01 October 2018 by Liz Bradley
New research from ICSA into the next generation of the profession points toward an expanding remit for governance and concerns about excessive regulation
Most of us do not need a research report to tell us that society is facing numerous challenges and unprecedented change. But the question is, how many of those issues are truly governance issues? And do different age groups answer that question differently?
As part of its on-going thought-leadership series, ICSA initiated a conversation with members to gauge their views on the future of governance – particularly regarding the connection between governance and broader societal challenges.
Through focus groups and a survey, we heard the views of over 400 company secretaries and governance professionals of all ages and compared the perspectives of generation Y/Z (aged 18–35) with established practitioners (aged 56–65).
“Generations Y and Z attached greater importance to technological change, environmental sustainability and financial inequality as sources of future governance challenges”
We found two themes stood out across the responses from all age demographics surveyed.
First, recognition that changing public expectations will impact the way governance develops; and secondly, concern about extensive regulation.
However, differences between age groups emerged when it came to evaluating the connection between social issues and governance. Generation Y (otherwise known as ‘millennials’) and generation Z attached greater urgency and importance to technological change, environmental sustainability and financial inequality as sources of future governance challenges.
Additionally, a larger percentage of younger professionals strongly agreed that organisations would face greater scrutiny in the future.
In anticipating that certain social concerns could significantly impact the governance agenda, the views of the generation Y/Z respondents in our research mirrored those demonstrated by the same age group in other surveys.
Our review of other research revealed that millennials and generation Z have high expectations of the role organisations can – and, in their view, should – play in tackling some of society’s most intractable problems.
For example, 74% of the 8,000 millennials surveyed by Deloitte in its 2017 Millennial Survey believe multinational companies have the potential to solve economic, environmental and social challenges; and 73% said the same of charities and NGOs.
But it is not just the idealistic youth who expect companies and other organisations to be proactive about social concerns. It is a sentiment that is echoed by the public at large, with 60% of UK respondents to the 2018 Edelman Trust Barometer agreeing that ‘CEOs should lead change rather than waiting for regulators to impose it’.
These high expectations are fertile ground for the kind of extensive regulation that respondents to our survey considered to be problematic.
When asked to identify the biggest obstacle to effective internal oversight in the next 10–15 years, 42% of all respondents selected ‘insufficient time and resource to deal with the volume of applicable regulation’ – almost twice the number that selected the next most popular option.
81% of all respondents believe legislation or other political action will make concerns about environmental sustainability relevant to governance in the future. 87% of all respondents said that overlap or conflict between regulatory frameworks will also impact governance in the future.
We can already see the trend towards increased regulation developing – with the political response to social concerns generating additional reporting and governance requirements in the UK and elsewhere.
For some companies, the EU Non-Financial Reporting Directive has required more disclosures relating to environmental, employee and social matters – including respect for human rights, anti-corruption and anti-bribery measures. The Modern Slavery Act 2015 requires certain commercial organisations to make mandatory statements about actions taken to avoid engaging in modern slavery.
Recent reforms will also lead to annual CEO to the average worker pay ratio reporting, as well as reporting on how directors have complied with section 172 of the Companies Act 2006 in taking into account stakeholder interests.
Methods of workforce engagement are also under scrutiny, with the revised UK Corporate Governance Code 2018 addressing the issue more explicitly.
Similarly, not-for-profit and public sector organisations are facing more extensive responsibilities as the world in which they operate changes. One example is the EU General Data Protection Regulation (GDPR), which applies not only to large corporations, but all organisations using personal data – right down to small-scale charities, schools and religious groups. This is a reflection of the fact that the legislation seeks to respond to a pervasive social concern, rather than an industry-specific problem; privacy in an increasingly data-driven world.
Another example is the recent gender pay gap reporting requirements, which also apply to both the public and private sectors.
Once a social issue gains enough public momentum, recent history suggests that organisations will ultimately be held responsible for their conduct in relation to it. If governance professionals feel that additional reporting requirements are not always the right tactic, how can a better approach be developed?
