POWER July 2021 - 40

COMMENTARY
What Will Dominate
Future Corporate
Governance Agendas?
Bruno Bastit
N
ow, more than ever, businesses are under pressure
to ensure that environmental, social, and governance
(ESG) issues are being managed effectively. Indeed, the
coronavirus pandemic has exposed the need for resiliency-
heightening the necessity for effective crisis management and
board engagement. And, while 2020 was eventful in terms of
regulation and policy reform, the pandemic is expected to further
accelerate change in the future.
Mounting Pressure for Board-Level Change
Investors are pushing for greater diversity at the board level.
Despite gradual improvement, progress remains slow and is
not uniform across jurisdictions. For instance, while female
representation on boards has reached 33% and 40% in the UK
and France, respectively-the latter being aided by the 2011
Copé-Zimmermann law-in 2020, not even 8% of Fortune 500
CEOs were women. What's more, while, over recent years,
several countries have introduced policies aimed at increasing
female representation on corporate boards, these often only
apply to publicly listed companies.
As such, investors are increasingly voting against boards
that lack women at annual general meetings (AGMs). For instance,
in 2019, the New York City Comptroller launched the
Boardroom Accountability Project 3.0, aimed at improving
companies' diversity at board and management levels. And, as
the issue of gender inclusion continues to gather traction, we
expect diversity related to age, experience, and ethnicity to follow
suit-helping to reduce complacency and groupthink.
Additionally, investors remain focused on boards' effectiveness.
Indeed, as boards' responsibilities continue to increase,
and directors face an ever-broadening range of issues, it is
critical that corporate leaders are not overextended. As such,
there is strong impetus from investors and proxy advisors to
limit overboarding. Doing so not only improves board quality
and accountability, but also helps increase director renewal
and diversity.
ESG Competency Crucial
As the world continues to reel from the pandemic-and ESGrelated
disruptions continue to mount-the case for ESG
competency at the board level is now stronger than ever. Interest
in ESG is growing fast, but so is the risk of competence
greenwashing. In a recent study, New York University Stern
Business School confirmed a severe lack of ESG expertise on
U.S. boards. Meanwhile, investors, such as Legal & General
Investment Management in the UK, have been voting against
directors for failing to adequately report on their companies'
environmental strategy.
Resultantly, a growing number of businesses are appointing
sustainability experts to their boards and setting up
dedicated board-level committees to oversee ESG risks. We
40
expect to see this trend continue-particularly as, moving forward,
boards that are perceived to be failing to provide a clear
climate strategy and transition plan may face greater scrutiny
and challenges.
Corporates are also facing mounting pressure from investors
to disclose details of their plans to address climate change
and meet the requirements of the Paris Agreement. In January,
the UK Investor Forum announced its support for annual mandatory
non-binding votes on climate at AGMs, following the
UK Financial Conduct Authority's proposal to implement a Task
Force on Climate-related Financial Disclosures (TCFD)-aligned
disclosure requirement for listed companies. Meanwhile, in
the U.S., investor advocacy groups have called on the Securities
and Exchange Commission to make it easier to submit
environmental and social proposals.
Fairer Executive Pay and ESG Integration
2021 looks set to be a test case for executive pay restraint. With
the pandemic bringing earnings pressure, stagnant employee
pay levels, and dividend cuts in 2020, scrutiny of executive pay
is expected to ramp up as the year progresses. Certainly, with
the most economically vulnerable losing jobs or facing barriers
to salary progression, the disconnect between executive and
employee pay presents a growing reputational risk.
Thanks to the pandemic, some businesses have revised
executive pay policies and reduced bonuses-and we expect
calls for further restraint to continue. In addition, while few executive
pay packages currently include ESG metrics, we expect
to see a better integration of ESG factors in executive
remuneration.
Tax Transparency Gathers Momentum
Taxation policies, too, are drawing the attention of investors,
and there are increasing calls for fairness and transparency
amidst ballooning public deficits. In the aftermath of the Luxleaks
scandal, the European Commission stepped up its efforts
to combat tax avoidance-though its planned directive to mandate
multinational companies to disclose how much profit and
tax they pay is yet to be approved. Additionally, in February, the
United Nations published a report calling for the establishment
of a global minimum corporate tax rate of 25%-30% in a bid to
combat tax evasion.
The remainder of the year is set to see boards balance
secular changes to how they operate, with the broader societal
pressures created by the pandemic, as well as financial
upheaval, contributing to short-term pressures. Looking
ahead, the transition to a more stakeholder-focused economy-and
one that is adept at addressing systemic crises-
will likely require a more significant rethink of governance,
leading to the better alignment of corporate, environmental,
and societal needs. ■
-Bruno Bastit is a director with S&P Global Ratings.
www.powermag.com
POWER | July 2021
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POWER July 2021

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