Corporate Tax

Six Key Company Governance Developments For 2021

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(Editor’s Note: This commentary provides an overview of our expecations for corporate governance trends for 2021. Some of these trends may be material to S&P Global Ratings’ ESG Evaluations, or to our credit ratings, at an individual or aggregate level, in accordance with our methodologies and analytical approaches. Only rating committees can decide on rating actions. This commentary does not constitute a rating action.)

The pandemic will accelerate 2020’s governance trends this year, particularly those centred on addressing environmental and social challenges. Last year was challenging for companies and their boards. The pandemic laid bare the resiliency–or lack thereof–of companies when it comes to facing a crisis and being responsive and adaptable. It was very much a litmus test for governance and created a lot to draw on for 2021. It showed in particular how truly ready companies are to prepare for another systemic challenge: climate change. The pandemic has heightened the need for effective crisis management and has emphasized the importance of stronger board engagement in and oversight of ESG issues.

Last year was also eventful on the regulatory and policy side, for largely positive reasons. New codes of corporate governance took effect across the world (Australia, Germany, Japan, Spain, Sweden, Taiwan, the U.K.’s stewardship code revisions, among others). We also saw improved shareholder rights protection in Brazil, and stronger rules regarding related-party transactions in India. We expect these actions to lead to higher quality board structures and compositions, as well as better transparency.

In all, we see six key trends dominating the corporate governance narrative in 2021.

Board Diversity: Gender And More

Board diversity is improving but progress remains slow and uneven. Female participation on corporate boards has improved, notably in the U.S. and Europe–the latter largely driven by quotas. Women now account for over 40% of board members in France thanks to the 2011 Copé-Zimmermann law, and one-third in the U.K. Globally, however, gender balances are a way off, particularly in Eastern Europe, the Middle East, Japan, and Latin America where women are still largely absent from the boardroom.

Investors are increasingly voting against boards that lack women at annual general meetings. In 2019, the New York City Comptroller launched Boardroom Accountability Project 3.0 aimed at improving companies’ diversity at the board and management levels. Many investors have similarly and clearly stated they would vote against all-male boards. British Columbia Investment, for example, stated it would vote against nomination committee chairs if the board lacks adequate female representation. Over the last few years, several countries have introduced policies and taken legislative action to increase the number of women on corporate boards, primarily through the introduction of quotas, some voluntary (Spain) and others mandatory (France). Most legislation, however, only applies to publicly listed firms and leaves private companies unaffected. Quotas can be controversial but they have undoubtedly succeeded in increasing the number of female directors. The question of voluntary versus mandatory remains; we have seen voluntary quotas, like Spain’s, yield uneven results and left some large corporates with men-only boards. Germany introduced a 30% voluntary quota in 2015 to little effect so is now passing legislation to make this quota mandatory.

Despite improvements at the board level in some countries, female participation at the executive level remains low. In 2020, not even 8% of Fortune 500 CEOs were women–an all-time high but still modest. We anticipate an investor-led strengthening of scrutiny of and demands for gender diversity, and more broadly increased calls for better representation of women in the C-Suite. We also foresee increased demand for diversity related to age, experience, and ethnicity, among others. Greater diversity may help reduce complacency and groupthink.

Toward ESG-Competent Boards

The pandemic has highlighted the challenges of a systemic shock and the need for robust crisis management systems as well as knowledgeable and responsive boards. As the world is still reeling from the pandemic, it only makes a stronger case for more skilled, better rounded, and more resilient boards that are well equipped to deal with emerging risks and systemic challenges, including mounting ESG-related disruptions, such as climate change.

A recent study by NYU Stern Business School confirmed the severe lack of ESG expertise on U.S. boards, especially relating to environmental issues and climate change. Regulators and investors alike are looking more closely at the climate-readiness of boards. Interest in ESG is growing fast, but so is the risk of competence greenwashing. This is where stated ESG competency is not actually supported by experience. Awareness does not equate to expertise. Companies need to identify their most material ESG risks and look for any potential skills gaps on their boards. We believe this is essential to an entity’s resilience to emerging risks and challenges.

Organizations like Chapter Zero, founded in 2019 by non-executive directors in the U.K. in a bid to help boards set up effective climate governance, have now expanded to several other countries. This is testament to the need for and interest in ramping-up climate skills at board level. More and more companies are appointing sustainability experts to their boards and setting up dedicated board-level committees to oversee ESG risks. We expect this trend to continue and believe that boards that do so will be better positioned to continue operating sustainably.

Investor pressure is mounting and companies and their boards are being held accountable. Increasingly, inadequately handling climate change is seen as a failure of their fiduciary duty. Investors such as Legal & General Investment Management in the U.K. have been voting against directors for failing to adequately report on their company’s environmental strategy.