Our survey indicated that, when thinking about how to safeguard the quality of governance, the focus of company secretaries across all age demographics remains on the core elements of procedures and controls, stakeholder engagement and communication. These are viewed as the bedrock of high-quality governance.
The challenge for governance professionals going forward will be to proactively ensure that procedures and controls go far enough – covering how decision-making, authority and accountability are exercised in relation to issues that might once have been considered outside the traditional remit of governance for that type of organisation.
Even without legislation or reporting requirements making them a priority, the distinction between governance and social issues is not necessarily clear-cut. For example, although climate change is primarily a social, political and environmental issue, it can become a governance issue in terms of reputational risk if an organisation is perceived as not doing enough to mitigate its environmental impact.
Similarly, if governments decide to take action on environmental issues – for example, by increasing the cost of carbon – this has the potential to significantly raise company costs, reduce value and so become a governance issue.
Where reputational risks do materialise, searching questions can arise that link directly to traditional areas of responsibility for company secretaries, such as board composition, committee oversight and the nature and effectiveness of relevant policies – as has occurred in the fall-out from the Facebook/Cambridge Analytica scandal.
The improper access and misuse of data of millions of Facebook users led to fresh examination of the company’s governance structure – in which founder Mark Zuckerberg sits as both chair and CEO, with an alleged ‘stranglehold’ over Facebook’s voting shares – and subsequent proposals from investors for reform, including more independent input at board level and creation of a data privacy oversight committee.
Whether due to pressure from stakeholders, regulators, owners or the public, organisations are being expected to listen to a wider range of voices on a broader spectrum of issues than ever before. If a perceived failure to take those issues seriously ultimately leads to more regulation, organisations would do well to ensure that these concerns are on the governance agenda, sooner rather than later.
The good news is that many company secretaries feel empowered to shape the governance agenda in their organisations.
Participants in our focus groups stressed the variety of ways in which company secretaries exercise influence – from having a granular impact on behaviour and decision-making right across the organisation by drafting policies, formulating meeting agendas and conducting training, to relational bridge-building as a result of being part of the senior management team and providing support and advice to the organisation’s leaders.
Millennial and generation Z company secretaries have indicated the kinds of challenges they envisage grappling with in the coming decade, highlighting the importance of a broader perspective on governance.
They now have the opportunity to turn their insights into action – beginning with consideration of the following questions:
Governance professionals need to be able to understand the shift in public sentiment, driven in part by demographic changes, and think laterally about how social issues might intersect with more traditional aspects of governance if they hope to proactively identify areas that could become more relevant – and regulated – in the future.
2 Are today’s procedures and controls capable of addressing tomorrow’s challenges?
As expectations change, the tools devised to meet one type of challenge may not be capable of addressing the new spectrum of problems. This dilemma was considered in more detail in our first Future of Governance report, ‘Untangling Corporate Governance’ by Chris Hodge.
Company secretaries need to remember the business maxim ‘people do not want a drill, they want a hole’ – keeping the ultimate objectives of governance firmly in mind, but embracing the possibility that some existing processes might be better replaced altogether, rather than merely upgraded.
Participants in our focus groups defined the role of the company secretary as ‘the conscience of the company’. Governance professionals are key players when it comes to building trust within organisations and with external parties. However, higher expectations arguably mean higher stakes for organisations – there are more ways to fall short and be perceived as untrustworthy.
So, whether in addressing current hot topics like diversity, remuneration and stakeholder engagement, or stepping up to future challenges such as the impact of technology and concerns about environmental sustainability, organisations need to care, act and communicate. It is only by doing all three that organisations can demonstrate that they meet the standards expected of them and remain trustworthy as a consequence.
The next generation of company secretaries see a stronger connection between pervasive social issues and the governance landscape of the future.
By steering their organisations to engage more proactively with these issues, they could help to mitigate the increasing tendency to resort to regulation as a means of making sure organisations are paying attention to the issues that impact us all.