The future of good governance

As lockdown restrictions are eased – to varying degrees – companies are beginning to look at moving from crisis and survival mode to a more sustainable way of operating over the long term. Rachael Johnson reports on which practices adopted during lockdown companies and boards will look to integrate into their long-term recovery strategy.

Virtual board meetings

The move to large-scale remote and home-based working where possible was one of the most notable changes made to working practices instigated by the lockdown period. Boards were forced to meet virtually so that they could steer their companies through the crisis.

Virtual board meetings have different characteristics to in-person meetings. Typically, they’re shorter and more to the point. ‘What we’ve seen is better focus on what the board is going to discuss and how it’s going to discuss it,’ says Peter Swabey, Policy and Research Director at the Chartered Governance Institute, the qualifying and membership body for governance professionals. In some senses, this means they are well suited to the emergency crisis meetings that have been necessary during the response to Covid-19, where quick decisions on how to handle new developments have been needed.

Turid Elisabeth Solvang is Founder and Chief Executive Officer of FutureBoards, a project-driven company that aims to build better boards and support sustainable value creation. ‘What was said in boardrooms before the crisis was, virtual meetings are good for decision-making, but not so good for discussions,’ she says, ‘and I think that still holds.’

Historically emergency board meetings were handled over the phone, but now there is greater acceptance of video platforms, they’re more likely to be held as a video conference in future. ‘When we have meetings that would previously have been by telephone, we’re going to be having them by [video] platform, because that is so much better,’ says Lorraine Young, Director of Lorraine Young Board Advisory Services. ‘At least you get some of the body language.’

Dr Roger Barker is Head of Corporate Governance at the UK Institute of Directors and Managing Director of Governomics, a corporate governance advisory company. He believes ‘there are a lot of unanswered questions […] about how this way of communication has changed the nature of board meetings and their ultimate effectiveness.’

Virtual board meetings lack the nuances of in-person meetings that come from the more subtle aspects of body language. This means it’s harder to have a free-flowing, strategic discussion over a video conferencing platform, because it’s more difficult to read each other’s cues and to brainstorm. ‘There’s something about being round a table when you’re talking and the ideas are bouncing backwards and forwards,’ says Young. ‘There’s more of a discussion.’ Solvang agrees, noting ‘there’s something about the dynamics that has changed in the boardroom.’

There are challenges in managing a virtual meeting. In some senses online discussion can be democratising. ‘People who could perhaps physically dominate a room can’t do so in quite the same way,’ says Barker. Lucy Reeve, counsel at Linklaters specialising in company law, suggests ‘maybe it’s easier to make sure everyone is heard and more democratic if you have to raise your virtual hand.’

On the other hand, it’s possibly easier to become disengaged or distracted in a virtual meeting. These are issues that fall to the chair to handle, assisted by the company secretary. ‘There is quite a lot of power in the hands of the chair to control the [virtual] meeting, out of necessity,’ says Barker. ‘But does that allow the chair to excessively control the dynamics of the meeting?’

‘Company secretaries often [talk] about “the discreet word in the ear”, [or the] discreet piece of paper passed to the chair,’ says Swabey, which allows them to assist the chair in reading the room and understanding how the meeting needs to be managed. This is hard to replicate virtually: some company secretaries have taken to text messaging their chair to keep that one-to-one line of communication open.

Virtual meetings don’t offer the same opportunities for informal discussion between board members before and after the meeting, or at a board lunch or dinner, that can be an important part of team building. ‘I think what directors have really lost is direct contact, a sense of relationships and communication flows and personal contact,’ says Barker. Young agrees, noting ‘you don’t get to know someone by sharing a Powerpoint or a spreadsheet,’ she says. ‘You still need those relationships to grow and to build.’

Boards should consider adopting video alongside physical meetings, rather than as a replacement for them. Holding some meetings virtually is beneficial because it reduces the amount of travel required for directors to attend, and the associated financial and environmental costs.

For some non-executive directors who sit on a number of boards, virtual meetings are a more efficient use of their time and could improve their overall engagement with the company.  ‘A lot of directors […], especially non-executive directors, quite like this change in some respects,’ says Barker, ‘because previously they were on this endless trend of business travel. Now, in some respects, they feel they can be more effective.’