This year the EU plans to publish a proposal for a Sustainable Corporate Governance. This initiative is aimed at ensuring that sustainability is further embedded into corporate governance frameworks. The proposal is expected to target the management of sustainability and social matters–including in supply chains–as well as to better align the long-term interests of companies and their stakeholders.

Boards that are perceived to be failing to provide a clear climate strategy and transition plan may face greater scrutiny and challenges. We foresee an increase in companies looking into how they can best shore up their boards’ sustainability credentials.

Focus On Board Effectiveness

Dealing with a crisis is challenging. It is also time consuming. To ensure that boards can dedicate the time, effort, and focus required to steer a company means that there are only so many responsibilities a director can have at the same time. On the one hand, ensuring the right level of independence is essential to good decision making. More importantly, however, companies need non-executive independent directors to be engaged and have the capacity to prepare for and attend meetings as required.

As boards’ responsibilities are increasing and directors are expected to consider an ever-broadening range of issues such as climate-related risks, social risks, and cybersecurity, it is essential that corporate leaders remain focused and not overextended. As such we are expecting stricter stances on limiting overboarding–sitting on too many boards–to remain a key governance trend this year. Some codes of corporate governance have defined what overboarding means and specify how many mandates directors should have. For example, the 2018 U.K. Corporate Governance Code provides guidance as to how many external boards an executive should be on. However, the real impetus for addressing overboarding is coming from investors and proxy advisors. They have acquired much stricter views on the topic and most define overboarding as participation on more than five corporate boards. However, a lot depends on the individual responsibilities of each director: being the chair of a board or a committee could mean increasing pressure to reduce the number of external directorships even further so to ensure optimal preparation for and focus on board discussions.

Limiting board mandates is only part of a broader initiative to improve board quality and accountability. Limiting the number of directorships will also help increase diversity and director renewal and is an important building block of sound governance practice.

Executive Remuneration: Fair Pay And ESG Integration

With the pandemic bringing into sharp focus the gulf between the haves and have-nots, we expect even more scrutiny of executive pay in the upcoming proxy season. With earnings pressure, stagnant employee pay levels, and dividend cuts in 2020, shareholders are likely to take an even tougher stance on management compensation. Moreover, as the most economically vulnerable are losing their jobs, being furloughed, or in the best case scenario seeing their salaries stagnate, the disconnect between large (and rising) executive pay and employees conditions could create tensions both within companies and with external stakeholders. It also represents a growing reputational risk for companies. While some companies revised their executive pay policies and reduced bonuses amid the pandemic last year, we expect scrutiny and calls for more restraint to continue in the coming years. This year looks set to be a test case for executive pay restraint after public stock market performed strongly in 2020 (with the S&P 500 up 16.3%). We foresee tensions between rewarding short-term returns and respecting long-term stakeholder interests.

Building a system of incentives that balances business growth opportunities with risk-taking and aligns the interests of management with those of the company is essential. At a time when the World Economic Forum’s top 10 greatest threats are mostly environmental and social (climate action failure, extreme weather), we see few executive pay packages that include ESG metrics. To do so is a nascent trend. Compensation is a powerful mechanism to align the interests of executives, corporations, and society, rewarding forward-thinking and value-creating leaders. Better integration of ESG factors in executive remuneration with variable pay linked to non-financial metrics is seen as a sign that companies are turning words into deeds. We expect this trend to continue and gain in importance in the coming months.

Say On Climate: Increasing ESG Activism

The number of environmental and social shareholder proposals remained largely flat, at 114 in the U.S. in 2020 versus 115 the previous year, according to Broadridge Proxy Pulse 2020. This was largely as a result of the pandemic and regulatory hurdles, albeit we noted a slight increase in support primarily driven by institutional investors. However, we expect these sort of proposals to increase during the upcoming AGM season and gain further support. About 15 years ago, the “Say on Pay” campaign for better disclosure of executive remuneration and for a vote on executive pay received widespread support from investors and public policy makers the world over. Since then, many countries have introduced legislation requiring mandatory, or in some cases advisory, say on pay. This is the case in the U.K. (2002), the U.S. with the 2010 Dodd-Frank Act, and the EU with its 2017 Shareholder Rights Directive. All this led companies to improve their disclosure on remuneration.

