Corporate governance is due a significant shake up in 2019. We anticipate three key issues for board of directors in the new year.
1: Executive Compensation
Executive pay is primed for an overhaul in 2019. In the UK, the Financial Reporting Council (FRC) have revised their UK Corporate Governance code and those revisions about remuneration will come into effect on 1 January 2019. It comes amid significant calls for reformation, particularly in the U.K. after the denunciation of the Carillion board and its auditors for prioritising pay rather than company operations after its collapse, at a £148 million cost to the British tax payer.
The FRC aim that through this endeavour the focus will shift to promoting ‘long-term sustainable success” and not on short term remuneration packages.
They have proposed the following changes in 2019:
- A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established.
- No director should be involved in deciding their own remuneration outcome.
- Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.
It is not just in the U.K. that regulatory changes are expected to feature as a strong trend in 2019. According to NACD’s Public Company Directors’ 2019 Outlook Governance Survey, 48.9% of surveyed boards foresee ‘Change in the regulatory climate’ as the number one trend in the U.S. For the majority of American boards, the “say on pay” trend via the Dodd-Frank Wall Street Reform and Consumer Protection Act will remain a strong focus in 2019. International law firm, Mayer Brown, conclude in their 2019 proxy report that “investors will expect the company to either make changes to its compensation program going forward or to provide an understandable rationale for not making such changes”. This in turn, Mayer Brown advise, will focus companies to “achieve high levels of support”.
2: Independent Directors
Independent directors are increasingly important in 2019 to measure a boards efficacy. A 2018 U.S. based JWC Partners Survey found too that directors surveyed rated ‘Board composition’ (measured on a scale of 1-7) as 5.3 in terms of importance. It is clear that board members are concerned about composition but also how independent members will contribute to board processes, decisions and overall governance. A recent Harvard Law School Forum, noted that overall, ‘a director must be able to contribute something other than independence alone, whether that is in the form of sector knowledge, commercial experience, international experience, technical skills or other areas that support the board’s oversight of company management’. It is clear that independence is not the sole ingredient needed to drive efficacy but rather vital supplementary skills to work alongside current directors.
Regulators also see independent directors as key to formalise best board practice. In the U.K, the Financial Conduct Authority (FCA) have decreed that asset managers will need to increase the number of independent directors by the end of 2019. A recent survey by the State of the UK Fund Boards 2018 cited that in order to meet these new standards, UK authorised fund managers will need to ‘boost their slate of independent directors’ from the current ‘11% to 25%’ of the board or a minimum of two independent directors, highlighting the growining importance of
3: Attracting and retaining top talent on and off boards
Talent wells running dry is a huge strategic concern for board of directors in 2019. Sourcing and retaining top talent was named by 41% of 5,000 directors surveyed by the Harvard Business Review as their number 1 challenge. This is for good reason. By 2020, advanced economies including Europe and the U.S. will face a 10% deficit of top talent for high-skill workers.
Moreover, top talent is ‘eight times more productive’ according to a 2012 study of 600,000 people. What is even more is that research points that the gap rises with a job’s complexity, for example among managers and software developers, high performers are ’800% more productive’.
Stripe, a technology company, found in their exhaustive 2018 survey of thousands of C-level executives and developers across 30+ industries that ‘access to developer talent’ was a concern of 61% of those surveyed, as a potential threat to growth. Technology expertise is inherently important for the future and will be a strong priority for boards of directors in 2019, to source and nuture top talent in and outside of the board room.