Company directors are busier than ever before as they grapple with the potential opportunities and threats of new technology, such as AI (artificial intelligence), keeping on top of new regulations and increased pressure from investors and other stakeholders to deliver a better, greener, more profitable business.
The increased demands have sparked robust boardroom discussions and were the subject of a recent paper from the IoD Centre for Corporate Governance, Are Boards Losing Control?
Some of the commentators we spoke to were concerned that directors are stuck in reactive mode and are no longer providing leadership or fully in control of setting company strategy.
If true, this leaves a vacuum at the top of companies that some believe is being filled by regulators, investors and other influencers, whose priorities may not always be aligned with those of the company. Their requirements and expectations are becoming increasingly prescriptive and arguably encroaching into areas of responsibility that rightly belong to the board, blurring lines of decision-making.
Drawing the lines
Chris Hodge, author of the paper and senior adviser at the Centre, summed up the situation in our recent Directors’ Briefing podcast: “It’s certainly the case that the lines that are drawn around where decisions should be taken—what we traditionally think of as decisions for the board, rather than policymakers and others—these lines are a lot fuzzier than they used to be.
“It would be helpful to everybody to have a discussion about how we can re-establish some clarity around these areas, even if it means some of the lines moving.”
Boards will always have to navigate short term economic shocks and distractions, like Covid and Brexit. But some of the environmental and social challenges facing boards are slightly longer term in nature.
While many boards are integrating the ESG issues most material to the company fully into their strategic thinking, it appears that some boards still view them primarily as a ‘tick box exercise’ focused on fulfilling reporting requirements.
Where there is an absence of strategic consideration of these matters at board level, it leaves a gap that is waiting to be filled by regulators, investors and others.
Another view expressed in the paper was that ESG-related reporting requirements had, in some cases, led boards to focus their attention on issues that may not be very material to the company, potentially neglecting others that were.
A more widely held view was that the sheer volume of regulation has meant that many boards are overly focused on compliance at the expense of strategy, innovation and other matters crucial to the company’s performance, and tended to be risk averse as a result.
There has also been criticism of what commentators saw as attempts by investors—and the proxy advisers whose services they use—to micromanage companies’ governance arrangements.
It is unquestionably the case that investors are applying more pressure on companies to address environmental and social issues than was the case even just a few years ago, reflecting societal expectations.
But what some might consider a loss of control, others will view as greater accountability.
New demands
It is not about to get any easier for boards to manage these demands. On top of existing rules and standards, 2023 sees the introduction of new sustainability disclosure requirements and an updated UK Corporate Governance Code.
In July, the government published draft regulations, due to take effect in 2025, which will require companies to publish a resilience statement and an audit and assurance policy covering, among other things, governance and climate transition planning.
Many of these newer requirements will apply to companies that are classified as public interest entities, regardless of whether or not they are listed, with the consequence that the reporting burden associated with being a listed company is now to some extent spreading to private companies as well.
Most decisions about a company’s strategic direction and governance arrangements should rightly be taken by the board.
Policymakers, the market, stakeholders and society at large all play a part in establishing the framework of requirements and legitimate expectations within which companies operate (the ‘rules of the game’). But within that framework, there should be plenty of scope for directors to exercise discretion and judgment in the company’s long-term interest. This is key to enabling the innovation needed to stimulate growth.
There is a need to ensure that regulations and regulatory processes do not inappropriately reduce the ability of boards to take decisions that they consider to be in the best interests of the company.
This might involve reviewing some existing regulations and standards to permit greater flexibility where appropriate, but without reducing accountability to shareholders and other stakeholders. Wherever possible, future regulation should be principle-based rather than prescriptive.
While boards need to be allowed to lead, they should not be unaccountable or completely insulated from external pressure. So the onus is on boards to demonstrate that they are capable of exercising judgment wisely and are deserving of the trust that they are asking for, by managing their companies in a responsible way that avoids provoking interventions from regulators and wider society.
Roger Barker is director of policy and governance at the Institute of Directors.