Recently, public company boards are facing increasing scrutiny and greater expectations from various stakeholders, particularly in light of society’s elevated concerns regarding corporate culture, gender equality and climate change and sustainability. In its report entitled “2019 Global & Regional Trends in Corporate Governance” (the Report), Russell Reynolds Associates noted that in 2019 “[t]he demand for board quality, effectiveness, and accountability to shareholders will continue to accelerate across all global markets.” The Report discussed five major global trends that are expected to define the corporate governance landscape in 2019:
- Improved board quality and composition continues to be the essence of corporate governance. Shareholders will continue to prefer a board that is independent, diverse, competent and subject to regular review, and push for enhancing board succession. In 2019, companies should expect shareholders to increasingly vote against the nominating committee chair if the board has no female members. With a greater focus on the board’s competencies, there will be a continued push for greater disclosure of the skills and experiences of directors relating to the company’s industry and strategy. Additionally, there is also pressure, predominantly from U.S. institutional investors, to ensure that effective board succession and evaluation practices are in place, including employing independent firms to assess board quality and effectiveness. In Canada, almost 40% of TSX-listed companies have no women on board, and beginning in 2019, proxy advisor firms, such as Institutional Shareholder Services, recommend withholding votes for directors involved in nominations for widely institutionally-held TSX-listed companies that have no gender diversity policies nor female representation on board. Furthermore, while the Canadian Securities Administrators’ instruments and policies relating to diversity speak only to gender diversity, large investors are beginning to focus on a broader level, including race and ethnicity diversity.
- Greater emphasis on the oversight of corporate culture. Culture and reputation are significant factors in shaping the value of a company. In assessing a company’s culture, shareholders will continue to be interested in understanding how the board interacts with management, including the mechanisms in place to identify potential issues.
- Prioritizing long-termism over shareholder primacy. Corporations are considering the demands and values of a broader set of stakeholders and incessant environment, social and governance (ESG) changes are moving corporations away from the theory of shareholder primacy. This switch follows the growing desire of institutional investors to actively collaborate with various stakeholders in an effort to produce long-term, sustainable growth.
- ESG is a critical issue. Climate change and sustainability have become fundamental considerations in evaluating companies and making investment decisions for many investors. While in the U.S., companies are placing growing emphasis on addressing ESG issues, Canadian companies should be more proactive and should establish and develop ESG policies, and ensure that the board is qualified to assess and handle the related issues.
- Activist investors continue to impact boards. As investors continue to implement various activist strategies to accomplish their end goals, activists are no longer being exclusively branded as hostile antagonists. Indeed, some activists are becoming more constructive with management, and more boards are becoming “their own activist”, proactively initiating independent evaluations to identify their strengths and weaknesses. In Canada, shareholder activism is increasing and while traditionally evident in industries such as basic materials, energy and banking, expansion into sectors such as blockchain and cannabis can be reasonably expected. The elevated number of proxy contests commenced by former insiders and founders is also expected to persist.
As 2019 begins, it is also worth considering what changes can be expected in corporate governance over the ensuing decade. In his paper “Corporate Governance 2030: Thoughts on the Future of Corporate Governance”, Stilpon Nestor identified four key drivers that will shape corporate governance over the next ten years:
- Diversity. Diversity in all respects will continue to increase and “portfolio directors”, whose value lies in their ability to challenge constructively, will be increasingly prominent on boards, particularly in private companies where this practice is currently only at a baseline level.
- Disclosure. The future of public company disclosures might become more streamlined. Private companies, in order to attract a greater number and diverse block of investors, will embrace the public market disclosure requirements, and essentially become quasi-public.
- Data. The evolving ability of data providers to collect, organize and analyze high quality governance data will enable shareholders and potential investors to gauge a board’s efficacy through quantifiable metrics.
- Development Financial Institutions (DFIs). The recent coordination of DFIs to develop and actively commit to better corporate governance has become a significant driver of change. Continuous improvements in this area will yield significant results in many individual investees, which in turn might serve to benefit all the companies in the investee’s immediate network.
There is no question that in the coming years there will be significant changes to the corporate governance landscape, both globally and in Canada. As we enter 2019 and look forward to the new decade on the horizon, it will be interesting to follow which predicted corporate governance trends actually emerge and which factors prove to be the greatest drivers of this change.
The author would like to thank Neil Rosen, articling student, for his assistance in writing this legal update.