We often hear of terms such as corporate governance being used by businesses and organisations. But what exactly does this term mean? In general, corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. With recent high-profile liquidations like the case of Hyflux, Hin Leong, Noble Group, and Swiber Holdings in Singapore, the importance of effective corporate governance has come to the forefront. By staying informed about the latest trends in corporate governance, businesses and investors can make better decisions, minimise risks, and create sustainable value for stakeholders. Here are some of the top trends in corporate governance for 2023:
Increasing Focus on Board Diversity
A diverse board with a mix of skills, experiences, and perspectives is better equipped to navigate complex business environments and make well-informed decisions. The importance of board diversity has been underscored in the case of Hyflux and its founder and CEO Olivia Lum. To ensure a balanced governance structure with robust checks and balances, companies are increasingly focusing on diversifying their boards in terms of gender, race, age, and expertise. Many accounting firms have also emphasised the value of board diversity in its corporate advisory services.
Greater Scrutiny of Executive Compensation
Executive compensation is a critical aspect of corporate governance, as it can impact a company’s performance, reputation, and ability to attract top talent. In light of corporate scandals and failures, stakeholders are demanding greater transparency and accountability in executive pay packages. Consequently, companies are now more likely to link executive compensation to performance metrics and adopt clawback provisions to recover incentives in cases of financial restatements or misconduct. This trend is also supported by the corporate advisory services of major accounting firms.
More Emphasis on Corporate Culture and Values
A company’s culture and values are crucial to its governance practices and overall performance. In the case of Hyflux, the company’s troubles were, among various factors, also linked to its foray into the energy business through the Tuaspring Desalination power station, which turned out to be a financial burden for the company. Nowadays, companies are placing a stronger emphasis on establishing and maintaining a healthy corporate culture that promotes ethical behaviour,, transparent decision-making, and effective risk management. This primarily involves educating employees, bringing in independent consultants to review policies and procedures, and identifying key stakeholders who will hold the organisation accountable for its actions.
The Changing Role of Shareholders in Corporate Governance
Shareholders are becoming more active in their involvement in corporate governance matters. As mentioned earlier, in the second trend, they are demanding greater transparency, accountability, and engagement from the companies they invest in. This trend is significant in the wake of the Hyflux, Swiber Holdings, and Noble Group cases, which left investors with losses. Additionally, shareholders are pushing for stronger stewardship codes that hold the company accountable for meeting their fiduciary duties and encourage long-term decision-making. These codes also ensure that executives and non-executive directors are held to the same standards of corporate responsibility. Finally, shareholders are increasingly using their voting power to influence governance practices, such as board composition, executive compensation, and environmental, social, and governance (ESG) issues.
The Key Takeaways for Businesses and Investors
Corporate governance failures serve as a stark reminder of the importance of effective governance practices. To safeguard their interests and create sustainable value, businesses and investors must prioritise board diversity, executive compensation transparency, strong corporate culture, and active shareholder engagement. Staying informed about the latest corporate governance trends and seeking guidance from reputable accounting firms like KPMG, Deloitte, PricewaterhouseCoopers, and Ernst & Young, can help companies implement robust governance practices that promote long-term success and stability.
In conclusion, the ever-changing landscape of corporate governance necessitates a proactive approach from businesses and investors. By staying up to date on emerging trends and adapting accordingly, companies can avoid costly mistakes and set themselves up for success in the years to come. With the proper guidance and support from reputable accounting firms, businesses can create a corporate governance framework that will help minimise risks and create sustainable value for all stakeholders.