ICGN Governance Principles Updates: Evolution of corporate governance in the face of existential change | Ethical Boardroom

Key governance changes: We have emphasised the importance of independent board leadership and a clear division of responsibilities between the role of the chair and CEO to avoid unfettered powers of decision-making. We also think the roles of both should be clearly described and publicly disclosed as well as the role of the lead independent director (LID). 

We have strengthened our standard for a majority of independent directors on the board – not just in companies with widely-held share ownership, but also for those with concentrated share ownership and subsidiaries.

Board diversity guidance has been expanded to encourage effective, equitable and inclusive decision-making across the workforce in alignment with the company’s purpose and key stakeholders. And we have separated out specific guidance for gender diversity with a preference for at least one-third of board positions to be held by women.

We emphasise the importance of conducting board evaluation annually to review composition in alignment with the company’s long-term strategy, succession planning and diversity policy. And we maintain the importance of having external board evaluation once every three years.

Reference to board tenure has been enhanced to clarify that term limits, where they exist, and the identity of directors who have exceeded limits (and thus are no longer independent) should be disclosed. More generally, we believe director re-election should be contingent on a satisfactory annual performance evaluation of his or her contribution to the board.

There should be a formal approach to board director appointments based on relevant and objective selection criteria, led by the nomination committee, to ensure appropriate board independence and refreshment aligned with the company’s long-term strategy, succession planning and diversity policy.

There is new guidance on capital allocation to manage competing company, investor and stakeholder interests, while maintaining sufficient liquidity to ensure resilience. We have acknowledged public debate around tax avoidance by emphasising the board’s role in overseeing a company’s tax policy – not only within a legal context but also within the bounds of acceptable social norms.

On risk, we have added that board oversight should include threats to the company’s business model, cybersecurity, supply chain resilience, performance, solvency, liquidity and reputation. In relation to audit, the work of the audit committee should be explained in the annual report.

There should be engagement with shareholders on any significant issues arising from the audit relating to the financial statements and how they were addressed. Additionally, the effectiveness of the audit process should be discussed, including auditor tender, tenure, independence, fees, and any non-audit services.

Key sustainability changes: Firstly, from the outset we clarify the need for the board to publicly disclose a company purpose to guide management’s approach to strategy, innovation and risk. 

Directors’ duties clarify responsibility to promote the success of the company to preserve and enhance share value, while contributing to a sustainable economy, society and environment.

Risk oversight has been expanded to systemic events, including ecological degradation, social inequality and digital transformation.

Stakeholders are referenced throughout with a focus on identifying key parties, disclosing how their interests are considered and engagement.

There is new reference to human capital management, including workforce recruitment, retention, training and succession planning, linked to strategy.

Human rights, including modern slavery and workforce safety, focus on how companies identify and mitigate risk in their operations and supply chains. We have referenced climate change and the board’s role in assessing business impacts and how it will be adapted to meet the needs of a net-zero economy by reducing carbon emissions over a specified period.

Remuneration guidance emphasises that plans should be designed to align the interests of the CEO fairly and effectively with the workforce and long-term company strategy, including the use of sustainability-related metrics.

We have new reference to ‘double’ materiality for reporting on a company’s external impacts on society and the environment, as well internal impacts on the company’s own financial performance.

We also refer to ‘dynamic materiality’, recognising that materiality evolves over time alongside emerging technology, innovation, regulation and so on.

Finally, we encourage companies to use sustainability-related accounting and reporting standards to facilitate consistency and comparability and to contribute to the global consolidation of standards and frameworks.

Evolution of corporate governance in the face of existential change | Ethical Boardroom

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s