Learning the governance lessons of 2020 to prepare for 2021

By Parmi Natesan and Prieur du Plessis

“The year 2020 was one of disruptions; boards should be working hard to identify the lessons it taught as they prepare for the new year.”

As 2020 draws to a close, it’s no exaggeration to say that the business environment has undergone a seismic disruption, the full implications of which will only emerge with the passing of time. But several broad governance lessons are already evident, and boards should be acting to take them on board.

While 2020 will forever be associated with the emergence of the COVID-19 pandemic and, most notably, the extreme reaction to it, other important issues also surfaced during this period, and boards should not omit to consider their significance.

A more integrated approach to corporate governance
As an article by Richard Samans and Jane Nelson for the World Economic Forum notes, the crisis provoked by COVID-19 makes a more integrated approach to corporate governance essential. We have had graphic proof that ours is a connected world, and boards need a holistic understanding of the economic, social and environmental systems in which they operate and on which they are dependent. This is the primary lesson of 2020, and it implies that organisations must become more active participants in society and cannot simply react to developments.

Many – if not most – of the following lessons spring from this overarching realisation.

Greater focus on ESG issues within an enhanced enterprise risk framework
COVID-19 has shown that Environmental, Social and Governance (ESG) issues pose risks that can materialise with devastating consequences. These risks are evolving fast and must be monitored constantly. More generally, South Africa’s risk environment remains challenging, with sovereign debt, energy, water and social instability remaining high-risk issues. Another important lesson is that all risks cannot be foreseen, and thus boards should take the lead in building resilience into their organisations. Also, boards need to ensure ESG is incorporated into corporate purpose, strategy, goals and executive remuneration.

Technology and data governance
Long-made plans for digital transformation were rudely accelerated as the firms “pivoted” to deal with the realities of remote working, and cloud adoption soared. The ongoing digitalisation of business and society has created a much more complex technology environment, a huge risk and an equally huge opportunity. All that technology is generating vast amounts of data, the governance of which is becoming key to success. Principle 12 of the King IV Report on Corporate Governance distinguishes technology and information for good reason ̶ although interdependent, they pose different challenges for boards.

Wider forms of activism and stakeholder engagement
The infamous Clicks advert and the EFF’s reaction to it show that activism is now a fact of corporate life. The unprecedented events sparked by the killing of George Floyd in the United States further underscore this point. In both cases, corporates have chosen to appease activists, but it seems unlikely that this reactive approach is a viable long-term strategy. “Failure to embrace stakeholder governance could be the most significant risk factor, outside of liquidity, facing businesses over the next ten years,” argues Board Intelligence.

Diversity of boards (and excos)
Globally, in the wake of the Black Lives Matter protests, boards are placing renewed focus on ethnic/racial and gender diversity. This is one area in which South Africa leads, but we need a mindset that goes beyond the tick-box, quota-based approach. Corporates that appreciate that a strong business case for genuine diversity exists, must look at ways of better achieving it.

Executive remuneration
Disparities in pay have been an issue for some time, and have been simmering during the COVID-19 crisis. While many executives took public pay cuts, their leadership also had the unplanned effect of emphasising just how much they do earn. Empowering remuneration committees with the right level of skills is critical.

Auditors and audit committees
Steinhoff remains the poster child for corporate scandals, with some views that auditors and/or audit committees lack either competence or independence. Boards must ensure audit committees are properly capacitated and auditors are effectively held to account.

Disclosure
There’s a good argument to be made for the concept that the quality of an organisation’s disclosure correlates with the quality of its governance. The “apply and explain” regime advocated by the King IV Report means the board must look beyond a tick-box approach to applying its mind to achieving the governance outcomes identified in the Report.

Parmi Natesan		Dr Prieur du Plessis

Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: info@boardgovernance.co.za