Peering Into the Corporate Governance Crystal Ball

A Mayan end of the world may have been averted, but the New Year still does bring a reckoning—for us.

Each January we predict governance trends we think will unfold over the next 12 months. But in deference to accountability, we start by testing how our forecasts fared over the past year. Last January we offered four predictions—and scored a modest success in the crystal ball business.

First, we expected debate to intensify on what steps could counter the rise of short-term behavior by institutional investors, and it has. Books such as Lynn Stout's The Shareholder Value Myth and influential reports such as the Britain's Kay review clearly put shareholders in the spotlight for myopia. But one antidote touted by some—giving extra votes or dividends to funds that act long term—failed to gain the attention we predicted. Of course, we may just have been premature. The idea continues to surface in academic venues and at gatherings of policymakers and international institutional investors. So far, though, it remains a murmur, not a roar.

Second, we guessed that parties would make material progress on defining just how companies could achieve sustainability. There sure was progress—but almost too much of it. Groups such as the Sustainability Accountability Standards Board, the International Integrated Reporting Council, and others each issued advice. The result: There is now more cacophony than clarity. Advocates are finding it harder to gain consensus than they expected.

Third, we predicted a national backlash against U.S. corporate political contributions, causing boards to curb such donations going forward. The public did seem repelled by the wave of candidate cash leading up to the November elections, but there was so much other noise in the general election that the issue never dominated. Still, boards did appear quietly to pay more attention to the reputation risks involved in picking favorite parties and candidates.

Each January we predict governance trends we think will unfold over the next 12 months. But in deference to accountability, we start by testing how our forecasts fared over the past year. Last January we offered four predictions—and scored a modest success in the crystal ball business.

Finally, we wrote that corporate directors would make more rapid progress in appointing women to boards. There was some action on this front, including a wave of initiatives in the United States such as  the “2020 Women on Boards” campaign and the “Thirty Percent Coalition,”  aimed at boosting board diversity. But no one could call measurable progress rapid. “The pace of change in the United States is discouraging,” found the latest Spencer Stuart survey. “Women now account for just over 17 percent of independent directors, up from 16 percent in 2007 and 12 percent in 2002.”

What to Watch in 2013

Time to tackle 2013. And let's start where we left off—board diversity. No doubt the emergence of advocacy groups and vocal shareowners will prompt gains over time. But there is little evidence of change accelerating much beyond the sluggish pace we have seen during the last few years here in the United States. Even the goal some have proposed—20 percent of board seats occupied by women by 2020—is embarrassingly modest, especially when weighed against the European Commission's forthcoming target of 40 percent of women nonexecutive directors by 2020. That leads to our first prediction for 2013: The year will see the beginning of a striking, first-ever gender gap between U.S. and European corporate boards. Ironically, executive recruiters for European boards are beginning to call American and Canadian women, thereby gaining a “two-fer”: A board member who is female, and who also understands a major international market.

To the extent that European boards start to look more like the markets in which their companies operate, research suggests they may be better placed to succeed than boards that remain predominantly monocultural in makeup. Board behavior, in any case, may increasingly diverge between the two mega markets.

Our second forecast is closer to the ground: Staggered boards in the United States are about to “go the way of the dinosaur,” as one fund executive put it. The writing on the wall was the remarkable 2012 record of eight institutional investors working with Harvard Law School's clinical Shareholder Rights Project. Concentrating capital firepower on this one issue, they negotiated management resolutions to declassify boards at 48 S&P 500 companies. Where boards refused to move, the investors brought 38 shareowner proposals for annual elections that drew average support topping 80 percent. These and other institutions are targeting 74 U.S. corporations in 2013 on the same issue. In response, advisers have begun counseling boards to give up expending resources to win this fight. By 2014, we expect, only a handful of boards will be clinging to classified elections to the bitter end.

Third, we predict that 2013 is the year regulators take unprecedented steps in response to corporate complaints about proxy advisory firms. OK, here we are cheating a bit; the European Commission's Action Plan on corporate governance, released last month, explicitly promised rules in 2013 to improve “the transparency and conflict-of-interest frameworks” around proxy advisers. So we already know something is coming. We are also guessing the Securities and Exchange Commission will also finally unveil its proposals mooted in the proxy plumbing report it circulated two years ago. Proxy advisers may actually welcome limited disclosure mandates likely in both market areas; the firms may hope steps will let steam out of efforts to put them under stricter regulation.  But don't expect corporate anger against them to ease, even if investors depict complaints against proxy firms as a ‘shoot the messenger' reaction against instances of shareowner dissent.

Fourth, we forecast that board oversight of corruption risk will rise to the top of matters getting director attention. There is no mystery why that is; the U.S. Department of Justice's criminal division is for the first time applying strong enforcement resources to the Foreign Corrupt Practices Act—and raking in record penalties from companies caught breaching it. Expect regulators in London to bring similar enforcement actions against multinationals to uphold the newer U.K. Anti Bribery Act.

Costs to targeted companies come not just in fines, but in big hits to reputation and stock prices. Boards are trying now to tighten internal oversight, and to convince regulators and investors that such controls are effective. The International Corporate Governance Network has developed widely touted guidelines on risk and corruption oversight. Moreover, that body last month inaugurated a road show allowing companies and investors collectively to press top policy officials in countries for strong anti-corruption measures, so that everyone must play by the same rules. Pilot meetings took place in the Czech Republic.

We'll test in a year how sturdy is our crystal ball.