The governance stakes get higher

Regulation multiplies

On specific governance regulation, the workload for legal and company secretariat leaders continues to mount. The European Union (EU) has now adopted the Corporate Sustainability Reporting Directive (CSRD), which includes a range of prescriptive governance requirements. In the US, the Securities and Exchange Commission (SEC) is moving to require US companies to make disclosures broadly aligned with the approach taken by the Task Force on Climate-related Disclosures (TCFD). In the UK, the Queen’s Speech in May, included no fewer than 38 new bills, many of which contained new governance requirements.

For larger organisations in particular, this brings the additional challenge that different entities and subsidiaries must meet different requirements. Mapping the regulation and legislation for each entity – and how those regimes interact – is crucial. Each entity will face its own challenges in meeting its obligations, but the parent needs to visualise the whole.

Pension scheme governance adds to the burden. Last year’s Pension Scheme Act introduced tough new penalties for businesses that fail to provide adequate financial support for their pension plans. These include unlimited fines and even jail sentences for individual directors found guilty of avoidance and conduct offences.

This shift towards greater accountability for boards and individual directors is a theme across the governance space. For example, the Audit Reform Bill announced in the Queen’s Speech will introduce a new Audit Reporting and Governance Authority to replace the Financial Reporting Council; it will have powers to bring prosecutions against directors.

Naturally, such measures are grabbing directors’ attention – both at parent company level and at subsidiaries, where boards will face the same regulation and the same penalties. Indeed, in polling conducted during this livestream, 78% of respondents said increased risk and personal liability would drive changes of behaviour for subsidiary boards.

Dealing with the challenge

There will be no one single solution for boards as they seek to rise to the governance challenge. Many organisations are investing in new resources for legal and, particularly, company secretariat, recognising the growing demands on these functions.

Training for directors and senior management is also an increasing focus – both formal governance training and also broader work to improve understanding of what key stakeholder groups are looking for from a governance perspective.

In addition, some organisations are implementing formal ESG governance frameworks. In this livestream, 56% of respondents said they were prioritising this approach. The aim here is to build a structure that provides connectivity across the organisation, bringing together potential disparate ESG activities, as well as the business’s various subsidiaries and entities.

Such frameworks will inevitably be fluid. They will need to adapt over time as new regulation emerges and the business’s approach develops. But they provide a means through which to approach governance holistically – to understand how the organisation is approaching key ESG issues both centrally and via its individual business units. This can also help centralised functions, including legal and cosec, identify where help and support is required.

Many pension schemes are taking a similar approach as they respond to the governance challenge. Such structures provide a means with which to institute the prescriptive steps that boards and pension scheme trustees must take in order to protect both the business and the scheme.

Putting these frameworks in place should also help organisations to speak with a single voice. One difficulty facing businesses is that the differing reporting regulations faced by subsidiaries operating in different jurisdictions creates the potential for confusion and contradiction. Structures that ensure disclosures are aligned – even if the detail required varies – will therefore be important.

Towards a more collegiate response

Rising to the governance challenge will also require some organisations to embrace a shift in attitudes. Business leaders have a responsibility to listen to their legal and cosec functions’ advice on what is now required from a governance perspective.

Advisers also need to understand the business – to offer advice on how to manage governance in a way that aligns with the organisation’s goals and priorities.

The same applies to pensions governance, where the pension secretarial function is going to become increasingly important. Pension secretaries will need to increase their understanding of what is going on within the business, including in its subsidiaries, but this communication will need to be a two-way street. The cosec function may be a good conduit for such conversations.