Next generation governance: The role of the regulator

New ICSA research reveals an interesting perspective on the responsibility of regulators

On 27 September, ICSA published a new research report called ‘Next Generation Governance’. Written by my colleague Liz Bradley, it gives some fascinating insights into the differences – and similarities – in how different generations of governance professionals think about their role.

The report reflects on the findings of a survey into the views of ‘Generation Y/Z’ (governance professionals aged 18–35) and ‘established practitioners’ (aged 56–65). As an aside, I was delighted to discover that despite my advancing years I am not yet quite old enough to be considered ‘established’. This is the nicest thing anyone has said about me in ages.

One section of the report addresses the expansion of governance, which is something I wrote about in the report ‘Untangling Corporate Governance’, which ICSA published last year. Where once it was a term used to describe the internal effectiveness of an organisation, ‘governance’ now encompasses that organisation’s relationship with, and impact on, the world in which it operates as well.

Whether you agree with it or not, this is the direction in which we are heading. In the UK and globally, many of the current governance debates are about issues such as directors’ duties, the fiduciary duties of investors, stakeholder engagement, sustainability reporting, and so on.

As you might expect, Generation Y/Z respondents were more convinced than established practitioners that these issues are integral to the role of the governance professional, although it is by no means a sharp divide. Over 60% of established practitioners agreed that financial inequality was relevant to governance, for example.

So there is broad agreement that our understanding of what we call governance is expanding, and that this has an obvious impact on the role of governance professionals. But if things are changing, why? And who is driving the change?

The survey asked respondents for their views on which external parties had the greatest influence over the standards of behaviour in organisations. Both groups agreed that stakeholders – excluding owners, investors and other funders – and the public had the least impact. Both also agreed that funders and regulators were most influential.

However, there was a notable difference of opinion about the relative influence of regulators. They were ranked as most influential by 44% of Generation Y/Z respondents, but only 28% of established practitioners (nearly half of whom put owners, investors and funders in first place).

As a former regulator myself, I found this intriguing – but the reason for the difference of opinion is not obvious. Possibly Generation Y/Z governance professionals are in relatively junior roles and spend more of their time on regulatory and compliance issues, whereas established practitioners have more exposure to the views of investors and others. Possibly they have a less time to develop a jaundiced view of regulators than their more long-serving colleagues.

More positively, perhaps it is an indication that Generation Y/Z respondents think that the agenda that regulators are now setting is the right one.

Even if that interpretation is correct, does it follow that regulators then have the main responsibility for bringing about change in the relationship between organisations and the outside world?

It seems not, judging by the views of respondents to the survey. In answer to a question about what would most improve the relationship between organisations and the public, over 40% of both groups said that changes to stakeholder engagement was the single most important factor. The interest that we have seen in the ICSA’s guidance on ‘The Stakeholder Voice in Board Decision Making’ suggests this is a widespread view.

Some respondents felt that changes to law and reporting were important, but they were very much seen as secondary considerations. I agree. Both have a useful role to play, but neither regulation nor reporting requirements are able to establish a direct relationship between organisations and their stakeholders or wider society. And you cannot improve a relationship if it does not exist in the first place.

So if one objective of the recent corporate governance reforms in the UK is to rebuild trust, as the government said when launching those reforms, what is the role of regulators?

One conclusion from this research might be that they should use their undoubted influence to set the agenda and ensure that channels through which engagement with different stakeholders can happen are in place and being used – to lead the horses to water, so to speak – but then withdraw and allow the principals to establish a direct relationship. Without such a relationship, lack of trust seems likely to linger.

Chris Hodge is Policy Advisor at ICSA: The Governance Institute

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