Corporate Governance 2021

The new Corporate Governance 2021 guide covers 28 jurisdictions. The guide provides the latest legal information on environmental, social and governance (ESG) considerations; decision-making processes; board structure and composition; legal duties of directors/officers; the role of shareholders; corporate reporting; and audit, risk and internal controls.

Last Updated: June 22, 2021


Authors



Herbert Smith Freehills operates from 26 offices across Asia Pacific, Europe, the Middle East, Africa and North America. The firm is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. Herbert Smith Freehills provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT, and manufacturing and industrials. The dedicated corporate governance advisory team comprises governance specialists with technical expertise who provide practical advice to clients on the full spectrum of governance issues. The team advises listed and privately held companies on the regulatory, reporting and governance standards applicable to them. The firm draws on its wide-ranging experience to advise on legal and regulatory requirements, emerging trends and market best practice.


The Inevitable Focus on the Role of Governance

The focus on how businesses are governed, and their wider social impact, is only increasing. COVID-19 has been in part a catalyst for this, as governments, companies, investors and others continue to react to its impact and long-term consequences. Coupled with this, the exponential growth in consideration of environmental, social and governance (ESG) issues in recent years has led to debate and discussion on the role and purpose of companies in a number of jurisdictions.

COVID-19: the switch to virtual and the longer-term impact

The impact of COVID-19 on corporate governance structures, processes and considerations was felt almost immediately. The switch to virtual governance solutions was a fundamental, and in some cases almost instantaneous, change that governance professionals, company directors and many others had to adapt to in short order last year. For many, it is a change that has continued in one form or another, and to varying degrees, for a large part of 2021.

Virtual board meetings

The move to virtual board meetings presented a number of challenges for governance professionals, not least asking themselves the fundamental question of how to facilitate an effective virtual board meeting given that previously such meetings were not commonplace for a number of organisations. Facilitating an effective virtual board meeting meant not only navigating technological challenges, juggling time zones and the inevitable home-working issues but also adapting the form and conduct of the meeting in light of its virtual format. As well as placing greater emphasis on the need for a carefully considered meeting agenda and structure, the virtual meeting format also required participants to adapt soft skills developed over many years of in-person board meetings to the virtual environment.

Ensuring the orderly and effective participation of all members was a skill that chairs of meetings had to hone quickly, as was picking up the mood of a virtual meeting, which is a different skill to picking up the mood of an in-person meeting, where board language can more readily be observed and acted upon. Notwithstanding these challenges, many boards met considerably more frequently as a result of the pandemic and it is a cliché that COVID-19 has educated all business leaders on their ability to lead and govern without physical meetings.

Shareholder meetings

In relation to shareholder meetings interestingly, governments and regulators around the world, for the most part, moved quickly to facilitate these against the backdrop of COVID-19. Different governments and regulators took very different approaches to address this problem. Solutions ranged from effectively overriding a shareholder's legal right to attend the meeting such that meetings could be held behind "closed doors" to facilitating, or in some cases mandating, a virtual meeting format allowing shareholders to exercise their rights in a substantially similar way to an in-person meeting.

Whilst the notion of a virtual shareholder meeting led to trepidation for those governance professionals operating in the many jurisdictions that had not previously embraced the virtual shareholder meeting format (or the hybrid shareholder meeting format where virtual participation was facilitated in addition to the option to attend the meeting in person), for the most part, like virtual board meetings, virtual shareholder meetings have been held without incident. However, the return to in-person shareholder meetings in some jurisdictions has been welcomed in most quarters, not least by retail shareholders, for whom the annual shareholder meeting is typically the only time that they are able to interact directly with, question and challenge the board of directors.

Making permanent changes

Many companies and governance professionals are now reflecting on which of the adaptations and changes that have been made over the last 18 months should be permanent features of their governance frameworks. Most company directors would not dispute the importance of face-to-face board meetings and the site visits or other workforce engagement activities that are arranged to coincide with such meetings, and pre-pandemic many companies would likely have doubted the effectiveness of virtual-only board meetings. However, the relative successes of virtual-only board meetings, including the speed at which that they can be called and the ancillary benefits of a reduction in travel time and costs, mean that many boards will incorporate at least some virtual-only board meetings into their meeting schedules going forward.

In certain jurisdictions that had not previously permitted virtual shareholder meetings, there are either consultations taking place to make the temporary legal and regulatory changes made to facilitate virtual shareholder meetings becoming permanent features of the governance landscape or those advocating for such consultations to take place. 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.

