Three trends in corporate governance in North America are environmental, social, and governance (ESG), diversity, and shareholder activism. These trends are among the most relevant as they are discussed by several experts in various reputable publications and reports.
1. Environmental, Social, and Governance (ESG)
- The events of 2020 have amplified the importance of ESG. It is now clear that ESG will not just emerge in the long term. The companies that committed resources to ESG are in a far better position to deal with these challenges than those that have no ESG policies, and will definitely be stronger going forward.
- These issues were once thought to be beyond the scope of the board, but failure to tackle them is now viewed by many now consider a failure to deal with them now as a breach of fiduciary duty. The momentum, justification, and positive results of ESG are continually increasing in scope and prominence.
- An emerging aspect of this trend as a result of this unpredictable situation is more emphasis on corporate resilience.
- Resilience is the ability of an institution to “react to, adapt to, and recover from an adverse event,” and it is anticipated that the role of boards, especially risk management oversight, will improve as companies struggle to adapt and recover from the COVID-19 pandemic and get ready for whatever the next crisis might be.
- ESG issues were major considerations for regulators, investors, companies, and their boards before the pandemic. Key investors now identify sustainability as crucial to their investment choices, and resilience to unforeseen crises over any period is an important component of long-term sustainability.
- Proactive companies in Canada will consider creating and publishing their own ESG policies and the upgrading of their boards to make sure that their directors can understand ESG risk.
- The significance of diversity on corporate boards, management successions, and board renewal is continually gaining momentum and is regularly the subject of developments around regulatory, legislative, and investor-driven issues.
- The Canadian government recently amended the Canada Business Corporations Act (CBCA), requiring “public companies incorporated under the CBCA to disclose to shareholders, for every annual shareholders’ meeting, certain prescribed diversity information relating to the directors and members of senior management, along with disclosure regarding board renewal initiatives” as of 1st January 2020.
- The CBCA amendments also require “CBCA distributing corporations to disclose diversity information relating to all designated groups, which include not only women but also members of visible minorities, persons with disabilities and Aboriginal peoples”.
- Around 40% of TSX-listed companies in Canada have boards that have no women. Proxy advisors recently introduced voting guidelines regarding gender diversity issues by TSX-listed companies.
- Board diversity and renewal will continue to be on the front burner of corporate governance reform, with legislators, regulators, academics, and investors mounting increasing pressure on companies.
- Diversity in all forms will continue to be in focus and “portfolio directors”, who have the capacity to challenge constructively, will gain increasing prominence on boards, especially in the private sector where this practice is not yet widespread.
3. Shareholder Activism
- Shareholder activism is growing in Canada. Energy, basic materials, banking, and financial institutions are the industries that have the highest levels of activism. Emerging industries with high potential for growth such as blockchain and cannabis are expected to be next.
- While proxy battles are not slowing down, activists are deploying other means like constructive engagement to effect change. Proxy contests initiated by company founders or former insiders are also increasing in Canadian companies. Greater shareholder engagement will be vital as experts expect this trend to continue.
- More company boards are becoming “their own activist” as they proactively launch independent assessments to determine their strengths and weaknesses.
- In 2021, companies should be ready to encounter all kinds of activism.