A growing number of investors are now demanding a say on climate. They are asking companies to not only disclose their emissions but also concrete plans to address climate change and deliver the transition required by the Paris Agreement. Gaining traction is the U.K.’s Say on Climate campaign launched by the Children’s Investment Fund Foundation in November 2020. It is supported by the CDP (which runs the global disclosure system), ShareAction in the U.K., and the Australasian Center for Corporate Responsibility. In January 2021, the U.K. Investor Forum announced its support for annual mandatory non-binding votes on climate at AGMs, as did UN climate envoy Mark Carney. This follows the U.K. Financial Conduct Authority’s proposal to implement a TCFD-aligned disclosure requirement for listed companies as well HM Treasury’s plans set out in November 2020 on mandatory climate-related disclosure.

In the U.S., investors are also increasingly calling on companies to disclose their climate plans. In December 2020, Exxon Mobil announced a five-year plan to cut emissions following a campaign by activist investors targeting the company for its failure to address the needs of the long-term energy transition. A group of investor advocacy groups has also been calling on the Securities and Exchange Commission (SEC) to make it easier for investors to submit environmental and social proposals. While it had become harder for ESG-themed shareholder proposals to make it onto the proxy in the last few years, we believe it is likely to become easier under the SEC’s new leadership. The SEC also recently announced the creation of a Climate And ESG Task Force to identify what it calls “ESG-related misconduct”. We expect to see more and more investor scrutiny on climate change strategies. BlackRock’s 2021 stewardship policy states it will ask companies to demonstrate their “plans to align their business with the global goal of net zero GHG emissions by 2050” and see “voting on shareholder proposals having an increasingly important role in [their] stewardship efforts around sustainability”.

Underpinning most activist campaigns is the search for value. However, while some activists are primarily focusing on annual dividends and quarterly growth rather than–and often to the detriment of–the implementation of long-term, stakeholder-focused strategies, we believe investors are increasingly taking a longer term and more holistic view. This includes better management of social and environmental risks and opportunities, which are increasingly seen by investors as essential to long term, sustainable value creation, in the interests of all stakeholders.

Tax Transparency

At a time when public deficits have ballooned amid the pandemic, we expect to see the topic of “fair and transparent” taxation continue to gather momentum among policy makers and other stakeholders. In the aftermath of the Luxleaks scandal, the EU Commission stepped up its efforts to combat tax avoidance. However, its planned directive to mandate multinational companies to disclose how much profit and tax they pay, on a country by country basis in the EU bloc, is yet to be approved. Any overhaul of EU tax rule is likely to be protracted given unanimity requirements among the block’s members on such matters. In addition, on Feb. 25, 2021, the UN published a report calling for the establishment of a global minimum corporate tax rate of 25%-30% and for countries to establish beneficial ownership registers, in a bid to combat tax evasion by limiting the incentives and tools for companies to move their profits to lower-tax jurisdictions. The recent declaration from the new secretary of the U.S. treasury, Janet Yellen, to remove a contentious point of its proposal to reform global digital taxation will also play a major part in driving the issue forward, including at ongoing OECD discussions. Nevertheless, while there is still significant push back for a global tax regime at the national government level, companies’ stakeholders (mostly society and institutional investors) are becoming more vocal on these issues and demanding corporates be more transparent.


This is by no means an exhaustive list of what matters in governance but we believe these are the topics that will drive the narrative in 2021. This year is set to be yet another atypical one where boards are going to have to balance secular changes to how they operate, with the short-term pressures stemming not just from the financial upheaval of the pandemic but the broader societal challenges it has created. The transition to a more stakeholder-focused economy and addressing systemic crises (climate change uppermost) could require a rethink of governance. This may lead to more diverse boards, with the right set of skills to understand environmental and social issues, and building a new system of executive incentives inclusive of environmental and social metrics to achieve a better alignment of corporate and societal needs.

Related Research
  • Rising Shareholder Activism Mostly Harms Credit Quality, March 17, 2021
  • Sustainability In 2021: A Birds-Eye View Of The Top Five ESG Topics, Jan. 28, 2021
  • Stakeholder Capitalism: Aligning Value Creation With Protection Of Values, Jan. 19, 2021
  • Diversity And Inclusion As A Social Imperative, Aug. 3, 2020
  • Why Corporations’ Responses To George Floyd Protests Matter, July 23, 2020
  • The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus, July 16, 2020
  • The ESG Lens On COVID-19, Part 2: How Companies Deal With Disruption, April 28, 2020
  • The ESG Lens On COVID-19, Part 1, April 20, 2020
Other Research
  • Gender equality in the workplace: going beyond women on the board, Corporate Sustainability Yearbook 2021, S&P Global Market Intelligence, Feb. 5 2021

The author would like to thank the following contributors to this article: Corinne Bendersky, Beth Burks, Patrice Cochelin, Gregg Lemos-Stein, Bernard De Longevialle, Noemie De La Gorce, Michael Ferguson, Peter Kernan, Dennis Sugrue, and Emmanuel Volland.

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