Lucy P. Marcus writes: Around the world, the corporate governance landscape is shifting, as efforts to improve business practices and policies gain support and momentum. The wave of reform has become visible everywhere – from tough new regulations in Japan to sovereign wealth funds like Norway’s Norges Bank Investment Management taking a more active approach to their investments – and it is certain to continue to rise.
Three factors are driving these developments. First, today’s deep economic uncertainty has broadened ordinary people’s awareness of the influence that companies have on politics, policy, and their own daily lives.
Second, there has been a burgeoning awareness among governments that economic growth requires a proactive regulatory approach.
In Japan, the Financial Services Agency enacted a Stewardship Code in 2014, with a Corporate Governance Code from the Tokyo Stock Exchange entering into force this June. By creating a more equal environment among shareholders, ensuring more disclosure and transparency, specifying the responsibilities of company boards, and requiring outside independent directors on company boards, the codes enshrine changes that make Japan more attractive for foreign investors.
In the United States, the Securities and Exchange Commission enacted a rule at the beginning of August requiring public companies to disclose the pay gap between workers and CEOs. Corporate behavior and governance has emerged as a campaign issue for US presidential candidates.
The European Union and its member states are also taking an increasingly active approach to corporate governance, including regulations concerning boardroom diversity. Italy, France, Spain, Norway, and others have all enacted boardroom gender quotas, with companies required to fill 30-40% of independent board seats with women.
The third, and perhaps most important, factor underpinning recent changes in corporate governance has been the sharp rise in cross-border investing. Sovereign wealth funds, pension funds, global investment banks, and hedge funds do not invest only in their own backyard. They scour the planet looking for places to put their money, and they expect companies that receive it to play by rational rules.
International investors are in a unique position to encourage, or even enforce, global best practices in corporate governance. If such investors show that they are willing to withdraw financing, they will gain real influence in bringing about sustainable change – to the benefit of us all.
Global funds that uphold high ethical standards concerning labor practices and environmental protections are safeguarding the global ecosystem on which they, and the rest of us, depend.
CalPERS (the California Public Employees’ Retirement System), a $300 billion pension fund, has published its corporate governance principles, which include boardroom diversity, fair labor practices, and environmental protection. Norges Bank Investment Management, Norway’s $870 billion sovereign wealth fund (the largest in the world), has also pushed for changing governance rules, including separating the role of chief executive and chairman and better reporting by companies on how they are addressing climate change.
The shift in emphasis on best-practice corporate governance is real, and it is here to stay.
