Associate Attorney
In recent years, many companies have shifted their thinking regarding corporate governance. Rather than focusing on financial performance, business leaders have expanded their view to consider broader or longer-term consequences of corporate decisions, such as effects on the company workforce, the environment, or society. New trends in corporate governance include ESG and sustainability, diversity, cybersecurity, and stakeholder priorities.
ESG and Sustainability
One of the most significant recent developments in corporate governance includes ESG and sustainability investing. “ESG” stands for environmental, social, and governance, a concept that prioritizes focusing investment on environmental and social issues and corporate governance. ESG and sustainability investment have become popular in recent years as stakeholders have demanded increased corporate social responsibility.
Rather than focusing solely on the rate of return on investment, ESG encourages companies to consider the environmental and social effects of a proposed course of action. Today, many corporate leaders evaluate business decisions based on whether they will have a positive social or environmental impact or will avoid or mitigate adverse consequences. Companies can implement ESG and sustainability by engaging multiple stakeholder groups and increasing transparency in decision-making and reporting.
Diversity
Corporate governance has also recently focused on improving diversity in corporate leadership. Proponents of diversity and inclusion argue that increasing diversity in leadership will bring different perspectives to corporate decision-making, which can help companies identify and pursue novel solutions to business challenges. Many companies have undertaken concerted efforts to increase race, gender, and educational diversity among leadership to help broaden the company’s viewpoint. Customers and other stakeholders have also encouraged or pressured companies to increase diversity in their leadership so that companies better reflect their customers.
Technology and Cybersecurity
Technology and cybersecurity have become top priorities for corporate leaders in an increasingly online and interconnected world. Corporate boards that don’t emphasize cybersecurity risk significant legal and financial consequences should their company become the victim of a data breach. In many industries, state and federal regulations impose various technology and cybersecurity requirements on companies to protect individuals’ data. Recent developments in corporate law have reinforced corporate boards’ obligation to perform reasonable oversight of the company’s cybersecurity and risk management; directors cannot leave everything to officers and employees without understanding the company’s technology security efforts and potential risks or red flags.
Executive Compensation and Accountability
Corporate boards have begun aligning executive compensation towards creating long-term value for the business rather than on short-term goals like meeting quarterly earnings estimates or generating a specific amount of year-over-year revenue growth. Unfortunately, many companies have learned the hard lesson that chasing short-term success may involve sacrificing long-term growth and company health.
Executive compensation packages have also begun including measures to ensure director and officer accountability for governance failures, such as clawback provisions for cases involving executive misconduct that harms the corporation.
Shareholder vs. Stakeholder Priorities
Much of the shift in corporate governance has occurred due to business leaders taking a broader view of stakeholder priorities rather than focusing solely on shareholder needs. Many shareholders have a year-to-year or even quarter-to-quarter view of corporate performance, focused almost exclusively on a company’s financials. However, other corporate stakeholders, such as employees and customers, may have different or longer-term priorities for a business.
Employees may prioritize a business’s long-term financial health to ensure a secure job; they also want corporate leaders to focus on creating a workplace that encourages employee success and supports a healthy work-life balance. Customers, on the other hand, often prioritize the quality, safety, and sustainability of the products or services they purchase, as well as the ethical practices of the business, favoring companies that align with their values and offer consistent value over the long term.
Contact a Corporate Attorney Today for Legal Advice to Better Manage Your Business
Staying on top of changing corporate governance considerations can help your business thrive by setting it apart from others in your industry. Contact Sul Lee Law Firm PLLC today for an initial consultation with an experienced Texas corporate lawyer to discuss how our firm can guide your business in improving corporate governance.