CFOs will have a lot more on their plate if the findings of an examination of corporate governance trends come to pass, according to the “2021 Global and Regional Trends in Corporate Governance”, an annual study from executive search consultant Russell Reynolds. The report draws insights from in-depth interviews with over 40 institutional and activist investors, pension fund managers, proxy advisers, and other corporate governance professionals.
The report predicts six key global corporate governance trends for 2021: climate change risk; greater emphasis on diversity, equity, and inclusion (DEI); convergence of sustainability reporting standards; more focus on human capital management; the return of activism and increased capital markets activity; and virtual board and shareholder meetings continuing for the foreseeable future.
“These governance trends will definitely impact the role of the CFO and the broader finance function,” said Ken Witt, CPA, CGMA, senior manager on the Management Accounting team at the Association of International Certified Professional Accountants, representing AICPA & CIMA. “As expectations of boards continue to expand, so too will the need for the CFO to provide the information necessary for the board to fulfil its responsibilities.”
Louder demands for climate disclosure
The report’s finding that boards need to more urgently manage climate change as a long-term material financial risk is no surprise, and it is therefore set to consume a larger slice of CFOs’ time. Wide-ranging commitments globally to various targets — including net zero — mean that CFOs are expected to play a growing role in helping to plan strategic reductions in company climate impact, and to disclose increasingly granular data in corporate communications.
“Consistent, investor-grade metrics is something that these boards should already be focusing on,” said Maria Castañón Moats, Governance Insights Center leader, PwC US. And auditors can help management as they develop and discover these environmental, social, and governance metrics, she added.
But it isn’t all about disclosure, argued Laura Sanderson, leader of Russell Reynolds’s European Board and CEO Advisory Group, and one of the report’s three authors. It’s about seizing opportunity, too: “CFOs should be delivering the ‘triple bottom line’ — social, environmental, and financial success should all be aligned,” she said.
“It is often said that risk and opportunity are two sides of the same coin,” Witt added. “In addition to developing KPIs for all key risks and critical value drivers, the CFO is well positioned to identify potential opportunities that may involve revisions to a company’s strategy and changes to their business model going forward.”
Information flows critical to DEI
Another area where stakeholders expect enhanced disclosure is in DEI. The report found that there is increased demand for racial and ethnic diversity at all levels amongst respondents and that gender diversity remains a priority for organisations across the world. The research also suggests that investors will be seeking more transparent disclosure on issues related to DEI.
The research found considerable difference between jurisdictions — for example, citing some diversity success in the UK, but limited change in Australia, where 93% of CEOs are from Anglo-Celtic heritage.
According to Moats, diversity should be a no-brainer for CFOs. “[A] diverse workforce and deliberate inclusion efforts help drive equitable outcomes that can actually lead to the broader economic development of our society,” she said.
Organisational leadership needs to set the tone when it comes to diversity. CFOs can be critical in ensuring that DEI is a priority and measuring the success of diversity effort, and boards will expect to see the CFO deliver.
Convergence, at last?
There may be one area where things are getting simpler for CFOs: the expected convergence of sustainability reporting standards. The ongoing international efforts by various organisations to streamline sustainability reporting will likely lead to internationally recognised standards that boards will need to pay attention to.
Sanderson said that boards, management, and investors would all be relieved, and echoed long-held frustrations with the proliferation of sustainability frameworks.
“How can you possibly report against your peers if you’re all reporting against different standards?” she asked. She said that management cannot be passive and has a role to play in collaborating with standard-setting bodies to “help answer the most important questions”.
Pay used as lever
The report also described an increased expectation of board oversight of human capital management (HCM) and corporate culture. With few developed standards, human capital and its disclosure remains a hot topic. But stasis is not an option, with the report declaring that “demand for disclosure of more HCM data (eg, gender pay gap, safety incidents, employee turnover) has skyrocketed”.
Boards can expect to be held accountable by investors for insufficient disclosure, and since CFOs are in charge of much of this data, they are expected to be across it.
Sanderson said that anecdotal observations from the recent UK annual general meeting season supported the report’s predictions on HCM.
“But we didn’t see the extent to which remuneration committees would incorporate HCM into their pay decisions. They are using it as a lever to encourage change.” Moats agreed with the report's findings and added that auditors may find themselves with an “extended scope” to provide assurance over HCM metrics.
Democratising investment: Shareholder activism and virtual meetings
Increased capital markets activity, especially on the retail front, along with shareholder activism, makes up another area that the report predicted but, Sanderson said, “probably did not make enough of a big deal about”.
“We foresaw activism,” she said, “but we didn’t foresee anything like the scale and strangeness of GameStop, and we didn’t make too big a deal out of special-purpose acquisition companies — but now it’s tulip mania. Everyone needs to be cautious or be accused of being asleep at the wheel again.”
Regarding retail shareholder activism and the role of the CFO in managing it, Sanderson said it helps to think about the history of investing.
“Over the last 150 years, we’ve got further away from investing in companies we have relationships with. But with the ease of use of trading platforms, investors are re-establishing that direct connection. Management and the board can’t see this kind of activism as a mosquito that needs to be swatted.”
Employing another historical metaphor, Sanderson argued that “all roads lead to Rome — retail and institutional investors ultimately care about the same things”, so the important focus for CFOs and boards remains “the fundamentals — capital allocation and key business metrics”.
Another investment democratisation trend the report predicted was that the virtual board and shareholder meetings (VSMs), necessitated by the coronavirus pandemic, are here to stay. In some cases they had improved attendance and engagement. The report’s findings suggested that they had varied success globally, though, with “chaotic” scenes in Brazil, and some forgivable early “lack of functionality” in the US and Canada. With VSMs likely to continue throughout a bumpy global recovery, CFOs can expect to spend more time preparing digital board packets.
For PwC’s Moats, the report’s findings could be summarised with one word: transparency. “These findings are consistent with where corporate governance is headed,” she said. “We are all on a journey towards transparency. Companies are going to report around [all] these metrics to their stakeholders externally — and they’re doing this to build trust.”
“I could not agree more,” added AICPA & CIMA’s Witt. “In fact, in the 2021 Edelman Trust Barometer, business has become the only trusted institution, and is now the only institution seen as both competent and ethical.”
— Felicity Hawksley is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.