Virtual shareholder meetings

The pandemic and consequent lockdown restrictions hit at the beginning of annual general meeting (AGM) season across many jurisdictions. In the UK, companies were faced with the challenge of ensuring that their meeting was held in a physical place with a certain amount of people present, in order to be legal.

For many, the solution was a hybrid meeting where the requisite amount of people found a way to meet in person while socially distanced and the rest of the meeting was held online. ‘There were a number of innovative ways of getting through that statutory obligation,’ says Swabey, ‘but still trying to make sure its point was […] being observed: its point being an opportunity for stakeholders to engage with the board.’

For Swabey this innovative thinking was particularly important because it offered an opportunity for governance professionals ‘to demonstrate to colleagues that they can be pragmatic, that they can be innovative, that they can be a provider of solutions in a business.’

The Corporate Insolvency and Governance Act 2020 has now come into force in the UK. It addresses some of the challenges faced by UK companies trying to hold an AGM under lockdown restrictions and makes it easier for them to hold a virtual meeting. It’s a temporary measure however, and currently in place until 30 September 2020.

The debate over the pros and cons of holding a virtual AGM is not new. In the US it is quite commonplace to hold a virtual AGM. Those in favour of virtual AGMs argue that they are more accessible to a greater number of shareholders, for example those that cannot travel to the physical location.

Those against argue they represent a significant erosion of shareholder rights, diminishing investors’ ability to hold the board to account by asking questions of directors in person in a public forum. ‘Shareholders, generally speaking, feel as if they’ve lost a key aspect of their engagement rights by losing [physical] meetings,’ says Barker. He says that some companies have needed shareholder approval to move to virtual meetings, which hasn’t always been granted. Swabey argues that companies also ‘generally do like to have that opportunity [of a physical meeting] for engagement with their stakeholders.’

The concept of a virtual AGM is less controversial in Norway, where companies have less dispersed ownership than they do in the UK and physical AGMs are not particularly well attended. ‘I think [holding] virtual AGMs in Norway would be unproblematic. It could very well be the way to go forward,’ says Solvang.

The pandemic has forced companies to adopt some degree of technological solution for holding their AGM this year. Afterwards, there will be an opportunity to reflect on the extent to which they would like to incorporate technology into their shareholder meetings in normal times. The majority will likely adopt a hybrid meeting, held in a physical place with some form of virtual element included.

The balance between the two will vary from company to company as each assesses the best way to maximise stakeholder access to its meeting. There is a notable cost implication associated with incorporating a virtual element into an AGM, which needs to be balanced with the likely uptake from shareholders, in order to assess the overall benefit to both the company and its shareholders. ‘You could end up with a range of options that suit different companies and their circumstances,’ says Young.

For Swabey, Covid-19 has ‘created an environment in which more companies can think about this and will be willing to think about ways in which they can make their AGMs more accessible.’ For Reeve, ‘the thing that’s really essential is ensuring there’s dialogue, there’s an opportunity for investors to ask questions and to hear from the board and to engage with the company. That doesn’t necessarily have to happen at a physical meeting at a big conference centre.’

One thing UK companies could be doing now is updating their Articles of Association to allow them to hold a hybrid meeting in future. This option is legal under the UK Companies Act 2006 providing the company’s Articles allow for it. Including it now would offer more flexibility in future, which should make the business more resilient in the face of another crisis.

More focus on all stakeholders

The pandemic has disrupted normal working practices for everyone. Business leaders have needed to have an understanding of how their employees were coping under lockdown to ensure their organisation could carry on operating. In some cases, this has meant having more regular contact with individual employees to understand of the challenges they’ve faced, both at work and personally. ‘If you’re going to create huge changes for your workforce,’ says Barker, ‘you have to find a way to bring [your workforce] with you.’

Some organisations have learnt from this process and are looking to place more emphasis on employee wellbeing, especially employee mental health, in future.

Treating employees well is increasingly seen as a hallmark of good corporate behaviour. ‘It speaks volumes about the culture of the company, the way they treat their staff, when something like this happens,’ says Reeve. Solvang agrees, and says ‘that is where good leaders differentiate themselves from other leaders’.

