Corporate Governance 2024

2024: The Year of the Election and the Impact on Corporate Governance

So far, the 2020s are proving to be a volatile decade. The impact of the COVID-19 pandemic was felt across the globe, and whilst lockdowns, vaccine rollouts and mask mandates may be becoming distant memories, the consequences of the pandemic are still being addressed. Significant inter-state conflicts are causing unrest and widespread suffering on a human level and for the commercial community, the impact of these conflicts is being felt through issues such as supply chain disruptions, price volatility and operational restrictions. Higher interest rates continue to impact companies and individuals. Notwithstanding the concerted global efforts to address climate change and environmental degradation, numerous devastating climate events have fuelled calls for more urgent action to protect the planet. Against this backdrop, however, the ambitious commitments made in the Paris Agreement are being re-evaluated by many countries as the costs of meeting these commitments become clearer and need to be balanced against the challenges being faced by many as living costs have spiralled during a period of sharp inflation.

Layered over all of these issues, and increasing the feelings of uncertainty, 2024 is election year, on a scale never seen before. According to Time Magazine, more people will head to the polls this year than in any other year in history, with at least 64 countries holding elections (including across the EU member states for the European Parliament). A combined 49% of the global population are eligible to vote at elections being held in 2024. Whilst the outcome of some of these elections is widely predicted, there is considerable uncertainty surrounding others, in terms of timing and the results. The volatility of the 2020s seen to date is set to continue throughout 2024, creating a challenging environment for companies. Good leadership and governance will be as important as ever for companies navigating these uncertain times.

Universal themes of good governance

Companies, like countries, need good governance to be successful. The specifics of what represents good corporate governance will vary in detail from jurisdiction to jurisdiction and they will, to a certain extent, depend upon the size of the entity in question and the sector in which it operates. There are, however, broad universal principles that can be identified as making up good corporate governance.

Companies need directors with the necessary skills, knowledge and experience to manage their affairs. Companies should have regard to the benefits of diversity in all of its forms when considering board composition. Investors in the company and the wider market should be able to trust that the information published by the company is accurate and not misleading. Investors should have the ability to constructively engage with, and to robustly challenge the decisions of, management teams. Ultimately, they should be able to change the board where they believe the current directors are no longer acting as good stewards of the company. Just as elections act as a referendum on the governance of the country by the current government, so too should investors have the opportunity to assess and deliver judgement on the governance of the company by the current management.

Achieving an appropriate regulatory balance

The broad universal principles which make up good corporate governance are encapsulated in individual jurisdictions in the legislation and regulation which apply to companies, as well as in guidelines and best practice recommendations which companies are encouraged to apply. The relevant authorities for each jurisdiction need to finely balance the rules and requirements to which companies are subject to ensure that the regulatory burden is appropriate and proportionate. As observed in last year’s edition of this Guide, too little regulation may allow companies too much freedom and fail to protect market users. Too much regulation and an excessive governance burden can stifle growth. Either too little or too much regulation can therefore be damaging for individual companies as well as for the wider investment community and lead to market participants looking elsewhere for a stable operating and investment environment.

Achieving an appropriate regulatory balance is a key issue for governments and their appointed regulators, where the focus is on the quality, rather than the quantity, of regulation applicable. It is an issue which needs to be re-assessed regularly, to avoid regulatory creep. In the UK, for example, there are ongoing initiatives which are looking at the balance in certain areas of corporate governance and considering whether there are aspects of the current regulation which could be amended to reduce the burden on companies. These include a review of the requirements on companies in relation to non-financial reporting and the disclosure obligations applicable to listed companies in the context of significant transactions and for equity fundraising.

However, when assessing the regulatory burden, governments need to ensure that they are not changing regulation too frequently and they need to be mindful of the impact of change on companies and, indirectly, investors.  For companies, and in particular large companies and entities with complicated group structures, adapting to change takes time and money. Sudden changes in policy and short-termism create unwelcome uncertainty and volatility.

Tensions between being “green” and courting the vote

With elections on the horizon, it is not unusual to see governments seeking to maximise their time in office to complete the goals set out in their legislative agenda, aware that they may be voted out of office, thereby losing the opportunity to effect the change they have envisioned. Equally, the government of the day will be keen to complete its legislative goals ahead of election day in a bid to win over voters and secure another term in office. This can lead to rapid legislative or regulatory change, or even to the reversal of previously supported or adopted policies. As noted above, rapid change or “U-turns” in policy can create difficulties for companies. There have been a number of political decisions recently in different jurisdictions which look to have been influenced by the elections scheduled for the near future, in particular in areas related to ESG concerns, where political parties often have divergent policy views.

For example, in the EU, in April 2024, the proposal for mandatory due diligence on sustainability issues was finally adopted as the Corporate Sustainability Due Diligence Directive (CSDDD). The agreed final text for the CSDDD, however, is a significant watering-down of the measures first proposed. There has been speculation that the looming EU parliamentary elections and the rise in popularity of parties known to be critical of increased ESG-related regulations were drivers for ensuring an acceptable compromise was agreed promptly.

Another example is in the UK, where the government committed in November 2020 to phase out the sale of all new petrol and diesel cars and vans by 2030. Given concerns voiced about both the scale of infrastructure needed to support the anticipated number of electric vehicles and the current costs for motorists to shift to EVs, in September 2023, the UK Prime Minister announced that the phase-out deadline would be moved back to 2035. The move received a mixed response from industry, with some welcoming the delay and others expressing frustration at the uncertainty caused by the change.

In the US, the climate-related disclosures which had been adopted by the Securities Exchange Commission (SEC) for publicly traded companies have been challenged by numerous individual states and commercial organisations. The challenges have centred on the argument that the SEC does not have the authority to impose these disclosure obligations on companies. With elections being held at all levels of the federal and state legislative and executive functions in the US this year, the situation illustrates how the different views held by the different parties can lead to uncertainty for corporate planning.

Whatever results we see this year in the elections being held across the globe, it is inevitable that companies will need to be prepared for change. Having strong corporate governance policies and procedures in place and good leadership will be vital for success. The summaries presented in this Guide for individual jurisdictions provide a clear overview of the corporate governance framework being applied in those jurisdictions and also highlight some of the hot topics and trends currently being seen. The Guide will therefore be a useful resource for companies as they navigate the regulatory landscape in the jurisdictions in which they operate.