Corporate Governance 2020 features 30 jurisdictions. The guide provides expert legal commentary on the key rules and requirements for organisations, ESG, directors and shareholders, financial reporting, and auditing and risk.
Last Updated: June 22, 2020
Global Governance Themes: ESG Priorities and Where Next after COVID-19?
Governance discussion in European markets over the last 12 months has been dominated by two themes:
Most companies are far more focussed on their purpose, from delivering great products or services, to wanting to be great places to work, than public perception would believe. For years, business leaders have focussed on building long term success as well as developing skills, strong cultures and being respected in their communities. It is a myth that all but a few businesses are only focussed on the bottom line year by year.
But of course, there is inevitably disconnect between the way in which the public perceives or actually experiences a business and the way the leaders of that business view their goals and aspirations and their success in addressing them. Sometimes this is because the management of the business are, rightly or wrongly, pursuing decisions which have significant negative outcomes for some of those affected, or it may be because of the competitive pressures which the business believes it is under to cut cost or respond to market pressures. Often it is because of disconnects between the goals of leaders and the approach of those implementing their decisions, who in large organisations are less close to the policy discussions and the rationale for and nuances around the goals: people can add their own interpretation, for better and for worse. Overall the public is often suspicious of the goals and impacts of businesses, as well as of the power of businesses in relation to their lives.
ESG focus is a label developed in recent years for trends that have long existed. But the ESG focus has changed dramatically over the last two or three years in many major jurisdictions. For boards, ESG focus was always relevant in strategy discussions, discussions about workforces, training and culture, in relation to community engagement and the value and usefulness of the business’ own products or services. For some, it also focussed on environmentally responsible behaviour, for example controlling pollution and emissions. Other businesses had, and continue to have, their own stakeholder or societal priorities and strategies.
The last 12 months have seen a step-change again in the priority of ESG focus at board level. This has been for a range of connected reasons but two in particular are worth drawing out. First, the reassessment of business models for sustainable success in the context of changing social and political views on climate change and carbon emissions. Second, the rise of both public scrutiny and populist agendas in a number of developed countries, in response to public disaffection with established leaders and their approaches. Together, these have created a risk of long assumed business models being overturned.
The extraordinary shift in business models for investment and growth in the European energy sector is an example of the first of these, and the prospect of a radical socialist leadership of the government in the UK, at the 2019 general election, is an example of the second.
The public in many countries are expecting greater political focus by their governments on how businesses perform and engage in the relevant society in which they operate. Access to data and instant communications have accelerated these trends. But there is not a single consistent global approach: in some countries populism is combined with a deregulatory approach to business, as in some respects has occurred in the USA; in others it is the opposite.
What does this mean for boards?
If public/private boundaries are being or to be rewritten, boards must inevitably treat the relevant ESG issues as central to their strategies and focus. Not just as box-check compliance, but looking at the substance and sustainability of business models. As the needs of consumers change, so businesses are responding.
An area in which further significant changes are likely is that of reporting metrics. Corporate reporting for many years has focussed on financial performance and relative market performance, as well as on executive pay. But other metrics and ratios are coming into focus and seem likely to become increasingly important: reporting on pay ratios from highest to lowest paid, reporting on gender or ethnic and cultural diversity are already becoming established in some markets. Which other non-financial metrics are key will vary by jurisdiction and sector, but the likelihood seems to be more focus on non-financial metrics, from carbon impact to other areas of societal focus: will we see reporting more widely on age, social and educational diversity within businesses, or on value put on staff wellbeing or other assessment and engagement feedback provided by the workforce, or the service standards which customers and suppliers feedback on the business? None of these are out of the question, in an increasing number of jurisdictions, as we anticipate what might come next. The question is whether, and if so to what extent, some of these areas of reporting will become standard across multiple markets.
COVID-19: Impact and consequences
As this Guide demonstrates, for many governance lawyers, the reorganisation of board and shareholder meetings and of reporting arrangements to enable “virtual” compliance has taken up a vast amount of time. Interestingly, governments and regulators around the world have generally moved quickly to facilitate corporate governance without physical meetings, filings or reporting. It is a cliché that COVID-19 has educated all business leaders on their ability to lead and govern without physical meetings. It is another cliché, but also true, that COVID-19 has and will continue to accelerate changes which were due anyway, so the use of virtual communication seems here to stay.
Perhaps more interesting is the question of what other changes COVID-19 will accelerate or bring?
These questions will be of interest over the next few years, but no doubt the speed of change for governance lawyers will continue to be rapid.