Anticipating Board Evaluation Trends for 2024
Downes Patrick
高级非执行董事，执行董事会和政府首脑。 一个战略性，动态和驱动的领导者，在私营和公共部门工作。 在复杂多样的环境中拥有强大的利益相关方关注点，同时积极影响股东价值。
As we look ahead to 2024, it's clear that the corporate governance landscape is rapidly evolving. The trends that have shaped the past few years - from increased standards for sustainability reporting to rising gender diversity on corporate boards - are expected to continue, but with new challenges and opportunities on the horizon.
Here at Lionheart Corporate Governance we have seen that the board evaluation process has undergone a significant overhaul in recent years. The traditional check-the-box, survey-based exercise has been replaced by a more rigorous and strategic approach. This shift reflects the growing recognition that an effective board is a strategic asset, not a hurdle to compliance.
Emerging Trends
Several key trends are shaping the approach to board evaluation.
First, there is increasing scrutiny of board composition, processes, and performance. Issues such as gender, racial, and ethnic diversity have led to a greater focus on underrepresented groups.
Second, there is a renewed emphasis on human capital management and DE&I priorities. Finally, the digitalisation of governance has significant implications for competitive advantage and board composition and to that end as a Diligent partner practice we are pleased to be ahead of the curve in terms of fulfilling our client needs.
In response to economic uncertainty and rising inflation, boards are expected to face increased pressure to perform and adapt their strategies. This trend is likely to intensify in 2024, with boards leveraging their longer-tenured directors while maintaining a balanced approach to board refreshment.
Looking Ahead
As we look ahead to 2024, it's clear that Corporate Governance will continue to evolve. Boards will need to navigate a range of challenges, from managing macroeconomic uncertainty to responding to increased demands for transparency and accountability. The trends identified in this report provide a potential roadmap for boards as they seek to enhance their effectiveness and add value to their organisations.
The ESG Juggernaut
Environmental, Social, and Governance (ESG) factors have become increasingly important in the corporate world, influencing not only investment decisions but also board evaluations. ESG factors encompass a wide range of issues, from environmental sustainability and social responsibility to governance structure and practices. These factors are now considered critical indicators of a company's long-term sustainability and ethical performance.
The consideration of ESG factors in board evaluation has several implications. Firstly, it broadens the scope of evaluation beyond traditional financial metrics to include non-financial performance indicators such as environmental impact, social responsibility, and governance practices. This shift reflects the growing recognition that a company's long-term success is closely tied to its ESG performance.
Secondly, ESG factors can influence board composition, with increasing pressure for boards to reflect diversity in terms of gender, ethnicity, and expertise in ESG issues. Finally, ESG factors can shape board processes and decision-making, with boards expected to oversee the company's ESG strategy and ensure accountability for ESG performance.
ESG factors are also playing a pivotal role in investment decisions. Investors are increasingly using ESG criteria to screen potential investments, with companies demonstrating strong ESG performance often viewed as more attractive investment prospects. This trend reflects the growing recognition that ESG factors can impact a company's financial performance and risk profile. For instance, companies with strong environmental practices may be better positioned to navigate regulatory changes and reputational risks related to environmental issues. Similarly, companies with strong governance practices may be more likely to avoid corporate scandals that can damage their reputation and financial performance.
Looking ahead, the importance of ESG factors in board evaluation is likely to continue to grow. Boards will be expected to demonstrate not only awareness of ESG issues but also the ability to integrate these issues into their strategic decision-making. This will require boards to develop new skills and expertise, and to adopt more rigorous and transparent processes for ESG oversight. In this evolving landscape, boards that can effectively navigate ESG issues will be better positioned to add value to their organisations and meet the expectations of their stakeholders.
Integration of EDG Risk Factors
As we head into 2024 incorporating Environmental, Social, and Governance (ESG) risks into your risk management framework is a critical step in your risk mitigation process. ESG factors, such as climate change, social inequality, and ethical business practices, significantly impact a company's long-term sustainability and financial performance. By integrating ESG risks into their risk management strategies, businesses can enhance decision-making, strengthen stakeholder relationships, and mitigate potential reputational and operational risks.
To effectively integrate ESG risks, it is essential to develop an ESG strategy tailored to your organization's unique risk exposure. This involves conducting a comprehensive assessment of your organization's operations, supply chain, and stakeholder expectations to identify material ESG risks. Board and management oversight is vital in driving the integration of ESG risks into the risk management framework. Establishing clear roles and responsibilities for overseeing and implementing ESG initiatives, and incorporating ESG goals and performance metrics into executive compensation plans can further enhance this integration.
2024 and Cyber Risk
Its no longer if but rather when and Cyber risk and cybersecurity are complex issues that boards and directors must effectively oversee to protect business interests from current and future threats. The board should develop its own cybersecurity oversight manual covering the legal and regulatory environment, cyber knowledge on the board, preparedness, detection, response, and disclosure. This active oversight role requires the board to understand emerging and constantly changing legal and regulatory environments, and to address any knowledge gaps.
for 2024 the integration of ESG factors into risk management and the role of cyber risk in board deliberations are critical aspects of modern corporate governance. By effectively managing these risks, boards can enhance their decision-making, strengthen stakeholder relationships, and ultimately contribute to a more sustainable and responsible business future.
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CSRD
Another Ubertrend that is about to land in 2024 is the European Union's Corporate Sustainability Reporting Directive (CSRD) which has significant implications for Irish entities. The CSRD, which replaces the Non-Financial Reporting Directive (NFRD), is applied to companies with more than 500 employees that are public limited companies or regulated by the Central Bank of Ireland. The Irish Government is currently working on amendments to the Companies Act 2014 to enact the requirements of the CSRD.
The CSRD arises from the European Green Deal's climate change action objectives, aiming to enhance the disclosure by companies on climate and environmental data. Ireland, along with other member states, has until mid-2024 to transpose the directive. Mandatory requirements will commence for financial years on or after 1 January 2024 for public interest entities in scope of EU non-financial reporting rules (greater than 500 employees) and 1 January 2025 for other larger companies and public interest entities (greater than 250 employees).
The CSRD will significantly increase the number of companies impacted in Ireland compared to those complying with the NFRD. Large companies, for the purposes of the Companies Act 2014, will be required to prepare a sustainability report that complies with the CSRD starting from financial years on or after 1 January 2025. Some large listed companies will start reporting from 1 January 2024.
The CSRD aims to improve the quality, comparability, and relevance of sustainability reporting by companies in the EU. This directive establishes a corporate due diligence duty, requiring companies to identify, prevent, mitigate, and account for negative human rights and environmental impacts in their operations, subsidiaries, and value chains. Certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.
The CSRD introduces duties for the directors of the EU companies covered. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. Directors must take into account the human rights, climate change, and environmental consequences of their decisions. Furthermore, the CSRD expands the reporting requirements, with a broader set of large companies, as well as listed SMEs, now required to report on sustainability.
The CSRD has far-reaching implications for both Irish and European entities, significantly expanding the scope of sustainability reporting requirements. Its our view here at Lionheart Corporate Governance that by integrating these requirements into their operations, companies can enhance their sustainability performance, contribute to climate change mitigation goals, and ultimately drive a more sustainable and responsible business future.
If you are interested in CSRD you could do worse than sign up to the Irish Times Training module on the 30th November on GETTING TO GRIPS WITH CSRD for Irish companies.
In the spirit of sharing please find some links which maybe of interest in the subject.
14.https://empoweredsystems.com/blog/how-to-integrate-esg-risks-into-your-risk-management-framework/