The public sector and business intervention

More fundamentally, given the significant interventions and interactions in the business landscape from governments around the world as a consequence of COVID-19, through fiscal, liquidity, social and economic measures, the question arises as to whether there will be a change in how the public sector feels able to intervene in businesses. Whilst this could manifest itself in companies being subject to further rules, regulations and requirements seeking to manage and mitigate the risks of failure, it could conversely lead to a reappraisal of the relevance and cost of some of the regulation which businesses are subject to, with existing rules, regulations and requirements being relaxed either temporarily or permanently to support the competitiveness and survival of businesses.

What is inevitable is that the coming years will lead to a further period of change to the corporate governance landscape.

The focus on ESG issues

ESG issues continue to rise up the agenda for corporates, regulators and investors, with the sustained focus on climate change and other environment (E) issues continuing but with an increasing focus on social (S) factors driven in part by the impact of the COVID-19 pandemic.

Most boards are far more focused on their purpose and stakeholders, from delivering great products or services, to wanting to be great places to work, than public perception would believe. For years, business leaders have focused on building long-term success as well as developing skills, strong cultures, being respected in their communities and their environmental impact. While such issues may have historically been viewed as dilutive to financial value, there is a growing acknowledgement that sustainable business practices are not only essential from a risk management perspective, they are also often accretive.

A shift in priority

The last 12 months have seen a step-change again in the priority of ESG focus at board level. This has in part been driven by a material shift in investor views and attitudes to ESG-aligned investing, with asset owners and asset managers increasingly committing to global initiatives such as the UN Principles for Responsible Investment and the UN Sustainable Development Goals.

Companies and their boards are now required to comply with a growing set of non-financial reporting requirements relating to ESG issues. Some of these are dictated by industry bodies and voluntary codes; though increasingly many of these disclosure requirements are prescribed by law, a trend which is only likely to continue. It was notable that the communique published following the 2021 G7 nations summit expressed support for moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants and that are based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.

Increased disclosure

One of the themes coming out of a wave of ESG-related regulation emerging largely out of Europe is increased disclosure by asset owners and asset managers on their ESG credentials and those of their financial products and portfolios, together with their impact on ESG factors. Evolving out of a need to overcome the lack of consistent benchmarking and common standards in the green investment market in particular, the EU’s Taxonomy Regulation (and its accompanying technical standards) is perhaps the most ambitious and detailed attempt to date at establishing a “common language” to allow asset owners and retail investors to make “like-for-like” comparisons between portfolio companies and funds/asset managers. This development is expected to have a significant impact on corporate reporting going forward as there will be greater pressure on corporates to provide the ESG disclosures that will enable their investors to fulfil their own ESG disclosure obligations.

Asset owners and asset managers have typically sought to influence responsible business practices through various forms of engagement with their investee companies, meetings with senior management, the exercise of voting rights or the making of investment or divestment decisions. Increasingly, both institutional and retail investors are seeking to influence corporate behaviour by using company and securities law mechanisms to require companies to put certain ESG-related proposals, in particular climate-related proposals, to a vote at annual shareholder meetings. Whilst a large number of these proposals have been instigated or facilitated by interest groups or retail shareholders, institutional shareholders are increasingly willing to support such initiatives given the increased focus on their stewardship responsibilities.

Resolutions

Another emerging trend is for corporates themselves to propose "say on climate" resolutions, voluntarily seeking an advisory shareholder vote on their climate action or climate transition plans. Whilst many investors are supportive of such resolutions, there are those in the investor community that take the view that they present a number of challenges, especially where they relate to a company’s strategy or long-term plans.

All of these developments, taken together, present an opportunity for both companies and investors to adopt and articulate a clearly defined position on ESG and the role it plays in their decision-making processes.

Authors



Herbert Smith Freehills operates from 26 offices across Asia Pacific, Europe, the Middle East, Africa and North America. The firm is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. Herbert Smith Freehills provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT, and manufacturing and industrials. The dedicated corporate governance advisory team comprises governance specialists with technical expertise who provide practical advice to clients on the full spectrum of governance issues. The team advises listed and privately held companies on the regulatory, reporting and governance standards applicable to them. The firm draws on its wide-ranging experience to advise on legal and regulatory requirements, emerging trends and market best practice.