say on Pay campaign for better disclosure of executive remuneration and for a vote on executive pay received widespread support from investors and public policy makers the world over. Since then, many countries have introduced legislation requiring mandatory, or in some cases advisory, say on pay. This is the case in the UK (2002), the US with the 2010 Dodd-Frank Act, and the EU with its 2017 Shareholder Rights Directive. A growing number of investors are now demanding a say on climate. They are asking companies to not only disclose their emissions but also concrete plans to address climate change and deliver the transition required by the Paris Agreement.

The UK's Say on Climate campaign launched by the Children's Investment Fund Foundation in November 2020 supported by the CDP, ShareAction in the UK, and the Australasian Center for Corporate Responsibility are all signs of a growing movement.

In January 2021, the Investor Forum announced its support for annual mandatory non-binding votes on climate at AGMs, as did UN climate envoy Mark Carney. This follows the Financial Conduct Authority's proposal to implement a TCFD-aligned disclosure requirement for listed companies as well HM Treasury's plans set out in November 2020 on mandatory climate-related disclosure.

Tax Transparency – both in terms of legislation that is slowly gaining speed, although slow hardly covers the idea, and in terms of reputational damage to the corporate brand the issue of tax will come under increasing scrutiny.

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