Despite the unprecedented nature and scope of COVID-19, the crisis should not be viewed as an isolated event. For decades, systemic shocks have been on the rise, whether in the form of global financial crises, digital revolutions, political uprisings, natural disasters or pandemics. At the same time, in the 10 years that we have been publishing Davies Governance Insights , massive shifts in the technological, environmental, socio- economic and geopolitical environments have reshaped the expectations and operating context of businesses. Over the past decade, we have also witnessed a meteoric rise in the concentrated accumulation of wealth by asset managers (including Vanguard Group, BlackRock, Inc. and State Street Global Advisors) and giant institutional investors (including a number of Canadian pension plan funds), which are wielding increased influence over a wide range of environmental, social and governance (ESG) matters. During this period, climate change has risen to the forefront of corporate governance trends, culminating in the January 2020 letter from BlackRock CEO Larry Fink announcing initiatives to “put sustainability at the center of [BlackRock’s] investment approach.” And more recently, widespread recognition of institutionalized racism and calls for change in the wake of George Floyd’s death have brought the discussion of racial diversity to the boardroom. In this context, change and disruption should be viewed as the expectation, not the exception. Moreover, when combined with the enormous human and economic toll caused by COVID-19, these changes have brought new significance to the role of the “S” in ESG matters, and have highlighted the importance of fully integrating ESG factors into a company’s governance, strategy and operations. The crisis has also accelerated the push to move beyond a shareholder-
primacy model toward a broader stakeholder-driven model of corporate governance that calls on issuers to consider the interests of a wider range of stakeholders, including employees, customers, suppliers, communities and the environment. The practical result is that today’s directors must proactively manage the evolving and often competing needs of a diverse group of constituencies in increasingly complex situations. If there’s one silver lining in this challenging time, it’s that upheaval can lead to new understanding and opportunities. This multidimensional crisis has exposed cracks in business policies and practices that might not otherwise have come to light, thereby opening the door for much-needed change. When the dust settles, boards and management teams will have the opportunity to tap into the learnings from their COVID-19 responses in order to reset strategies and build more resilient governance structures that can prevail through future shocks. This will necessitate looking beyond the business space to set in place good governance practices that will sustain the business for the longer term. Only by considering and implementing these practices and strategies will companies be sufficiently prepared to respond and recover when – not if – the next disruption occurs. With these overarching themes in mind, the issues discussed in this report can be grouped into three distinct, yet interwoven, principles that should guide an issuer’s approach to governance over the next decade.
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Governance Insights 2020
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