The new corporate governance #1: a new role for a new era

This, our new series, looks at the role of corporate governance, Boards of Directors, senior management, and shareholders in our new global context.  In this first article, we review the keys to corporate governance and analyze what factors mark state of the art of corporate governance in the times we live.

 Over recent years, we’ve seen a rise in governance-related phenomena—like the increase in ‘activist investors’ (those who seek to guarantee the maintenance and development of companies in a realistic way, and / or help companies improve their records and functions on the environment, diversity (ESG), etc.). The increased incidents of these phenomena show that the concern to have a system of surveillance for correct corporate governance is already a reality. Cases like 2021’s GameStop trading make it even more evident.

Corporate governance is no longer just an ethical issue. Countries have been installing concrete measures to govern legislative frameworks, and ensure their correct application, with particular intensity for two decades. Europe is strong on corporate governance; Directive 2017/828, (to promote greater long-term commitment of shareholders), or Directive 2019/1151, (regarding digital tools and processes for companies) stand out in particular. In Spain, the Capital Companies Law, the Code of Good Governance of Listed Companies (revised in June 2020), the Law on Audits of Accounts (Law 11/2018) are in force. The United States is a governance pioneer through the United States Securities Act of 1933, replaced by the Sarbanes-Oxley Act (2002), which dictates practices for financial reporting. In Ecuador, the Superintendency of Companies, Securities and Insurance has issued the “Ecuadorian Standards for Good Corporate Governance”.

Legal complexities aside, no one doubts that the roadmap for a corporate project to come to fruition (and, above all, last over time) requires leadership and governance that exceeds expectations and is up to the times—and future challenges. The problem is that we are immersed in a liminal context, where regulatory changes happen too quickly and are forcing decision makers (in the broadest sense of the term) to adopt reactive strategies.

Prior to 2020, there was a certain consensus about what marked the ABC of corporate governance, despite changes introduced following the financial crisis of 2008. Generation of long-term value, transparency, equanimity in the treatment of shareholders, diversity and sustainability, constant auditing—for example. Of course, these elements continue to be part of the checklist of good corporate governance but, despite near-universal acceptance, they seem like issues which, possibly, do not prepare companies for scenarios such as those experienced in the last two years.

Therefore, we look to analyze what the keys to corporate governance in this new reality.

Spaces for diversity, conversation, debate, and discussion

Indicators of equality and diversity are increasingly part of the presence of companies (due to the importance of ESG criteria, among others), and no one doubts that diversity (in all its variables) must be part of the reality of corporate governance.

The composition of Boards of Directors must guarantee a diversity of profiles, competencies, commitment, independence, relationship with the CEO and the breadth of the roles themselves. But this diversity should not be limited to only these elements, but also applied to the depth of conversations and discussions taking place.

By using this confluence of multifactorial diversity and turning Boards into spaces for real debate, companies can avoid Boards becoming ‘echo chambers’—generating unilateral visions that do not respond to the external requirements of the company, of investors and, especially, to the requirements of society.

By using this confluence of multifactorial diversity and turning Boards into spaces for real debate

With an eye on the long term (but what is the long term?)

One of the constants when talking about corporate governance is the importance of focusing on the long term. With a corporate world that moves in cycles marked by three- or five-year strategic plans, the long-term view is sometimes reserved more for environmental issues, leaving the rest of the ESG criteria and business issues for the short term and always marked by the generation of results.

Of course, this is not easy, and there are often clashes between the generation of sustained value, the need to generate dividends for investors and guarantee capitalization, and maintaining liquidity reserves for everything that may be necessary (from growing through M&A, to simply having a financial lung to withstand cyclical or unexpected crises).

The key to proper corporate governance here is twofold: on the one hand, understanding that the long-term concept has changed and goes beyond a succession of strategic plans; on the other hand, to act as aligners of all the elements that generate disruption or add noise to the long-term / short-term debate. This involves betting on accountability and constant measurement, culturally aligning the organization to ensure that the purpose, vision, strategic objectives, and action plans all point in the same direction.

Catalysts for the spirit of permanent innovation

If we assume that we live in liminal times and that we are unable to clearly forecast what the future will bring, the work of corporate governance must not get bogged down in speculating on what will change, but should prepare the organization to be ready for permanent change, and instill a capacity for reaction that turns reactivity into proactivity.

Thus, one of the objectives of good corporate governance is to be catalysts of permanent innovation. How? Last century, Boards were focused on creativity or technological skills—now is the time to make room for innovation. This involves the creation of senior management roles directly related to innovation, enmeshing these roles in Executive Committees, providing them with content, functions, objectives and metrics. This enmeshing also requires that other senior roles, such as the CFO or the CHRO, be aware of the importance of innovation and take it into account in their strategy and management KPIs as well.

Ensure the quality of information and transparency in communication

Possibly one of the great issues / signs of the current times, is disinformation and the impact that it has—not only on organizations, but on the world in which we live and the way we relate.  This is an issue that affects people (implementing a culture of total and constant measurement in the organization), technology (through analytics and measurement solutions) and processes.

Therefore, one of the objectives of good corporate governance must be to guarantee the quality, veracity, transparency, and availability of information. Boards of Directors and Executive Committees must establish the necessary and relevant control mechanisms to ensure that the information they have for strategic decision-making is correct.

But one task of current corporate governance is to ensure that disinformation does not act negatively within the organization itself. Companies are not entities isolated from the world, they are living organisms and are, in the same way, exposed to the great challenges that we experience as a society. Therefore, a further responsibility of corporate governance should be to ensure internal communication and to generate spaces for debate and conversation based on honesty, transparency and veracity of correct information.

Openness of Boards

No one doubts that having more horizontal organizations or, at least, having horizontal organizations liquid enough to overcome the disadvantages of more rigid structures without renouncing the advantages of hierarchy, represents a competitive advantage. But flattening the organization provides challenges of its own; one of which is to open the Board of Directors to the rest of the organization.

Boards should become spaces for conversation, where certain profiles (both of the Executive Committee, as well as organic leaders throughout the entire organizational chart) can transfer the pulse of the organization to the Board. And it should not be forgotten that soft aspects, more linked to talent and people than the pure, hard management of the business, should also be part of Board agendas.

Although correct corporate governance is a generic goal of all presidents, Boards and investors, the post-COVID panorama and current situation has highlighted the need to instill new approaches. We will continue to analyze the phenomenon of corporate governance and its implications for organizations through this ongoing series.

To speak to an expert about your corporate governance challenges get in touch with us.