Corporate Governance Trends and Their Effects on Investor Behavior

Corporate Governance Trends and Their Effects on Investor Behavior 
Where We’ve Been; Where We’re Going  

A Harvard Law School Forum on Corporate Governance study conducted earlier this year identified the global corporate governance trends that would impact businesses in 2021. The study was based on interviews with investors, pension fund managers, advisors, and other corporate governance professionals from around the world. As the new year approaches (I know, I can hardly believe it myself!), we thought it was an ideal time to check back in on these trends, as we navigate what investors may be looking for going forward. 

For the United States, the trends have been focused, in part, on the following topics: 

• Diversity, Equity, & Inclusion (DE&I) 
• Environmental, Social, and Governance (ESG) Oversight & Disclosure 
• Corporate Culture & Human Capital Management 
• Executive Compensation 
• Technology & Cybersecurity 
• Virtual Shareholder Meetings 

DE&I 

Social and racial issues gained unprecedented attention in the United States last year, and companies are responding. They are now incorporating far more aggressive initiatives to address DE&I concerns to increase racial and ethnic diversity, especially on the board and at the C-suite level. But if they plan on bringing on investors, they should maintain or even increase these efforts. 

Investors are holding more companies accountable, demanding increased disclosure of key data on diversity, equity, and inclusion. They expect improvements in these areas and full disclosure of the company’s data. Some states and institutions are taking it a step further. The study notes that “California law now requires that by the end of 2021 public companies headquartered in the state have at least one director who is from an underrepresented community. NASDAQ has proposed a similar listing requirement, which is subject to approval by the Securities and Exchange Commission (SEC).” 

ESG Oversight & Disclosure  

There has been a rise in ESG reporting standards over the past year. Investors are increasing their support of ESG oversight and disclosure, and are holding directors responsible if those standards are not met. 

Now, private equity firms and other private companies are also increasing their focus on ESG. All boards should expect to start being held more accountable for ESG disclosures by their stakeholders. Key considerations should include (1) if they have ESG data ready for review, (2) if they have considered shareholder interests when creating ESG initiatives, and (3) whether ESG has been integrated into their business strategies and financial planning. 

Human Capital Management 

The consequences of the pandemic and social justice movements for businesses have led to an increased demand for Human Capital Management (HCM) data, such as gender pay gap, safety incidents, and employee turnover. 

The SEC has adopted new HCM disclosure rules on the premise that employees are key to an organization’s value. Those rules require a description of the company’s human capital resources, including applicant attraction and employee retention and development measures. Investors also have increased expectations and are demanding increased board oversight of HCM and corporate culture issues.  

Executive Compensation 

While executive compensation has always been a consideration for investors, it is under increased scrutiny now. With the unique considerations brought about by the pandemic – company acceptance of federal aid, mass layoffs, and overall employee treatment during the pandemic, investors are looking more closely at compensation paid to the C-suite. Companies should be carefully scrutinizing the compensation paid to upper management compared to how the pandemic affected their frontline workers and be ready to address disparities.

Technology and Cybersecurity 

As a necessary result of conducting business from afar, technology use has exploded over the past year. Unfortunately, with all of the benefits it provides, increased technology use also increases security risks. This year, and going forward, investors want to see that cybersecurity needs to minimize those risks are a part of both the company’s financial planning and overall strategic business decisions. Companies should be prepared with additional board oversight and disclosure on these matters. 

Virtual Shareholder Meetings 

As shareholders and directors adapted to virtual life last year, many began the process of permanently leveraging the methods used, and their associated efficiencies, post-pandemic. Most of what is emerging is some form of a hybrid model, where at least one annual meeting remains virtual, along with other smaller meetings, while other meetings transition back to face-to-face.  

Best practices for virtual shareholder meetings have been codified in the Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings. They include submission of questions, treatment of shareholder proposal proponents, and the use of audio versus video. Boards should ensure that these best practices are taken into account while conducting their virtual shareholder meetings.  

Barker Associates has extensive experience in corporate governance issues, especially as they pertain to financial considerations and investor scrutiny. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.