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Top Corporate Governance Issues and How to Solve Them
The Global Investor Sentiment Survey 2023 found that 68% of investors believe good corporate governance practices are crucial to a company’s long-term success.
However, only 54% of investors expressed satisfaction with their portfolio companies’ current corporate governance practices. These beliefs produce tangible results with MSCI ESG Research 2022 finding that companies with robust corporate governance practices have outperformed their peers by an average of 2% annually over the past five years.
These statistics highlight significant areas for improvement, particularly in transparency, accountability, and alignment of interests between management and shareholders. Additionally, the growing importance of ESG factors indicates a shift in how investors evaluate corporate governance practices.
In this article, we will outline the top corporate governance issues and provide solutions to help issuers navigate these challenges.
Why is Corporate Governance Important for Companies?
Corporate governance ensures companies operate efficiently, ethically, and in the best interests of their shareholders and is crucial for long-term sustainability.
Effective corporate governance fosters a culture of integrity and accountability, building trust among shareholders, employees, customers, and the community. It provides a framework for decision-making, accountability, and risk management – safeguarding the effective management and oversight of an organisation which is vital for business sustainability and investor confidence.
Moreover, corporate governance supports strategic decision-making by ensuring that the board of directors effectively oversees and guides the company’s strategic goals, driving long-term value creation.
What Are the Top Corporate Governance Issues?
Corporate governance issues can significantly impact a company’s performance and reputation.
Boards of directors and stakeholders want to ensure robust safeguards are in place to address governance issues that directly impact the effectiveness, sustainability, and accountability of the organisation.
Here, we discuss the pressing issues and provide effective solutions for consideration.
Increased Board Accountability
Increased board accountability is a key concern for many issuers as it directly impacts corporate governance, investor trust, and long-term performance. A report by PwC stated that nearly 50% of directors express the desire to replace at least one member of their board, reflecting a push for greater accountability and effectiveness. Additionally, a large number of shareholder proposals in 2022 demanded more accountability from the board on certain aspects like ESG.
Regular evaluation of board performance is crucial, focusing on setting clear performance metrics for board members and holding them accountable for their contributions.
Implementing mechanisms for shareholders to assess and influence board performance, such as “say on pay” votes and other shareholder engagement initiatives are also increasingly popular.
Other key strategies to increase board accountability include:
• Clear Roles and Responsibilities: Define and document the roles and responsibilities of each board member. This helps in setting clear expectations and measuring performance.
• Performance Evaluations: Regularly assess the performance of board members through structured evaluations. Use a mix of self-assessments, peer reviews, and external evaluations to get a comprehensive view. Evaluations should also include metrics associated with the overall performance of the company, statements around board member attendance and the number of boards a director sits on.
• Transparent Decision-Making: Ensure that all board decisions are documented and communicated clearly to stakeholders and investors. This transparency helps build trust and ensures accountability.
• Shareholder Engagement: Engage regularly outside of the annual shareholder meeting with shareholders and other stakeholders to understand their concerns and expectations
Prioritising Board Diversity
A diverse board brings a variety of perspectives and experiences, leading to better decision-making and innovation. Issuers have emphasised the need for diverse board members in terms of gender, ethnicity, skills, and experience to bring varied perspectives and enhance decision-making.
In PwC’s Annual Corporate Directors Survey 2022, 57% of directors noted that investors are pushing for greater board diversity and inclusivity.
Additionally, Deloitte’s 2023 Investor Survey found that 61% of investors believe board composition and effectiveness are the most critical aspects of corporate governance. Prioritising board diversity is not just about fulfilling quotas; it’s about creating a board that reflects the diversity of the company’s stakeholders and the global market.
Strategies to prioritise board diversity include:
• Diverse Recruitment Practices: Implement recruitment practices that seek candidates from diverse backgrounds, including gender, ethnicity, age, and professional experience.
• Inclusive Culture: Foster an inclusive culture where diverse perspectives are valued and encouraged. This can be achieved through diversity training and creating an environment where all board members feel comfortable sharing their views.
• Succession Planning: Develop a succession planning process that considers diversity. This ensures that as board members retire or leave, the board continues to reflect a diverse makeup.
• Mentorship Programs: Implement mentorship programs that support the development of diverse talent within the organisation, preparing them for future board roles.
Addressing Sustainability
As outlined in our recent article about retail investor trends, environmental, social, and governance (ESG) factors have become a critical concern for investors, consumers, and regulators. Boards must integrate these factors into their strategic planning and operations. This involves:
• Sustainability Strategy: Develop a comprehensive sustainability strategy that outlines the company’s ESG goals and how they will be achieved. This strategy should be integrated into the overall business strategy.
