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A ‘Twist’ On Top Ten Governance Trends For 2021

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A twist, but hopefully not twisted . . . a slightly different take on developments likely to impact corporate governance in 2021. A list that doesn’t mention shareholder activism, cybersecurity, climate risks, nor SEC regulation. What follows are perspectives offered from a slightly higher altitude but still within sight of the tarmac.

Addressing Continued Volatility. Directors will confront the tactical and strategic implications of continued political, social, economic and regulatory volatility. This will be driven in part by the prospect of divided government in the aftermath of the 2020 elections. It may also include concerns with economic growth, trade conflict, income and gender inequality, inflation and continued societal fragmentation. To address these challenges will require directors to exercise heightened attentiveness and closer interaction with management.

Recalibrating the Board/Management Dynamic. Directors and executives will reconfirm their respective roles and relationships following a year of pandemic-driven accommodations on leadership duties. Clarity will be sought on the lines of decision-making, as traditional distinctions between what is the responsibility of the board, and what is the responsibility of management, may have become blurred. Special efforts may be necessary to restore key board monitoring duties following a period of understandable deference to management.

Reimagining the Company. Boards of companies that have successfully recovered from the pandemic will follow Satya Nadella’s call to “re-imagine” the organizational mission. Innovations born of necessity during crisis response will emerge, “like remote control of manufacturing processes, A.I. bots helping diagnose patients and more effective distance-learning technologies.” This will incorporate the efficiencies, shortcuts, ideas and designs initially developed out of necessity, while remaining “on the lookout for what is lost.”

Accelerating the Commitment to Diversity. Boards will respond to signs that their prior, good faith efforts to achieve diversity fall short of accelerated social and public policy expectations. This is especially the case with respect to gender equality, and data indicating that women have born an outsized workplace-related burden during the Covid-19 economy. It also relates to organizational disparities involving ethnicity and underrepresented communities; all of which could have long term consequences if not promptly addressed.

Emphasis on Board Refreshment. To achieve the turnover necessary to accommodate increased diversity goals, boards will pursue more extensive director refreshment practices. This, as surveys show that director tenure continues to be very extensive; that board vacancies are rare and open seats are often taken by an experienced director. Offboarding, term limits, performance evaluations, retirement requirements and overboarding policies will see wider application. Prior public company board experience will decrease as a factor.

Re-Evaluating Risk Profiles. The board’s approach to risk evaluation will undergo significant readjustment. The pandemic has confirmed that cataclysmic disasters can indeed occur, with a resulting profile increase for the enterprise risk function. Risk committees will reconfirm “mission critical” risks, assure readiness of crisis management plans, and track risks subsumed within the “known unknowns” as well as in the “unknown unknowns.” These committees will balance the need for more imagination in risk identification and monitoring, without creating distraction for the committee or frustrating management.

Greater Emphasis on Human CapitalOversight of human capital matters will receive greater governance focus for three primary reasons. First is the emphasis on the board’s fiduciary obligation to the vitality of the workforce as a significant corporate asset. Second is the extent to which issues such as return-to-work, employee health and safety, employee engagement, diversity and inclusion fill the corporate agenda. Third is the external value attributed to effective human capital management practices (e.g., Drucker Institute ratings).

The Corporate Social VoiceIncreased corporate social responsibility expectations will cause boards to more closely monitor the direction of the company’s commitment to related “CSR” principles. This is especially with respect to sustainability-related strategic decisions and business practices; organizational responses to social justice; corporate values-related initiatives of the Biden Administration; and the public position of the company and its CEO on leading political, economic, public health and social issues.

Corporate Accountability Returns. A confluence of recent and expected developments will prompt boards to support an increased organizational commitment to a culture of ethics and corporate compliance. These include corporate fraud controversies; marginalization of corporate legal, compliance functions; consumer safety and product design crises; Biden Administration initiatives on corporate and executive accountability; and media coverage of the 20th anniversary of Enron. Director codes of ethics will be refined and given higher organizational prominence.

More Disciplined Board Processes. New concerns with director effectiveness and individual liability exposure will incentivize significant changes to board decision-making practices. Pandemic-driven relaxation of board meeting frequency, agendas, protocols and venues will be tightened. The sufficiency of management-to-board information flow will be revisited. Expectations of individual director engagement in board deliberations will increase. Application of conflicts of interest and independence policies will be more rigorous.

These and other challenges are likely to influence the manner in which boards function and exercise their leadership role. As the National Association of Corporate Directors has recommended, in the new year boards will respond by reshaping thought processes and operational approaches, and modernizing their expertise and behaviors.

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