Corporate Governance – Challenges Ahead for Irish Directors
The first two quarters of 2018 show further signals of important shifts in international expectations of boards. While the changes signalled may take time to be refined, the key challenges for boards are becoming better defined and some trends are emerging. Given the codification of directors’ duties in Ireland in the Companies Act 2014, it is important on an ongoing basis for Irish boards to embrace international best practice, to recognise and address similar challenges and to review and renew their governance structures to ensure that they are robust and continue to meet stakeholder expectations.
While the central aspects of these recent comments are addressed to the boards of companies that are publicly quoted, many of the messages are relevant to the directors of all companies. Directors of Irish companies should continue to take on board these messages – in part because better governance will promote the success of their businesses but also because these changes reflect standards against which their directors’ duties will be measured.
Board and corporate quality, culture and communication
Having the right board composition is fundamental – BlackRock emphasised the importance of a board with a diverse mix of genders, ethnicities, career experiences and ways of thinking in order to give a more diverse and aware mindset less likely to succumb to groupthink or miss new threats to the company’s business model. Others have signalled also the need for a range of skill sets and for the promotion of a strong corporate culture. Some of this logic will be familiar to Irish directors –it reflects the principle behind the duty imposed on directors of Irish companies under the Companies Act 2014 to ensure that the company secretary has the skills and resources necessary to discharge their duties.
The creation of a strong corporate culture for a business starts with the tone from the top and with the key relationships between the Chair, the CEO and the board. This can be promoted by having a dynamic of open discussions, challenging mindsets with a priority for integrity, professionalism and compliance in setting strategic and operating goals – one of ideas rather than personalities. As part of their best practice, boards are expected to inform, oversee and articulate the company’s strategies and increasingly the focus is on a strategy to deliver long-term growth. Key influential international investors have signalled the importance of articulation of a company’s strategic framework for long-term value creation and for directors to explicitly affirm that the framework has been reviewed by them and to describe the process of board oversight of strategy.
Boards have been informed also of the importance of engagement with investors to communicate their company’s strategy for long-term growth so that its actions and policies, its preparation for potential challenges and the context for its shorter-term decisions are better understood. This requires greater involvement by directors in corporate strategy and more active engagement by directors with investors. In this changing environment, even greater importance will attach to board evaluation, review of the board’s skills mix and board renewal and succession.
One of the practical consequences will be the need for increased work by the board with the executive team to ensure the provision on a timely basis of more information and management time to keep the directors updated.
While these trends will initially have most impact for publicly quoted companies, we expect that the standards set for those companies will be applied by investors and regulators to private companies, to companies in which there is state investment, ownership or regulation and to the not-for-profit sector.
Long-termism and sustainable growth, consider all stakeholders (not just shareholders)
Another significant recent trend is the shift in focus from shorter-term growth to long-term and sustainable growth and recognition of a broader stakeholder group than shareholders. In the EU, this has been part of a commitment to becoming the global leader in fighting climate change which has sought to engage the financial sector to reduce the EU’s environmental footprint while enhancing the sustainability and competitiveness of the EU economy.
From a corporate governance perspective, a number of points of note were signalled by the Commission – in passing, the Commission recognised the stakeholder roles of financiers, customers, management, employees, government and the community rather than just the role of shareholders. More significantly, the Commission noted that sustainability requires discussions and strategic planning at board level, as well as proper control and accountability mechanisms and that the regulatory framework needs to enable companies to create long-term value.
In the longer term it is likely that similar pressures will apply to the boards of private companies either as a consequence of investment from EU-funded investors or from international investors who recognise the importance of promoting the same strategies. As noted earlier, some of the most significant international investors have indicated their eagerness to promote long-term value creation and a better governance framework serving the broader stakeholder group, recognising the need to promote broader societal goals.
Application to Irish boards
Directors of Irish companies should take on board some key messages from the changes signalled. We expect that:
- Board composition will continue to be more closely scrutinised, evaluated and challenged for its quality and diversity (in skillsets and experience as well as ethnicity and gender).
- Investors will require that corporate culture and the tone from the top will prioritise integrity, high professional and ethical standards and compliance with best practice as much as with legal obligations.
- There will be increased demand for greater board-led engagement with investors and the broader stakeholders to communicate the company’s corporate strategy.
- Greater recognition will be given to the importance of the dynamic between the Chair, the CEO and the board.
- More focus will be placed on long-term value creation and explanation, review and board sign-off of the strategy involved to achieve it.
- Sustainability will become a more important feature of governance strategy.
While it isn’t clear yet how the Irish Courts will consider these aspects in reviewing the performance by a director of the duties codified in the Companies Act 2014, over time the standards reflected above will shift from being best practice to becoming expected practice and part of the standard by which directors’ duties are measured.