The crisis has placed more focus on moving away from pure shareholder value and instead considering all stakeholders in the company. ‘I think the old [idea] of, “we’ve got to do this for shareholder value creation” [is] not going to be the narrative that brings people along with you,’ says Barker. ‘It’s got to be more of a partnership approach, more of an all-stakeholder approach; you’ve got to win their trust in terms of governance processes.’

Despite this, Solvang says, ‘the problem is that the labour market is really difficult now, so most employees would go a long way to keep their jobs, and that will be the primary focus.’ She adds that ‘while […] people want to work for companies that are doing good and that have a purpose, I think now we will see people who just want to have a job and a salary.’

In a climate of fear over job security, it is much easier for organisations to exploit employees who are desperate to retain their income. Even if a company itself is not guilty of this behaviour, it’s more important than ever for it to ensure its entire supply chain is behaving well.

There are immediate questions for business leaders to ask in relation to how their supply chain is managing the challenges presented by Covid-19. For example, ensuring a supplier is enforcing social distancing at its factories and that its workforce has the necessary personal protective equipment (PPE) to work safely.

This should prompt a broader review of the supply chain. ‘It’s not just "what are we doing?"’ says Reeve. ‘It’s also what are our suppliers doing? Are they treating staff well? Are they respecting human rights? Are they complying with best practice health and safety?’

Elise Groulx Diggs is Co-Chair of the IBA Business Human Rights Committee and an associate tenant at Doughty Street Chambers based in Washington, DC. She argues that the pandemic has exposed the potentially global scope of legal liability and the limitations of confining it to one jurisdiction, or within the walls of one organisation.

Companies ‘can benefit from taking a more holistic approach,’ says Groulx Diggs. ‘Of course, lawyers will look at the black letter of the law in front of them today, but that will often not be enough. There are too many issues coming around the corner that they have to be aware of.’ She says that more and more investors, general counsel and boards are starting to understand that, ‘if you don’t have a global understanding of the context in which you’re operating, you’re much more at risk.’

Covid-19 perfectly illustrates why business leaders and investors need to understand what constitutes improving the social aspects of running a company. For example, when adopting an environment, social and governance (ESG) framework, Groulx Diggs says companies face the challenge of defining human rights under the ‘S’ umbrella. She also argues that businesses have to adopt governance models that go beyond the traditional corporate one, under the ‘G’ umbrella. ‘The ‘G’ has to include stakeholders, states and corporations learning to work together as three essential pillars of society and economic development,’ she says.

‘It’s all about risk and reputation as much as liability,’ says Reeve. ‘I think that’s a focus. It’s not just a question of what’s the maximum liability in pounds, it’s a question of what would the wider implications of this be for our business?’ For Barker, responding to the pandemic has ‘been an opportunity either for companies to build social capital or to destroy social capital.’

Time to build resilience

The Covid-19 crisis has accelerated change and sparked innovation. ‘There are a lot of areas where we’ve almost made more progress in these few months than we would normally do in the course of a few years,’ says Reeve.

A greater acceptance of technology and remote working will be one of the lasting effects of the pandemic in the workplace and in the boardroom. This in turn could have benefits for the environment by reducing the frequency of business travel.

As business leaders begin to reflect, they should think about how they will make their organisation more resilient, to better prepare it for another shock. Barker argues that in the past the focus has been on creating efficient organisations, optimising the number of employees and outsourcing where possible, taking on debt rather than keeping cash in reserve. ‘I think that kind of pre-crisis mentality now needs to be reviewed and rethought by boards,’ he says. ‘They need to think, well, we can be hit by these kinds of crisis: how resilient are we?’

For Barker the need to create more resilience will be ‘the headline for corporate governance going forward.’ Swabey agrees, noting that, ‘the whole issue is stress-testing our risk management [and] stress-testing our governance.’

‘When there’s a crisis it calls into question the legitimacy of the system,’ Barker observes. In doing so it allows us to question areas that may not have been up for debate previously. This offers an opportunity for unprecedented change, if boards and the teams that support them are willing to take up the challenge.