2. Interacting with shareholders
Regulators across the world have been urging companies to increase the amount and clarity of their disclosures to shareholders. The introduction last year of the Shareholder Rights Directive (SRD) in the EU was a response to the slow rate of progress under voluntary codes.
Regulators have recognized that major investors increasingly take a long-term view. As such, there is a growing need to align long-term assets and liabilities. For instance, under the SRD, European companies must now demonstrate a clear link between corporate performance and executive pay.
The SRD presents boards with an opportunity to improve the alignment between corporate strategy and shareholders. They will be expected to develop policies that take account of stakeholder feedback and will then be subject to shareholder approval and oversight.
3. Focusing on corporate reporting
The reporting landscape continues to change and boards must now take a proactive approach to communicating with stakeholders.
Preparers of corporate reports must ensure that they are putting historical performance into context as well as presenting the risks, opportunities and prospects for the company in the future. The primary purpose will be to help investors and stakeholders understand the company’s strategic objectives and the progress made in the execution. That means delivering a clear and consistent sustainable value-creation strategy. .There must be coherence between financial performance measures and other performance indicators, and reports must establish a clear link between strategy, key value drivers and executive remuneration structure.
Of course, long-term value creation is not entirely sustained by financial growth. Nonfinancial measures have gained currency as sustainability concerns, risk reporting and scrutiny of corporate governance have become more important.
4. Optimizing capital allocation decisions
Stakeholders now expect directors to take an active role in developing long-term strategies to grow the company’s business. Taking on questions of opportunity and risk management is of upmost importance, especially while businesses continue to experience digital disruption.
Given this, the board must become a “constructive challenger” of the capital allocation strategy. By maintaining a healthy distance from everyday operations and having a diverse composition, it should be able to challenge the status quo by asking the right questions.
As new megatrends gather pace, are boards prepared to assess where capital investments should be allocated? Are executives empowered to make informed decisions? Are the right external advisers engaged at board level? Are key stakeholders on board with the company’s strategy?
5. Enhancing talent and corporate culture
The links between diversity – at boardroom level and beyond – and better corporate performance are growing in strength and number. Diversity does not simply mean ensuring a balance of ethnicities and gender in the workplace. It also requires boards to seek out and champion a diverse set of voices from a range of educational and cultural backgrounds. By doing so, companies should develop a more innovative and engaged workforce.
Increasingly, external stakeholders expect talent issues to be measured and reported on, from basic KPIs such as employee turnover to more sophisticated qualitative analysis tracking staff engagement and productivity.
6. Defining reward
For companies in EU Member States, a new era is about to begin. The biggest change will be the introduction of an annual vote on the compensation report. Boards will be required to defend their remuneration reports and policies and, if there are votes against their recommendation, they will have to explain at the next AGM how they have incorporated this into their decision-making.
This will require real board engagement in new areas, such as pay ratios that contrast executive pay with others within the organization. If these ratios, as well as a perceived misalignment of performance and reward, continue to cause concern at national level, then boards should be prepared for further legislation in the coming years.
Stakeholders will be able to exert greater influence over this by demanding that boards create a set of KPIs that feed into remuneration strategy. This should drive improved and more transparent behavior at board level.