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Back to Global Corporate Governance Trends for 2024
Navigating sustainability dynamics ahead of COP 2030
With COP 2030 to be held in Brazil, corporate governance is increasingly shifting towards sustainability. Corporate boards and investors are strategically scrutinizing sustainability initiatives, while also building their own technical competencies. These directors are expressly focused on developing a comprehensive understanding of risks and impacts of these actions, which include value chain tracking, certified suppliers, and positive social impact in communities. Of significant note, the CVM (Brazil’s securities regulator) has made an early commitment to adhere to ISSB IFRS S1 and S2 standards (S1 sets out the requirements on an entity’s general sustainability-related risks and opportunities and its impacts on cash flow, whilst S2 is specific to climate-related information). This strategic decision positions 2024 as a pivotal year for testing regulatory patterns, setting the stage for full implementation in 2025. As Brazilian companies strive to align with European and US sustainability standards, we anticipate that the climate agenda will ascend to the forefront of future strategic deliberations in corporate board meetings.
Capital market resurgence demands more board attention
Following a two-year stint of stagnation and minimal IPO activity, Brazil's stock market is exhibiting signs of revival, creating a potential window of opportunity for transformative developments in 2024. Recent market dynamics point to a potential resurgence in mergers and acquisitions, initial public offerings, and other strategic maneuvers by key players. Drawing valuable insights from 2023, corporate boards are facing heightened demands for meticulous attention to fiscal and accounting matters. Rigorous oversight of potential transactions and the development of internal technical competencies for adept financial evaluations will be increasingly critical for boards.
State-Owned Enterprises are standing at a crossroads, with regulatory turmoil potentially heralding significant changes in governance. Recent legislative maneuvers are casting shadows on the 2016 State-Owned Enterprises Law (enacted to promote transparency; reduce political interference; and establish principles governing management, board nominations, procurement, and bidding procedures). Enacted to regulate the governance and operation of SOEs, this law aims to promote transparency, reduce political interference, and establish principles governing management and board nominations. If approved, these proposed modifications could unravel progress to date and expose SOEs to political influence, thereby impacting ongoing privatizations and challenging Brazil’s legal certainty—a critical matter to international investors.
Further emphasis on human capital planning and oversight
While discussions on executive compensation intensified in 2023, tangible actions have been limited. Looking ahead, boards understand that the focus on compensation mechanisms and the discrepancy among executives' pay will demand more substantial initiatives.
From a C-level succession perspective, there is increased appetite for discussion, albeit in unstructured ways. Boards must now prioritize structured, continuous discussions on succession planning to address evolving challenges effectively. The ongoing debates and engagement on these issues underscore the need for boards to transform discussions into tangible processes, recognizing the pivotal role that effective human capital management plays in the sustained success of any organization.
Elevating effective governance through strategic board evaluations
In the contemporary corporate landscape, both private and public enterprises are increasingly shifting their focus towards external board evaluations while diminishing the reliance on internal assessments. Governance experts welcome this shift as an opportunity to enhance corporate governance practices, urging companies to implement external evaluations and skill-competency matrices as part of their strategic roadmap. As companies further embrace these practices, the outcomes are providing a foundation for a more robust and informed director nomination process. For many investors we spoke to, this transformative shift “holds the promise of elevating the overall governance standards” within organizations, fostering a culture of excellence in directorship.
An evolving view on diversity within the board landscape
While strides have been made to improve gender diversity within corporate boards, there is an evolving imperative to broaden diversity across multiple dimensions. Beyond gender, boards are now tasked with promoting diversity in terms of ethnicity, age, thought, technology proficiency, and non-traditional backgrounds. In 2024, boards will be challenged to foster an inclusive environment that not only accommodates, but actively seeks diverse perspectives. Increased diversity results in more strategic debates and enhanced decision-making processes, while also allowing minorities to play an important role in shaping the corporate agenda.
Evolving and strengthening dynamics of shareholder activism
There is still little shareholder engagement and stewardship in Brazil, excluding a tentative push from institutional investors to increase their activism, particularly in the realm of compensation disclosure. Despite the introduction of a new resolution in 2023 (Resolution No. 59), disclosure remains inconsistent. Shareholders are increasingly calling for active communication and stewardship with boards. In turn, boards should seek to understand their investors and shape their narrative to align with investor expectations. Notably, there is a growing trend of investors seeking more seats on boards; however, we advise caution with this approach, as investors goals may not align well with the boards’ strategic objectives.
Digitization readiness and the imperative of technological advances
While the advances of big data, AI, and machine learning promise to reshape numerous industries, they also bring forth formidable challenges for boards. Companies are finding themselves tasked with establishing robust cybersecurity procedures to thwart potential digital attacks and safeguard against data leaks. This imperative extends to employee training and the development of risk management protocols. Simultaneously, boards are increasingly required to engage in nuanced discussions surrounding innovation, new technologies, and ethical matters regarding AI, all while ensuring compliance with regulations. This evolving digital landscape requires boards to develop competencies in critical areas, such as cybersecurity. While these are burgeoning skillsets within most boards, directors’ mandates increasingly require them to adeptly deliberate on digital strategies and risk management.