Recent times have seen extreme shifts in institutional environments, resulting in excessive risk-taking, unhealthy firm cultures and acts of corporate misconduct. In addition, firms have to urgently respond to the twin crises of the Covid-19 pandemic and the climate emergency, as well as other external trends that threaten their stability and survival.
All these factors raise important challenges for corporate governance across the world, and call for new priorities to underpin corporate governance solutions; as such, the British Journal of Management has recently published a special issue on “Corporate Governance in Extreme Institutional Environments”.
Challenges to governance in extreme environments
The challenges facing corporate governance are numerous and complex. Emerging technologies, from fintech to robotics, artificial intelligence and machine learning, need effective and agile governance regimes not only to support their sustainable and socially responsible deployment but also to reassure potential innovators, investors and other stakeholders.
Equally, while current corporate approaches to climate change can be affected significantly by agency problems, appropriate governance responses are called for. Further, despite a high level of diversity within corporations and other organisations, women and members of other minority groups continue to be under-represented on corporate boards.
The political dynamics that we witness across the world also call for appropriate governance responses since it is clear that all institutional environments may become unpredictable or even extreme, for example, due to the rise in right wing populism across the western world, and in phenomena such as Brexit in the UK.
Last but not least, there are other challenges and obstacles to good governance that have persisted in different country settings over many years, e.g. corruption, non-disclosure and non-transparency, as well as a lack of infrastructure—such as access to the internet, crowdfunding or angel investment—to enable entrepreneurial activities.
Focusing on profit is not enough
There is a lot that we know about corporate governance in fast-changing and extreme environments from academic research in areas such as international business, banking and finance, and entrepreneurship and innovation.
Traditionally, research has discussed corporate governance issues from the perspective of firms, prioritising profit maximisation over other objectives. Our article shows that a lot of attention in recent years has been paid to topics such CEO selection, monitoring and compensation or the introduction of codes, policies and practices of good governance.
Particularly in the aftermath of the global financial crisis (GFC), considerable progress has been made in strengthening corporate governance within both financial and non-financial firms, especially in countries of the Global North. Therefore, these remain important areas of interest, and further advances in research and practice are needed in relation to the implementation of reforms and standards leading to good corporate governance in the financial sector and beyond.
However, it has now become obvious that a perspective on corporate governance which prioritises shareholder profit maximisation is no longer adequate in light of the grand challenges that contemporary society faces. Instead, the extreme world we live in requires corporate governance solutions that will help fulfil the responsibilities of firms towards multiple stakeholders, such as governments, employees, local communities, civil society and future generations.
Responding to governance challenges in extreme environments
Governance structures need to anticipate and adapt to the new geopolitical balances, growing extreme socio-economic risks, and other unprecedented long-term trends, especially those associated with the risks of future pandemics and repeated extreme weather events.
Considering ways of contributing to sustainable development is relevant to corporate boards of firms operating in all sectors, and especially to those in the banking sector, as banks have an essential and urgent role in facilitating the transition to a greener economy and addressing climate risks. At the same time, corporate boards need to be attuned to the unique features and challenges existing in specific country contexts, and to understand the challenges that extreme institutional changes, the existence of “institutional voids” and political events pose for the development of effective, sustainable and socially responsible corporate governance systems.
A big task for corporate boards in tackling these challenges lies in structuring their own composition and decision-making processes in a way that will enable the firm to meet its “triple bottom line” objectives of people, planet and profits. One critical aspect is addressing gender inequality within firms and their corporate boards, both in terms of representation of women and pay levels.
Another aspect refers to the role of corporate boards in ensuring that firms play a positive role as global citizens, for example in countering global inequalities or addressing institutional voids and reducing poverty through entrepreneurial activity. The message for corporate boards in these extreme times and extreme environments is clear: developing and implementing corporate governance solutions that would prioritise the welfare and wellbeing of a variety of stakeholders is crucial for the ability to address current and future crises, and to the creation of a sustainable society.
Douglas J. Cumming is the DeSantis distinguished professor of finance and entrepreneurship at the College of Business, Florida Atlantic University.
Claudia Girardone is professor of banking and finance at Essex Business School, University of Essex.
Martyna Śliwa is professor of management and organisation studies at Essex Business School, University of Essex.