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Back to Global Corporate Governance Trends for 2024
Emphasis on business performance in light of the uncertain business environment
From companies, investors, and other stakeholders, the story has been loud and clear: businesses need to remain focused on financial performance. Succeeding here will remain challenging (and prove more difficult in certain sectors), given a brightening yet volatile macroeconomic landscape and combustible geopolitical environment. While many still hope for a “soft landing,” interest rates are near historic highs. And while inflation is cooling, it’s still a way off from the Federal Reserve’s 2% target. The economy continues to look volatile as we head into 2024, with some forecasting a mere 0.7% GDP growth, tied closely to diminishing consumer spending.
Talent strategies are – and will remain – under the microscope. Several industries are grappling with hiring slowdowns and repeated reductions in force. According to Layoffs.fyi, as of January 12, 2024, 1,186 tech companies took action to reduce their force in 2023, resulting in 262,682 affected employees. It’s not just tech; there have been notable workforce reductions in the finance, media, and retail sectors as well. Other companies are investing more time thinking through where they will find the talent of the future, especially given demographic shifts and skills gaps that are making it more challenging to find the right people in industries including healthcare, leisure and hospitality, and construction and manufacturing.
Stakeholders are also very interested in corporate resiliency and crisis response, especially given the unsettling prevalence of black swan events in recent years. One investor cautioned, “In 2023, we saw many companies experience crisis. It’s fair to say that those boards were not always particularly responsive.” Amid economic uncertainty, coupled with geopolitical tensions, prioritizing the integration of financial resilience into business models is crucial. Many boards will likely dust off crisis response playbooks in 2024.
Continued attention on CEO succession planning and board refreshment
Executives and directors, as well as their external stakeholders, know that effective succession planning is critical to long-term success. Surprisingly, only 51% of board directors surveyed in the 2023 Gartner Talent Survey reported having a written plan for their current CEO's succession. CEO turnover remains high, with 178 global CEOs leaving their posts in 2023, only 19 fewer than the five year record 197 in 2022. Accordingly, succession planning is set to remain a hot topic in 2024. Investors are demanding robust and thoughtful approaches to succession planning that include regular board discussions, a diverse mix of internal and external candidates, and plans for both expected and unexpected successions. As one investor remarked, “It would be worrying if a board said that the CEO pipeline only consisted of other current C-suite executives.” Many stakeholders perceive recent CEO succession failures to have eroded significant shareholder value, so attention on this topic will remain high. We have heard that at least two of the largest institutional investors will be asking board members to explain their approach to executive succession planning and to evaluate whether the company has a strong pipeline and is positioned to effectively manage the next transition.
Similarly, board level succession planning and refreshment is also under scrutiny. A recent study revealed that 60% of C-suite executives lack confidence in their boards’ ability to self-assess their performance effectively. Investor focus on board composition – the animating purpose behind both investor pressure for both proxy access and universal proxy rules – has encouraged boards to enhance their evaluations of whether the board has the necessary backgrounds, skills, and experiences for tomorrow. As one investor shared, “Universal proxy has given investors the opportunity to craft a board they think is fit for purpose. You need better quality candidates and people need to make the case for change – everyone must be a lot more thoughtful.” Universal proxy itself may, like proxy access, prove to be an imperfect tool to directly cause change. But even those who told us they doubt it will directly affect many director elections next year also believe the pressure on directors will continue; one investor predicted we are more likely to see “an increase in Vote No campaigns instead.”
We’ve witnessed many companies leverage external attention on board composition as a way to cause change in their own companies. One major company general counsel shared, “This gave us the ammunition to do what we know we needed to do.” More corporate proactivity about board composition, from both board members and C-suite executives, is likely to continue in 2024 and beyond. We believe this requires more than simple age or term limits; it involves a strong understanding of the necessary backgrounds, skills, and experiences needed for the future. By planning for director vacancies well in advance, organizations can diminish the tension and emotion often associated with board succession planning.
ESG activities continue with less fanfare
Politicization of ESG activities intensified markedly in 2023. Filing so-called “anti-ESG” proposals has become a common tactic, nearly doubling from 54 of these proposals in 2022 to 92 in 2023. Proposals like these are one of the reasons that, despite an increase in volume, average support for shareholder proposals plummeted across the board, dropping to just 23% in 2023. As topics that fuel significant partisan divide—such as climate change and diversity, equity, & inclusion (DE&I) efforts—tend to get more media attention during US presidential election years, we expect this politicization to continue in 2024.
In our conversations with investors, they stressed that even though they may change language around their investment priorities to avoid the now highly-charged “ESG” term, they still care about the same issues. Continuing to focus corporate efforts on those issues is not misguided. One investor said, “We intentionally aren’t using the acronym ESG. That’s not to say we are backing away from these relevant topics; we’re deescalating the fervor that is dividing people.” It’s important for boards to view ESG through the lens of risks and opportunities, aligning them with long-term corporate strategy. “We are sticking to what is financially material or helpful for companies in executing their strategy,” one investor shared when discussing engagement strategies.
The SEC’s highly anticipated final rule on climate disclosure has potentially substantial implications for oversight, but those rules will set a floor and not a ceiling for US companies; demands from other jurisdictions and important stakeholders will remain important. And this scrutiny applies beyond environmental issues; following the Supreme Court’s affirmative action ruling in Students for Fair Admissions v. Harvard, DE&I policies also demand attention. Boards should be mindful of the potential legal challenges and proactively address them, all while recognizing the value of a diverse workforce at every level of the organization. As one investor put it, “It’s still a priority to be an appealing and inclusive employer to a diverse workforce.”
An emerging spotlight on the governance of artificial intelligence
AI is advancing at an unprecedented pace, leaving boards and companies scrambling to keep up with the rapidly evolving landscape of risks and opportunities. In 2023, more than 30% of the S&P 500 and around 17% of Russell 3000 companies addressed AI in their proxy statements in some capacity. Of those that disclosed oversight responsibilities, the majority delegated AI oversight to either audit or technology committees. As this issue comes to the forefront, we saw a handful of shareholder proposals last year focused on more clarity around AI governance—a trend we expect to intensify in 2024.
While regulatory activities are underway at the federal and state levels, the road to AI regulation in the US is likely to be a long one. In the meantime, boards should proactively assess their organizational structure to support effective oversight and stay well-informed about their company's utilization of AI. By gaining a comprehensive understanding of how AI is being leveraged within the organization to enhance decision-making, operational efficiency, and innovation, boards can provide strategic guidance to capitalize on the benefits of AI, while effectively managing the associated risks.
Recent RRA research finds that, while 80% of directors globally agree that a strong understanding of generative AI will be a required skill for future C-suites, only 31% believe their organization has right expertise on the board to advise on AI implementation. As many directors are now beginning to assess the potential impact of this technology on stakeholders, expect more board-level conversation dedicated to this topic as well as further board education in the coming year. One investor said, “Boards need to figure out how to use this technology responsibly.” Responsible use of this technology should extend beyond company operations to governance. AI has the potential to transform boardroom work, offering numerous efficiencies. Failure to leverage these gains could lead to being left behind.