Corporate Governance 2021: Trends to Watch
Renewed crisis-management planning, DE&I initiatives, and other trends making a splash in corporate governance
- Overlapping crises in 2020 created a tipping point in corporate governance
- COVID-19 drives risk planning for corporate boards
- Public pressure builds for DE&I, ESG, and stakeholder capitalism initiatives
- Events present a unique opportunity for a new corporate governance framework
The events of 2020 will have a considerable impact on corporate governance practices through 2021 and beyond. Some stakeholders have issued a challenge to reimagine corporations’ roles and responsibilities in the wake of COVID-19 and economic, social, and environmental unrest.
Corporate directors now face a higher level of visibility and accountability. While each company’s specific circumstances will dictate its focus in 2021, experts project the “black swan” elements of the past year will cause philosophical and operational shifts throughout the business world.
A global tipping point
The past year’s overlapping crises revealed many areas of volatility that demand both immediate attention and long-term solutions. Among the most pressing concerns:
- Sustaining a business in an economy ravaged by the global pandemic
- Public pressure to address systemic racism and income inequality
- The rising human and economic costs of climate change
Corporations have spent the past year meeting these challenges with tactical solutions that temporarily contained possible damage and prioritized getting through the crises intact. Some companies managed to thrive. But the larger, higher-level questions underlying these challenges remain.
The concept of corporate responsibility that extends beyond financial payments to shareholders has taken on added weight. The essential role of the corporation in society—its obligations and its allowances—is under scrutiny.
Directors are charged with maintaining their companies’ financial health while balancing the competing interests of multiple stakeholders.
The COVID-19 implications for corporate boards
The sudden onset of COVID-19 uniquely tested corporate crisis-management mechanisms. But an overwhelming majority of international directors self-reported being pleased with their response to the pandemic and the quality of their oversight, according to a survey conducted by the National Association of Corporate Directors (NACD). Almost a third of respondents credited prior scenario planning for their success.
According to the surveyed directors, this COVID-19 experience has increased the emphasis on risk planning, including bringing in experts to design scenario-specific risk-mitigation strategies, such as those designed to address employees’ health and safety. Cybersecurity and technology-focused risk management have also become high-priority items for boards to discuss.
Company directors are also prioritizing issues related to human capital management, starting with the physical and mental wellness of their employees. The pandemic shed light on mental health issues, demanding increased support for benefits targeting employee well-being. And the overall treatment of front-line and essential workers has commanded the public’s attention and became a major concern for corporate leaders. Public relations and ethical worries have gained similar status to legal ones, in this regard.
One lasting effect of the pandemic will be the way corporations conduct business. This crisis offered the potential to rethink the modern company, from its reliance on physical office space and set work hours to how it oversees and compensates employees. Many professional norms have been upended. Boards will be challenged to develop new, sustainable policies and help reshape corporate cultures.
Human capital management and cultural issues have traditionally been critical areas of board oversight. And the changes caused by COVID-19 have elevated their importance.
The weight of public expectations: pressure builds for tangible DE&I and ESG initiatives
Current hot topics in corporate governance include diversity, equity, and inclusion (DE&I), environmental and social governance (ESG), and stakeholder capitalism. There is a perception that maximizing shareholder value is no longer enough. In the wake of the crises, many corporations feel the pressure to do their part to help alleviate economic and social unrest or suffer the consequences—which may include a decrease in company value.
Many directors worry that failing to enact policies that support DE&I objectives or otherwise falling on the wrong side of public opinion risks harming their companies’ reputations and brands. They assume there will be increased attention to diversity in hiring, promotions, and the composition of corporate leadership teams and boards, and amplified calls for disclosure in the case of private companies.
This year and for the conceivable future, the “E” of ESG looks to be a key component of corporate governance. Along with diversity, ESG performance is considered an important factor in determining the long-term success of companies. Certain investors are increasingly choosing environmentally sustainable organizations over comparable picks. A strong pro-environment narrative backed by tangible steps may make a company more attractive to both customers and talent.
The concept of stakeholder capitalism recognizes that corporations can preserve and grow profits while simultaneously pursuing ways to positively contribute to society. And in notable cases, these “activist” companies are rewarded by the market.
Toward a new corporate governance framework
The pandemic afforded companies worldwide a chance to reinvent existing policies and norms. And many directors believe they have a unique opportunity to initiate conversations about their board’s purpose, role in defining company culture, and communications strategies.
The essential character of corporate governance may not change drastically, but the specific initiatives that underlie these responsibilities are adapting to new priorities after an unprecedented year. Directors will play a pivotal role in supporting new programs, leading by example, and helping shape the organizational cultures that enable companies to navigate broader transformations.
The most successful corporations will adapt while mitigating novel financial, social, and legal risks.
The attorneys at Johnston Clem Gifford routinely advise and represent clients on corporate governance and investigation matters, as well as related litigation and trial matters. Contact us online or by calling (214) 974-8000.