Investors put cyber-security, proactive engagement, board performance and board committees in the spotlight
Corporate governance remains center stage for investors and watchdogs in 2016. We see a continued focus for boards to have the right composition to fulfill their collective responsibilities effectively – whether that’s in relation to strategy formulation, risk oversight, performance evaluation, succession planning or shareholder engagement. As directors and corporate secretaries grapple with the letter and spirit of their governance requirements, we expect to follow these trends closely and provide our insights on these themes throughout the year.
1. Improvements in cyber-security awareness and preparedness
The importance of cyber-risk transcends borders with companies facing serious challenges. Cyber-crime will continue to increase in sophistication and with some high-profile breaches in 2015 we expect this to be front of mind for directors in 2016. Specifically, ensuring the board, C-suite and operational staff are adequately aware of the risks and sufficiently prepared.
In this context, we expect boards to consider their risk-oversight arrangement closely, clearly defining their risk appetite and assessing the effectiveness of their company’s risk-management arrangements. Directors and regulators alike will want to ensure cyber-risks are managed and mitigated adequately given that security of data is of paramount importance. The balance is likely to prove tricky: assuming risk is, of course, inherent in any business that is going to deliver long-term value for shareholders, and directors will be thinking carefully about where they draw their red lines.
2. Expansion of proactive shareholder engagement
Shareholder activism in the US remained strong in 2015 so companies seem much better prepared than they did a year ago. Preparedness for activist strategies will remain a key focus in 2016 and we expect to see activism grow in Europe this year. European companies will spend more time, money and effort defending their positions – similar to what has been seen in the US recently.
Activism can be seen as a subset of shareholder engagement and there is a broadening consensus that knowing and engaging proactively with shareholders – in a year-round program – is vitally important. The UK Stewardship Code has been influential in improving engagement, but compliance remains mixed. We expect European minds will focus in 2016, as legislative progress is made with the Shareholder Rights Directive.
On a practical level, shareholder engagement has been at the executive level, but there is now a growing trend from investors to meet with non-executives. This will pose new challenges for the corporate secretary and the investor relations teams as they provide directors with professional support and insight. We expect to see firms develop clear shareholder engagement protocols or committees to ensure engagement and communication is co-ordinated and effective with the board. The use of external technology solutions will prove invaluable for the IRO and corporate secretary delivering insight, supporting workflows and enabling co-ordination.
3. Board performance
Investors have board refreshment in their sights given their desire to ensure there is an appropriate skill set and representation of a diversity of interest around the board table. Pressure from shareholders and stakeholders alike will continue to increase during 2016, and directors are taking note. Evaluations of board performance, its committees and its directors are some of the most challenging tasks of a board. We see varying degrees of success reported, and given the intense focus from investors and watchdogs, we expect boards in 2016 will more firmly grasp this nettle and will to continue to improve the process of evaluations.
4. More work for audit and risk committees
A simmering debate about the benefits of separating audit and risk committees continues. While the issues dealt with by each committee can be inter-related and overlapping, there is an increasing momentum that risk committees help the board to have more effective oversight of risk management. This is distinct from financial risk, but equally important given the increase in risk.
One size does not fit all, however. In the EU we note that the Statutory Audit Directive must be transposed into national law by EU member states by June 17, 2016 and be directly applicable from that date. Implementation will cover mandatory auditor rotations, prohibition on use of statutory auditors for non-audit services, audit and non-audit fee restrictions, mandatory rotations of audit partners, mandatory audit committee duties and more detailed audit reports.
While there are many more corporate governance topics for 2016, these are our top-of-mind issues for the upcoming year. Indeed, institutional investors have an increased focus on such non-financial matters in addition to their financial and strategic scrutiny and we expect, therefore, it will be another challenging year for board advisers and directors.
While corporate governance has typically been the preserve of the corporate secretarial team there will be an increasing need for investor relations departments to understand corporate governance so they can engage with key stakeholders in a meaningful way, and in doing so ensure there is a mutual understanding between issuers and investors. As such, we expect to see a growing inter-dependency between these two departments.
Blake Stephenson works in governance management and strategy at NASDAQ
The opinions expressed by the author of this article are theirs alone, and do not reflect the opinions of NASDAQ or any of its subsidiaries.