• ESG Reporting: Implement robust ESG reporting practices to communicate the company’s sustainability efforts and performance. Use recognised frameworks such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). A robust ESG report should comprehensively cover various aspects of a company’s operations, impact, and strategic initiatives. This should include:
• The overall vision and milestones achieved regarding ESG factors
• Composition of the board with information on their diversity, skills, and independence
• The company’s environmental policy, data on sources of energy, annual plan for energy efficiency and management of resources and overall climate change strategy
• Data on employee demographics, turnover rates, diversity and inclusion, labour practices etc. and plans to further improve these factors
• Shareholder identification, engagement strategies, customer and investor feedback and a response plan
• Compliance standards and framework, alignment with recognised ESG standards and frameworks (e.g., GRI, SASB, TCFD, UN SDGs, and third-party assurance)
• Metrics around investor value and how future ESG plans impact shareholder returns
• Stakeholder Engagement: Engage with stakeholders to understand their sustainability concerns and expectations. Use this feedback to inform the company’s sustainability strategy.
• Continuous Improvement: Regularly review and update the sustainability strategy to ensure it remains relevant and effective. This involves staying informed about emerging sustainability trends and best practices.
Improving Transparency and Disclosure
Transparent reporting builds trust with investors and stakeholders. The Edelman Trust Barometer 2023 found that investor satisfaction is notably higher (by about 20%) in companies that regularly engage with shareholders and are transparent about their governance structures and policies.
Issuers should adopt best practices in financial and non-financial disclosures, ensuring timely, accurate, and comprehensive reporting. Steps to improve transparency and disclosure include:
• Financial Reporting: Ensure financial reports are accurate, complete, and prepared in accordance with applicable accounting standards. Use external auditors to provide an independent assessment of the financial statements.
• Non-Financial Reporting: In addition to financial reporting, disclosures on non-financial aspects such as ESG performance, risk management, and governance practices should be provided. This provides a holistic view of the company’s performance.
• Regular Updates: Provide regular updates to shareholders and other stakeholders on the company’s performance and any significant developments. This can be done through quarterly reports, investor calls, and press releases.
• Shareholder Communication: Use multiple channels to communicate with shareholders, including annual reports, websites, and social media. Ensure all communications are clear, consistent, accessible and in an accepted format.
• Transparency in Proxy Voting: Ensure meeting agendas, proxy statements, and voting information are transmitted to shareholders in a timely and clear manner. Solutions like Proxymity’s Vote Connect Suite enable real-time transmission of golden source information directly to the investor, ensuring accuracy, efficiency and transparency in proxy voting while providing crucial data on voting trends.
Navigating the Regulatory Landscape
Staying compliant with evolving regulations is a significant challenge for Issuers. Boards must stay informed about changes in the regulatory environment and adapt their governance practices accordingly.
For instance, SRD in 2007 and SRD II in 2017 were introduced with the aim of improving shareholder engagement and transparency, specifically in relation to exercising shareholder rights. One of these areas of communication is an SRD corporate action notice, a formal communication by an issuer to inform its shareholders about significant events and decisions that require their attention or action.
This introduced a series of challenges for the parties involved that necessitated changing processes and frameworks to meet the new regulatory requirements. However, SRD II Solutions like Proxymity help participants in the custody chain manage this transition without disrupting existing systems.
Similar to the EU’s directive, other countries have regulations to govern shareholder disclosure and enhance corporate governance. Examples include The Corporations Act 2001 in Australia, The Companies Act 2006 in the U.K., and The Securities Exchange Act or The Dodd-Frank Act in the U.S.
These regulations aim to enhance corporate transparency, accountability, and shareholder engagement. Broadly speaking, the key steps to navigate the regulatory landscape are similar and include:
• Regulatory Monitoring: Implement a process to monitor regulatory changes at the local, national, and international levels. This involves staying informed about new regulations, amendments to existing regulations, and regulatory trends.
• Compliance Programs: Develop and implement compliance programs to ensure the company adheres to all applicable regulations. This includes training employees on regulatory requirements and conducting regular compliance audits.
• Regulatory Engagement: Engage with regulators to understand their expectations and provide feedback on proposed regulations. This engagement can help shape regulatory policies more conducive to the company’s operations.
• Risk Management: Incorporate regulatory compliance into the company’s risk management framework. This involves identifying regulatory risks, assessing their potential impact, and developing mitigation strategies.
Preparing for the Corporate Sustainability Reporting Directive
The Corporate Sustainability Reporting Directive (CSRD) requires companies to enhance their sustainability reporting capabilities. Boards must prepare for this directive by developing robust data collection and reporting systems. Steps to prepare for the CSRD include:
• Understanding Requirements: Familiarise yourself with the CSRD requirements, including the specific ESG metrics that need to be reported and the timelines for reporting.
• Data Collection: Implement systems to collect the necessary data for ESG reporting. This may involve upgrading existing systems or investing in new technology solutions.
• Reporting Frameworks: Adopt recognised reporting frameworks aligned with the CSRD requirements. These could include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD) and the International Integrated Reporting Council (IIRC). This ensures the company’s sustainability reports are comprehensive and comparable with those of other companies.
