Three Things We Learned About Corporate Governance in 2020

The EU’s determination to foster sustainable corporate governance and accountability was signaled by a Study on Directors’ Duties and Sustainable Corporate Governance, followed by a Consultation on Sustainable Corporate Governance. These are expected to inform legislative proposals in 2021 for an EU wide framework that has a greater balance of company and stakeholder interests. This is unlikely to affect UK companies following Brexit but it will be interesting to see if the UK voluntarily aligns with any EU legislative changes.

2020 also saw companies starting to report on their directors' approach to section 172 Companies Act 2006. This requirement, introduced for financial years starting on or after 1 January 2019, requires directors of ‘large’ or publicly traded companies to include a statement in their strategic report describing how they have had regard to matters set out in section 172 of the Companies Act. The increased transparency arising from such reporting obligations encouraged boards to review how decisions are made and consider how stakeholder interests can be embedded in decision making. A number of companies embarked on exercises to methodically map stakeholders, review engagement methods and assess the impact of such engagement on decision making. The FRC provided a helpful commentary on these statements in their Review of Corporate Governance Reporting.

Companies were expected to react to the COVID-19 pandemic in pro-social ways and public scrutiny of their treatment of employees and stakeholders increased. Companies were ‘called out’ by media outlets for paying dividends whist simultaneously making redundancies or availing of government stimulus. COVID-19 was not the only humanitarian issue that forced companies to re-think governance structures. The Black Lives Matter Movement put a spotlight on racial inequalities in society and we saw companies affirm their position on diversity and inclusion.

Investors and regulators also asked companies to focus on stakeholders. Large funds such as Blackrock, State Street and Vanguard began publicly to endorse, and indeed demand, reporting on ESG risks. Further, the FRC set out reporting expectations for 2021, identifying key issues as COVID-19, Brexit, climate change and S.172 statements.

Coherent non-financial reporting will therefore be an important tool for companies to communicate good governance and its impact on stakeholders. There have been a number of developments this year that suggest we are getting closer to standardising non-financial reporting, most notably an IFRS consultation paper considering the demand for global sustainability standards and the role it might play in the development of such standards.

There was a push from legislatures to promote sustainable transitions such as the European Green Deal and the UK Government’s 10 Point Green Plan. Legal obligations for companies to consider their environmental impact may also be imminent. The first European Climate Law aims to enshrine into law the goal of achieving net zero greenhouse gas emissions. In September, New Zealand became the first country to introduce mandatory reporting on climate risks for large financial institutions and asset managers (in-line with TCFD on a comply or explain basis). The UK’s FCA also published a consultation paper proposing a similar new rule for listed companies.

Various commentators contend that to ‘build back better’, we need greater sustainability obligations attached to government stimulus packages. Looking forward, we foresee that stronger stakeholder governance frameworks will need to be put in place by companies to access funding, not just from governments but from financial institutions and the markets. Companies should therefore ensure that they are in a position to communicate clearly and accurately their impact on stakeholders and the environment. Expect to be audited: applications for funding and/or government stimulus should be completed carefully with a clear audit trail that identifies how funding criteria is met and how such funds are allocated.