It seems the list of things for corporate boards to consider during their meetings continues to get longer and more detailed. There continues to be an expansion of the types of issues that boards are expected to explore in order to fulfill both their legal duties as well as the expectations of shareholders.
Following the onset of the financial crisis, I was invited by colleagues at the Canadian Institute for Chartered Accountants (CICA) to co-author an installment in the CICA’s Director’s Alert series. This Director’s Alert focused on the consequences of the financial crisis for board members; consequences that were difficult to decipher and which still remain very fluid. The full document can be viewed at the CCGRM’s website at http://business.sfu.ca/cibc-centre/ or at the CICA’s website at http://www.rmgb.ca/
But since that Director’s Alert was written, there have been a number of regulatory initiatives and news stories that continue to redefine and expand the duties and expectations of Boards. Executive compensation and bonuses- particularly among financial institutions- have been drawing the increased attention of regulators and the disdain of the public and media. Whether regulatory attempts to limit executive compensation- particularly in the UK and US- are motivated by good public policy or political calculation, it is very likely that compensation issues will remain in the public’s and regulator’s focus as a symptom of economic malaise and something which merits change. Recent studies which illustrate that Canadian CEOs earn 175 times as much as the average worker will only further focus public and political attention on these compensation inequities. Further focus on compensation issues also reflects increasing evidence of a correlation between compensation policies and effective risk management. There is increasing evidence to show that compensation that is not linked to longer-term performance of the company creates undesirable short-term incentives that lead to unwanted risk taking.
But the list of issues for board consideration is becoming even more complex and fluid than these thorny issues of executive compensation. Issues such as risk management- or more accurately risk oversight- may require separate committees and separate areas of expertise beyond typical board member competencies and mandates. Risk management no longer only deals with traditional areas of financial risk management but also touches on systemic risks, macroeconomic risks, reputational risks and whether consideration has been given to insurance policies that may assist in managing these risks; risks that are typically inherent in complex business enterprises.
Another very fluid consideration for boards is regulatory compliance. As the regulatory environment changes, both in a business’ home jurisdiction as well as the many international areas where it operates, keeping abreast of regulatory and compliance issues can be a daunting task. A related concern is whether companies are adhering to the requirements for transparency and disclosure. And this is not only a legal and compliance issue. More activist and engaged shareholders- particularly institutional ones- are increasingly advocating for, or insisting on, improved levels of communication and information in order to allow them to make informed investment decisions. Businesses and their boards must effect a very difficult balancing act between responding to the regulatory and shareholder requirements against the importance of protecting a company’s competitive position and information.
Reputational issues continue to gain interest, traction and complexity and raise new concerns for boards. Environmental policy, social and human rights issues will inevitably continue to provide difficult terrain for businesses to navigate, particularly those with international operations and diverse suppliers.
And then there is the issue that some companies and their boards fear most: the democratization of the boardroom and corporate decision-making. New initiatives on proxy access, shareholder resolutions and other avenues for having shareholders engaged in corporate governance, raise the possibility that corporate decision-making may change in dramatic ways in the near future. And, as detractors would argue, not all of the changes that promote the “democratization” of corporate decision-making may be positive for businesses. While we are a long way from having corporate decision-making resemble anything like the decision-making processes of modern democracies (including all its inherent flaws), boards will continue to strategise about how to create incremental improvements in shareholder engagement without compromising the board’s role as the main supervisor and overseer of corporate decision-making.
Each new year brings new changes and surprises. The last few years have brought many changes, most of which few of us predicted. This year promises to bring potentially meaningful changes in corporate governance and risk management, particularly in respect of how boards engage with these issues. The Centre will continue to monitor these developments and their implications, whether those that are taking place in our “backyard” in Canada or those that are changing the rest of the world.