Welcome to our annual predictions column, where we peer into our crystal ball and relay what we see for the coming year in corporate governance trends.

Even with a magic crystal ball, though, forecasts are tough to get right. Whether you are a chief executive planning for the coming year or presenting the weather on local television, the future is often elusive. While track records can sometimes be misleading—think of Bernie Madoff's wonderfully consistent investment returns until the scam was exposed—they can still be an important accountability mechanism. That's where we start this year—scrutinizing how our four predictions for 2013 panned out before we venture guesses about what 2014 will hold. 

We kicked off by prognosticating that pressure for more diverse boards would grow. Further, we thought that “the year will see the beginning of a striking, first-ever gender gap between U.S. and European corporate boards.” We'll modestly award ourselves an A- on that one. 

The issue of women on boards gained traction in the United States, even though, measured by Spencer Stuart figures, progress came grudgingly: Female directors held 18 percent of public company board seats in 2013, compared to 17 percent in 2012, and a staggering 44 percent of U.S. technology companies are still without a single woman on the board. 

But if the United States is changing at a snail's pace, the goalposts in Europe are moving swiftly—thanks to politicians rather than the market—even if the actual results are still yet to come. The percentage of women on EU boards today is about 18 percent, just as in the United States. But quota legislation adopted in November could propel boards to as much as 40 percent female membership by 2020 at large companies. Moreover, the new German coalition government, headed by one of Europe's most conservative parties, has pledged a 30 percent quota by 2016, a mere two years from now. So yes, cross-Atlantic gender gap, here we come. And fast.

Our second prediction was that by 2014 “only a handful of bitter-ender boards will be clinging to classified elections.” That's mostly true; the latest statistics from Harvard Law School's clinical Shareholder Rights Project show that by the end of 2014 more than 100 companies with staggered elections will have moved to annual elections. What we hadn't anticipated, however, was new, year-end research challenging the scholarly consensus that classified boards harm corporate value. Maybe they don't. University of Notre Dame finance professor Martijn Cremers and colleagues reported a surprise finding: “Firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value.” The paper covers 1978 to 2011. The result could stem from self-selection bias—that is, since annual election has become such a default norm, IPO companies that select a classified board structure have to have a very good reason for choosing it and so only those companies that actually benefit from it so choose. Still, the research could wind up girding boards that want to fight declassification or restore staggered elections. Prediction grade: B+.

First, we expect this to be the year of director engagement with investors. Yes, directors will be called on to speak directly to significant investors, not just investor relations, governance executives, or the CEO.

Next, we called 2013 the year when regulators would take “unprecedented steps” to regulate proxy advisory firms. Well, we were right, but our timing seems a bit accelerated. The European Commission compelled proxy advisories to develop a first industry-wide code of practice, which is now being finalized. Here in the United States, the Securities and Exchange Commission held a widely publicized hearing on the matter, and Commissioner Dan Gallagher has made the issue one of his top priorities. Still, the SEC has not yet acted. We don't give “incompletes,” so let's call it a B-.

Finally, we guessed “board oversight of corruption risk would rise to the top of matters getting director attention.” It sure did, but not only because of stepped-up policing of the Foreign Corrupt Practices Act by the U.S. Department of Justice—the catalyst we singled out last January. The tragic factory collapse at Bangladesh's Rana Plaza spurred and accelerated initiatives to curb corruption risk. Coalitions of companies in Europe and North America backed rival approaches to addressing the issue in Bangladesh. And the Global Compact and United Nations' Principles for Responsible Investment launched a joint anti-corruption initiative. A-.

With one of our better records to boast about, we turn to 2014. 

First, we expect this to be the year of director engagement with investors. Yes, directors will be called on to speak directly to significant investors, not just investor relations, governance executives, or the CEO. The era when the job description for

U.S. board membership made no mention of communication with shareholders is coming to a close. 

Still, it may not happen overnight. An October National Investor Relations Institute report found that 60 percent of companies surveyed still actively prohibit their directors from speaking directly to shareholders. But the direction of change is clear. As activism becomes a more common (and lucrative) strategy for hedge funds, and as institutional investors take expanded “say-on-pay” and director election rights more seriously, boards are increasingly considering high-level talks with investors prudent rather than outlandish. 

Law firms are counseling director dialogue with investors, too. Even Wachtell Lipton, which congenitally opposes ‘shareholder-centered' governance—issued a December memo to clients noting that “direct communication between shareholders and compensation committee members … can be particularly effective.” 

Groups such as the Conference Board are also tracking guidance and developing protocols for engagement. By 2015, we predict, director talks with investors will begin to be, if not commonplace, at least widely accepted. One result will be that nominating and governance committees will begin to consider communication skills on their list of desired director attributes, as they seek to have at least some directors who are “camera ready” if the need arises.

We'll also call 2014 the year of fiduciary duty. At least three projects are poised to change market behavior on a potentially grand scale. Perhaps the most far-reaching one is teed up at Britain's Law Commission. There, a final report is due this year that could for the first time make it a fiduciary obligation for institutional investors to integrate non-traditional accounting risks such as environmental, social, and governance (ESG) considerations into portfolio management. 

If that happens, companies around the world will begin to feel more pressure on ESG issues from U.K. funds. Moreover, moves in this area by the United Kingdom often spread to other markets. And in the United States, both the SEC and the Department of Labor have fiduciary rules pending that could expand duties to intermediaries such as proxy advisers and brokers, though we expect those obligations to be significantly watered down before final adoption.

Next, we will go out on a limb and predict 2014 as the year when, in a tipping point, the splitting of the chairman and CEO roles achieves major momentum at big U.S. companies. GM may have kicked off the next push when it announced its own split along with the appointment of Mary Barra as the next chief executive; Theodore Solso will serve as chair. But Spencer Stuart data has tracked a quiet but steady rise in the practice: A record 45 percent of S&P 500 companies now have a

separate CEO and chairman, with half of those chairs independent outsiders. A convergence of investor and director opinion in favor of separate chairs could, we forecast, push the percentage close to or over the 50 percent mark by year-end.

Finally, we'll venture out on that limb even further with a prediction that Pope Francis's historic pivot from issues of personal behavior—such as abortion—to economic inequality could stir public sentiment last expressed through the Occupy movement. That's already happening in Europe; ex-oil executive Justin Welby, now Archbishop of Canterbury, has added to calls for corporate social responsibility. Boards may have to be proactive, watching this trend and reviewing their social profiles to avoid criticism, especially in an election year. 

In January 2015 we'll report how we did—and if we should turn our attention, instead, to forecasting something easier, like the weather.

 

 

 

 

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