• Assurance Processes: Implement assurance processes to verify the accuracy and reliability of the reported data. This may involve using external auditors to provide independent assurance.
Managing Investor Expectations
Investor expectations are increasingly focused on long-term value creation and ESG performance. Boards need to engage with investors proactively and communicate their strategies for sustainable growth effectively.
Demonstrating alignment with shareholder ideas and outlining planned changes to meet expectations are vital for fostering better relationships with both current and potential future activist shareholders. Strategies to manage investor expectations include:
• Proactive Communication: Engage with investors regularly to understand their expectations and communicate the company’s strategies. This can be done through investor meetings, roadshows, and regular updates.
• Long-Term Focus: Emphasise the company’s long-term value creation strategy, highlighting how ESG factors are integrated into the business model and how they contribute to sustainable growth.
• Transparency: Provide transparent and consistent information about the company’s performance and future prospects. This helps build trust and confidence among investors. Keeping the contact information of the Company Secretary, IR Team, CFO etc public can help build trust and show the company is open to direct communication with shareholders.
• Proactive Engagement: Be responsive to investor inquiries and concerns, addressing them promptly and effectively. This demonstrates the company values investor input and is committed to meeting their expectations. Engagement should be year-round to help align board actions with shareholder interests before the shareholder meeting, during the voting period for the meeting and after the meeting. During the meeting, vital voting insights can help understand investors’ intentions and reasoning to engage with them early.
Using Technology for Effective Governance
Technology can enhance board capabilities and governance practices. Embracing digital tools for board meetings, reporting, and stakeholder engagement can lead to more efficient and informed decision-making. Key ways to use technology for effective governance include:
• Digital Board Portals: Use digital board portals to manage board meetings, distribute materials, and facilitate communication among board members. This improves efficiency and ensures all board members have access to the same information.
• Data Analytics: Implement data analytics tools to provide insights into the company’s performance and identify trends and risks. This enables boards to make more informed decisions.
• Automated Reporting: Use technology to automate reporting processes, reducing the risk of errors and ensuring timely and accurate disclosures. Post-meeting shareholder insights can also be crucial in determining future plans and managing expectations.
• Virtual Meetings: Conduct virtual board meetings to enable participation from board members who cannot attend in person. This increases flexibility and can enhance board diversity.
Despite the EU’s strong emphasis on corporate governance and shareholder engagement, significant barriers still hinder the exercise of shareholder voting rights, particularly the right to participate in and vote at the AGMs of listed companies.
These obstacles are especially pronounced in cross-border contexts within the European Union, where outdated and complex financial intermediary chains, along with omnibus accounts, complicate and increase the cost of exercising these fundamental rights. The involvement of multiple financial intermediaries further disperses liability throughout the chain.
Regulations such as SRD II aim to address these issues by improving information transmission through the traditional, yet flawed, intermediated systems. Your company can provide your shareholders and stakeholders with solutions by embracing the rise of digital boardrooms and proxy voting.
Improving Data Security
Data security is a critical concern for boards, given the increasing threats of cyberattacks. Issuers must implement comprehensive cybersecurity measures to protect sensitive information and maintain trust.
Cybersecurity is critical in modern corporate governance, particularly in proxy voting and shareholder identification. Ensuring the integrity, confidentiality, and availability of these processes is essential for maintaining trust and protecting shareholder rights. Key points include:
• Data Integrity: Ensure votes are accurately recorded and safeguarded against tampering, with robust logging mechanisms to detect anomalies.
• Confidentiality: Implement strong encryption and access controls to protect voting data, ensuring only authorised personnel can access sensitive information.
• Authentication and Authorisation: Employ Multi-Factor Authentication (MFA) and Role-Based Access Control (RBAC) to verify shareholders and manage access.
• System Resilience: Protecting against DDoS attacks and employing data redundancy features ensure continuous availability and quick recovery from disruptions.
• Transparency and Accountability: Execute clear reporting mechanisms and regulatory compliance with standards like GDPR and CCPA to guarantee votes are accurately counted, and shareholder data is protected.
Implementing these cybersecurity measures can protect the integrity of proxy voting processes and the confidentiality of shareholder information, thereby maintaining trust and compliance with regulatory requirements.
Address Corporate Governance Issues Today
Issuers can address corporate governance issues with a comprehensive framework. Key trends include integrating ESG factors into strategies, prioritising diversity, cybersecurity, and data privacy, and leveraging digital tools.
Shareholder engagement will become more proactive, driven by activism and transparency demands. Executive compensation will align with long-term performance and ESG outcomes. Regulatory changes and global standards will require agile compliance.
Issuers will shift towards long-term value creation and sustainability, adopting a stakeholder-centric approach and emphasising ethics and corporate culture. Boards will oversee technology and innovation to stay informed on business advancements.
Contact us today to see how Proxymity can help you resolve these challenges.