Center for
Issue #39
September 2022
Boards of Directors Should Look Beyond the Crisis
The current inflationary context signals a dramatic change in monetary policy over the next few years. Low interest rates are gone, and we don’t know yet how high they will climb in the new normal. Moreover, the war in Ukraine and the upward pressure on energy prices suggest that the energy transition will be more expensive for companies and citizens than what governments had predicted. While in the US the economic growth consensus suggests a mild and relatively short recession, in Europe the context is much bleaker and economic growth may stagnate for a longer period of time.

In this new uncertain scenario, some boards of directors may adopt an apparently reasonable attitude of “wait and see” and choose not to overreact. While this may seem sensible, it is not professional. The duty of care of board directors should always consider a wider question: what should board of directors do to support the firm’s long-term development? Empirical evidence suggests that doing nothing is not the best decision in most cases.

Navigating through a time of disruption – or a combination of different disruptions, including geopolitical factors and technology change –  isn’t easy and developing a specific vision of the future can be risky. But it’s important to keep in mind that companies exist to serve customers. Understanding how their needs and requirements will evolve over the next few years and being able to keep serving them in innovative ways are indispensable requirements for boards of directors and top management teams. Moreover, strategy should be based on a certain view of how companies plan to serve customers and the capabilities they need to develop in order to do this effectively and sustainably. Both boards and management teams must be fully involved in strategy. 
Boards should understand well that current and future geopolitical disruptions will not only create new tensions in international trade, but these will also make some markets less accessible. The current wave of disruptions – including higher energy costs, global supply chain interruptions and rising protectionism – will dramatically change the conditions under which companies serve their customers. This is something the board should be concerned about and discuss appropriately.

While these disruptions will create additional costs and new constraints for companies, they will also open up opportunities that firms will need to recognize and assess. Governmental efforts to relocate activities and strengthen regional supply chains may create new opportunities for some companies. Although higher energy costs may be painful, they will also force governments and companies alike to identify new sources of energy and think about more efficient manufacturing processes. For some companies, the new focus on resilience in the supply chain and sourcing from stable economies such as North America – including Mexico – and the EU will generate opportunities that were not available in the past. Many international companies have focused their presence in Asia on China. While ASEAN countries have smaller markets and pose some logistics issues, their rising middle classes offer new opportunities for long-term market development. The list of opportunities is long. 

Most importantly, boards – in collaboration with top management teams – should reflect deeply on how companies should serve their customers in the coming years and what aspirations they have for their companies. Boards should not only help devise new strategies in these turbulent times, but also make sure that the company has the right people to steer the organization towards the future. A strategy that considers the new business and social context can explain to investors, employees, customers and future hires how companies should evolve in the future. This is a key responsibility of the board.

Over the past few years, we have seen increasing pressure on boards from regulators and institutional investors regarding risk management, compliance and control. These are important functions of the board. Except in the case of growth stocks – shares in companies with a high potential growth, such as tech companies – pressure from investors to think about growth has not been very strong. Many investors have preferred high shareholders returns, through dividends and buyouts, rather than future growth. Boards should analyze the future and convince investors about their views. Now is the time for boards to help the top management team come up with new strategies for volatile times and generate new opportunities. Thinking about growth opportunities in the current context can unleash innovation and creativity. Moreover, it is the only way to build a strong future.
IESE - ECGI Corporate Governance Conference
 Barcelona, October 3, 2022
The 2022 IESE ECGI Corporate Governance Conference will take place in Barcelona, on October 3, 2022. This year’s conference theme will be “Corporate Governance, Corporate Culture and Board of Directors’ Culture.”
Corporate Governance Trends and News
As the business world has grown in complexity, the role of the chair of the board has become increasingly critical. A recent report by Deloitte based on interviews in 16 different countries, summarizes some of the major challenges that boards face, and the role that chair will need to play in the future to help boards tackle their challenges.
The evolving nature of regulation in different countries and the pressure from institutional investors are changing the corporate governance landscape. An important pillar of governance for the past 30 years has been the successive generation of corporate governance codes since the first code – the Cadbury Code— was approved in the UK in 1992. The first code set up some of the basic principles of contemporary corporate governance, including the “comply or explain” rule in corporate governance. The increasing complexity of governance, the web of agents and interested parties and the discussion of stakeholder management versus shareholder primacy call into question the role of the Cadbury Code and its successors. Cambridge Professor Brian Cheffins offers a rigorous and comprehensive review of the Cadbury Code and argues that it may not be longer useful.
Related to this topic, the Financial Reporting Council (FRC) issued in July a position paper setting out the next steps to reform the corporate governance framework and the UK corporate governance code. According to the FRC, the review should provide a stronger framework for reporting on the effectiveness of internal controls and board responsibilities for expanded sustainability and ESG reporting, as well as new guidance on enhanced resilience statements and fraud reporting by directors.
The Securities and Exchange Commission has approved new “Pay versus Performance” disclosure rules (PvP disclosure) for US listed companies that have generated a heated debate. The new rules aim to make clearer for investors and other stakeholders the connection between executive compensation and performance. The huge growth of executive compensation over the past 20 years, particularly in the US, called for greater clarity in pay guidelines. Nevertheless, this new norm may introduce an additional burden for companies and their compensation committees.
Compensation committees have a wider range of responsibilities, in particular, due to growing pressure from regulators and shareholders, including the above new disclosure rules issued by the SEC. A description of leading practices on the compensation committee goals, tasks and membership can be found in the guide developed by the Center on Executive Compensation of the HR Policy Association. 
Shareholder activism slowed down in the US during the first six months of 2022, but still shows relevant growth in Europe. Lazard has compiled data on the first half of 2022. 
The Conference Board and ESG Data Analytics firm ESGAUGE offer updated data on US companies in three key areas: board composition, director demographics and governance practices. A key finding is the increasing percentage of S&P 500 companies with an independent board chair, which rose from 31% in 2018 to 37% in 2022. The main driver of this growth has been the increased workload of boards and management teams.

IESE Recent Research
S.Cohen, I. Kadach and G. Ormazabal (2022), Why do Institutional Investors Request Climate Related Disclosures?. SSRN Working paper. 
Sakasai, Y., Ormazabal, G., Canals, J. (2022). Survey on Boards of Directors: Corporate Purpose, Culture and Strategy. IESE Center for Corporate Governance.