The Covid-19 pandemic was another unforeseen milestone in an already shifting corporate governance landscape – one where it is no longer sufficient for companies to simply meet their legal obligations.
Stakeholder expectations now far exceed legislative baselines and following best practice guidance of industry bodies, as well as being nimble enough to adapt to changeable stakeholder sentiment, are now essential to effective and acceptable governance.
At a time when exceptional, taxpayer funded measures are being put in place to alleviate pressures on businesses suffering the economic effects of the pandemic, focus is intensifying on corporate governance practices.
Government support to date has ranged from providing grants and loans to allowing flexibility on timings for holding shareholder meetings and publishing accounts.
However, as many boards are finding, accepting such support incurs additional scrutiny.
One of the practices that has come in for the sharpest criticism during the Covid-19 pandemic has been companies furloughing workers and while continuing to pay large salaries to executives.
Boards need to consider carefully what their stakeholders' expectations are when developing their recovery strategies. While government efforts to prop up companies affected by the pandemic have so far been broadly supported by investors and taxpayers alike, if the behaviour of companies receiving support falls below expectations, it may lead to a shift in opinion.
Adapting to change
The good news is that most companies are acutely aware of this, and many have already indicated their intention to repay money received through government schemes, or that they do not intend to accept further support if their business is faring better than expected.
These challenges created by the pandemic are unlikely to disappear any time soon. In fact, the pandemic has accelerated many existing trends and companies need to embrace this shift rather than try to cling to fast-fading ways of operating.
One of the most striking examples is the surge in sustainable finance.
Investors have injected record sums into sustainable investment funds (which have significantly outperformed the market), favouring companies that, via strong governance practices, are seen to do the "right thing" – both during Covid-19 and as part of their general corporate ethos.
Similarly, companies are considering, and aiming at, an increasingly broad stakeholder base, shunning shareholder primacy in the process, when making decisions and developing strategies.
The Chartered Governance Institute's recent guidance note on directors' duties under the Companies Act 2006 states that, to fulfil their statutory duties under section 172, directors must take into account "the workforce, customers, suppliers, government and regulators, and wider stakeholders in each case where relevant".
It is now more critical than ever that companies demonstrate awareness of, and adjust to, stakeholder sentiment.
This acceleration has highlighted the gap between the legal obligations of directors and the growing expectations of stakeholders.
The IoD Centre for Corporate Governance, launched in June 2020, will look at issues facing boards post-pandemic, with a focus on "whether existing corporate governance mechanisms and statutory obligations placed on directors and other actors allow them to deliver against the expectations of a wider group of stakeholders".
In other words, what changes may be required to bridge the gap between legal obligations and stakeholder expectations. The question then becomes – is our current legal framework sufficient, or is it time for it to evolve?
Jessie Abrahamson-Flynn is an associate in the corporate team in London at European law firm, Fieldfisher. For more information on our corporate governance expertise, please visit the corporate pages of the Fieldfisher website.
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