Corporate governance is an evolving landscape, influenced by economic, technological, and societal changes.
As we approach 2024, several challenges are likely to shape the corporate governance landscape.
1. Digital Transformation and Cybersecurity:
The accelerated pace of digital transformation poses challenges for corporate governance. With increased reliance on technology, boards must ensure robust cybersecurity measures to protect sensitive data. Cyber threats and breaches can have severe consequences, impacting shareholder trust and value.
Boards need to stay informed about emerging cyber risks and implement effective strategies to mitigate these threats. It is said, rather candidly, that the risk of cybersecurity breaches is not a question of 'if' but 'when', and it is better to be prepared for it when it happens.
Cyber risk is the price we pay for digital convenience. There is a trade-off between digital convenience and cyber risk – they are inversely proportional.
And should there be a ransomware attack, the board will have to make the tough decision of whether to pay the ransom or not. Paying the ransom may seem the easiest way out but the easiest way out is not necessarily the best way out.
For by doing so, you become a contributor to the success of ransomware attackers; you motivate them.
It is better not to pay the ransom. Be transparent, honest, and humble about what has happened with your stakeholders. Kick-off the well-rehearsed business continuity plan and come out smelling like a fresh bunch of roses for doing the right, ethical and moral thing. Never underestimate the forgiving and understanding nature of your stakeholders when it comes to transparent, honest, and humble admissions.
2. Environmental, Social, and Governance (ESG) Integration:
ESG considerations have gained prominence in recent years, reflecting a growing awareness of corporate responsibility. In 2024, companies are expected to face increased pressure to integrate ESG factors into their decision-making processes. Boards will need to adopt sustainable business practices, address climate-related risks, and enhance transparency in reporting ESG metrics to meet stakeholder expectations.
Often it is the major customers who demand it and companies which do not meet ESG standards pay a heavy price through loss of customer orders. History has shown that some Malaysian companies have been affected by ESG pressure especially in the glove and plantation sectors.
3. Diversity and Inclusion:
Achieving diversity and inclusion at all levels of an organisation remains a persistent challenge. Boards are under scrutiny to ensure diverse representation in terms of gender, ethnicity, age, and skill sets. Companies will need to implement inclusive hiring practices, mentorship programmes, and create a culture that values diversity to enhance decision-making and overall corporate performance.
While we have progressed well in gender diversity, we need to progress equally well in other aspects of diversity.
4. Shareholder Activism:
Shareholder activism continues to be a significant governance challenge. Activist investors are likely to push for changes in strategy, governance structures, and executive compensation. Boards must be proactive in engaging with shareholders, addressing their concerns, and clearly communicating the company's long-term value creation strategy to avoid hostile takeovers or disruptive actions. Boards should be proactive to ward off the shareholder activists.
5. Executive Compensation and Performance Metrics:
The alignment of executive compensation with long-term performance remains a focal point for corporate governance. Shareholders are increasingly scrutinizing compensation structures, demanding transparency, and seeking clear links between executive pay and company performance.
Executives are expected to share the pain of non-performance with shareholders. There must be alignment of interests.
6. Supply Chain Resilience:
The COVID-19 pandemic highlighted vulnerabilities in global supply chains. Boards are now tasked with ensuring supply chain resilience, addressing risks associated with geopolitical tensions, natural disasters, and pandemics. Implementing robust risk management strategies and diversifying supply chain sources will be essential for maintaining business continuity.
7. Regulatory Compliance:
Regulatory landscapes are continually evolving, and companies must stay abreast of changes to comply with various laws and standards. In 2024, boards will face the challenge of navigating complex regulatory environments, particularly in areas such as data privacy, anti-corruption, and financial reporting.
Staying compliant is crucial for maintaining trust and avoiding legal repercussions. Legal repercussions tarnish the name and brand value of a company. Once tarnished it is tedious and time consuming for them to regain the lustre of their name and brand.
8. Stakeholder Engagement:
Beyond shareholders, companies are accountable to a broader range of stakeholders, including employees, customers, and communities. Effective stakeholder engagement is crucial for building trust and maintaining a positive corporate reputation.
Boards need to develop comprehensive strategies to engage with diverse stakeholders, address their concerns, and foster a sense of shared value. It is in the best interest of the company to consider the best interest of the stakeholders because stakeholders can impact corporate value.
9. Long-Term Value Creation:
Balancing short-term and long-term priorities is an ongoing governance challenge. Boards must resist the pressure for short-term gains at the expense of sustainable, long-term value creation.
Boards need to carefully design compensation packages that incentivize sustainable growth and discourage excessive risk-taking. KPIs that balance short term and long-term interests of the company will be the way to go.
Focusing on innovation, responsible business practices, and strategic planning will be essential for companies to thrive in the dynamic business environment of 2024.
10. Crisis Preparedness and Resilience:
The unpredictability of the business environment requires companies to enhance their crisis preparedness. Boards must develop comprehensive crisis management plans, including communication strategies, to navigate unforeseen challenges such as pandemics, natural disasters, or reputational crises.
*The writer has over two decades of experience in the Malaysian capital market. He is a keen follower of capital market development and is passionate about corporate governance and fundamental investing.