It may be difficult for some to fathom that it has been an entire decade since the financial crisis of 2008. Perhaps it’s also fair to say that Wall Street has yet to bounce back completely from such a major event. The crisis caused financial and governance experts to rethink and re-evaluate nearly every aspect of the financial realm so that the financial markets and the economy would make sustainable, long-term forward progress.
Looking forward to 2019, boards across the globe will continue to face a greater number of challenges than ever before. If we look deeply enough, most of the challenges are rooted in the principles of good corporate governance — accountability, transparency and responsibility. In essentially every area, boards will need to rely on digital tools that assist them in total enterprise governance management. Here’s a look at the issues boards should be planning for in 2019.
Board Quality and Composition
Investors and regulators will continue to place pressure on boards in 2019 to let go of the old culture of automatically re-electing long-term board directors and replace it with a culture of composing their boards deliberately. Investors will insist on quality, independent board evaluations and focus on how the board uses them to build a diverse pipeline of quality director candidates. The new expectation is that boards will be regularly reviewed and refreshed, and newcomers will have a focus on forward-looking strategies.
Deeper Focus on Oversight of Corporate Culture
Boards will need to define and develop their corporate culture in 2019 and be able to communicate it successfully to their shareholders. Intangible assets like culture and reputation give value to companies and enable them to attract and retain the top talent in their industries. Successful boards will need to align the company’s values with the board’s and leadership’s actions and behavior, which will require strengthening how they engage with management on the issue.
The events that led up to the financial crisis didn’t occur overnight. Investors and other stakeholders are just now getting back to the basic principles of finance, including how short-term and long-term strategies work together to yield successful long-term growth. Successful “long-termism” can only happen when boards consider the impact of social values, environmental concerns, governance principles and sustainability in order to meet the needs of a broader set of stakeholders than in past years.
Environmental, Social and Governance Issues (ESG)
Moving into the next year, investors will be interested in how companies will integrate ESG into their investment and reporting decisions. Investors are most likely to be interested in how companies link sustainability to long-term value creation, which will also entail weighing new ESG risks with opportunities. ESG concerns may include issues of oversight of technology and cyber risk matters.
Activist Investors Continue to Impact Boards
Activism will continue into 2019, although shareholder approaches may be less hostile and more constructive in nature. 2019 may bring a trend where institutional investors are open to engaging with activists and willing to collaborate on the best ways to bring about the desired changes. Boards may move in the direction of commissioning independent assessments to identify their weaknesses to demonstrate that they’re proactively working on director performance and increasing oversight.
Investors view governance as a key ingredient to creating value and managing risks. As the months pass, investors will be looking to understand the long-term value creation story and to evaluate whether boards are adequately disclosing the right balance between long- and short-term strategies. Major discussions in 2019 may find some of the largest institutional investors driving discussions around the necessity for long-term, sustainable results and how organizations can partner to make it a reality.
Investors will be pushing for improvements in board director competencies; establishing a clear link between competencies and corporate strategy; ensuring independent evaluation processes; and developing diligent succession planning processes. Skills matrices may start to become best practices for board composition. Use of automatic refreshment processes, such as retirement ages and tenure limits, will be frowned upon.
Board diversity has been a growing conversation in governance, especially with regard to women board directors. Investors believe that women bring diversity of thought and experience, which are important to identifying risks and improving company performance. Investors will be insisting that boards appoint one or more women to their boards. In the next year or two, ISS may recommend that investors vote against nominating committees that don’t bring forth female nominees. California already passed legislation that requires publicly listed companies with California headquarters to have at least one woman on their boards by the end of 2019.
Oversight of Corporate Culture
Investors have learned from the past mistakes of boards to effectively oversee management and operations. Boards can expect investors to ask more questions about how well the board understands the corporate culture and their process for assessing the company’s health. Boards should prepare to address how they will assess vulnerabilities and potential issues related to culture.
Executive compensation and “say on pay” initiatives have been notable topics in financial circles during recent years. Investors want clarity of information on disclosures related to pay-for-performance metrics, particularly how compensation relates to risk management and strategy. Institutional investors will have their eyes on what they perceive to be excessive executive pay, especially if higher-than-expected compensation gets paid for two or more consecutive years. Many investors are aware that stock performance isn’t necessarily an indicator of excellence in CEO performance.
Boards should also pay special attention to the Corporate Governance Principles from the Investor Stewardship Group, which sets consistent governance standards for the U.S. governance market. Boards should also be looking at the recently published, version 2.0 of the Commonsense Principles of Corporate Governance. Boards may opt to proactively disclose their intentions on how they’ll proceed with complying with these sets of principles.
In closing, 2019 holds the potential for the financial markets to make substantial forward movement if the majority of the companies pay strong attention to the issues that investors and other stakeholders view as important. Investors and regulators will be watching how companies respond toward enhancing corporate governance principles. While the issues listed here will be certain areas of focus, boards will also need to be continually aware of new issues that emerge over the course of the year.