Global and Regional Trends in Corporate Governance for 2018

Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice, Anthony Goodman is a member of the Board Consulting and Effectiveness Practice, and Melissa Martin is a Board and CEO Advisory Group Specialist in the Washington, D.C. office of Russell Reynolds Associates. This post is based on a Russell Reynolds publication by Mr. O’Kelley, Mr. Goodman, and Ms. Martin.

At the end of each year, Russell Reynolds Associates interviews over 30 institutional and activist investors, pension fund managers, public company directors, proxy advisors, and other corporate governance professionals in five key markets regarding the trends and challenges that public company boards will face in the following year.

Across all of our interviews this year, an overriding theme was the importance of board quality and composition—and the components that go into both. Investors of all types (including institutional and activist) are continuing to ratchet up their focus on the quality of a company’s board of directors, both collectively and individually. The focus on quality and composition is even greater than in previous years. Investors are motivated to hold boards accountable for company performance and are willing to take action to ensure that boards are meeting governance standards. Governance expectations continue to rise across markets and industries. Investors and proxy advisors are relying on traditional metrics (e.g., tenure, overboarding) to assess board quality, but a number of investors have talked about needing to have greater insights into the board to assess quality.

Based on the events that have unfolded in 2017, it is likely that the world’s largest investors also will pay closer attention to cybersecurity, climate change risk, and corporate culture in 2018. This may require boards to revisit their approaches to risk oversight, including broadening their perspectives on what constitutes risk management and is therefore within the scope of a board’s oversight responsibilities.

Overview of Global Trends

Based on our interviews and research, we see seven key global trends in governance of which directors should be aware.

  1. Better Investor Stewardship: An enhanced interest in investor stewardship by governments and investors is impacting corporate governance globally. Since the last financial crisis, there has been a drive for more investor accountability in how they use their influence and votes to steer the strategic direction of investee companies. This has combined with a dramatic increase in the popularity of, and cash flows into, index tracking funds, which have increased the voting power of the major asset managers. In 2017, the top five global asset managers controlled over $8.2 trillion of equity investments and that number continues to grow. A consequence of the emphasis on stewardship is that many of the world’s largest institutional investors are expanding the staff and resources dedicated to engaging with investee companies and proxy voting.
  2. Board Quality & Composition: Institutional investors will continue to prioritize gender diversity, director skills and experiences, composition refreshment, and the appointment of directors who have enough time to dedicate to the company as key indicators of board quality. Boards and nominating and governance committees in certain markets should expect increased votes against directors where there are fewer than two women on the board. Activists and some institutional investors will pay close attention to the number of directors with direct industry experience when assessing composition and quality.
  3. Compensation: Executive pay will continue to remain in the spotlight as investors are looking for additional engagement and/or disclosure around total compensation and its link to long-term strategic goals and business performance. Boards and compensation committees should expect more inquiries related to incentive compensation schemes and how they drive desired employee behavior.
  4. Activist Investing: Many boards often feel trapped between what appear to be competing demands: Institutional investors want to see long-term shareholder value creation, and activist investors often call for short-term value enhancement. The companies that have had the most success navigating activist campaigns have been the ones with boards that are willing to have a meaningful dialogue with activists to achieve a resolution. Boards that fight with activists will face intense scrutiny of the value-creation history of each director, both in their executive and board careers.
  5. Environmental, Social, & Governance Risk: While climate change risk and sustainability have been emerging areas of focus for several years, investors now consider the topics to be mainstream priorities. Though companies in extractive industries are likely to receive the greatest levels of scrutiny, other sectors will also see more engagement from institutional investors. Guidance laid out by the Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) will lead to a greater investor focus on recommendations, such as the use of two-degree scenario planning to prepare for the Paris Accord goal of minimizing global temperature increase to two degrees Celsius. Under a two-degree analysis, companies assess the risks and opportunities of climate change on the business.
  6. Cybersecurity: Cyber risk continues to be a growing concern for global investors in light of multiple security breaches (in the political, government, private sector, and consumer spheres) worldwide. Cyber threats will be an important area of focus for boards to monitor. Many institutional investors will use 2018 to formulate their policies on cyber risk and the role of the board, leading to further engagement on this topic.
  7. Human Capital: Institutional investors are increasing their focus on human capital. There are various aspects to their interest, including effective succession planning at the C-suite level and beyond, the impact of company culture on performance, and gender pay disparity.

In our full whitepaper, we explore these trends and their implications in more detail across five key markets: the United States, the European Union, Japan, India, and Brazil. Abbreviated highlights for each region and country include:

United States

With the Trump Administration’s deregulation agenda and a lack of congressional action, we expect increased investor engagement with companies and the private ordering of governance changes to continue. U.S. boards can anticipate continuing pressure from investors to enhance disclosures regarding board composition, climate change risk, and cybersecurity.

  • Investors remain focused on improving board quality and want more insight into the composition of the board. The New York City Pension Funds’ Boardroom Accountability Project 2.0 will continue to put a spotlight on enhanced disclosure of board composition through the request for disclosure of a formal board matrix. Though most large institutional investors are unlikely to be as prescriptive, they do want to see greater insights into why a director is on a board and the skills he or she brings. Boards should consider how they can improve the narrative around their current board composition and the link to the company strategy, as well as their plans for refreshment.
  • Several large institutional investors, including State Street Global Advisors (SSGA) have reached the limit of their patience on the lack of gender diversity in boardrooms. These investors are now willing to vote against either the chair or the entire nominating committee of companies with either no or only one female director if they have previously attempted to secure change at these companies through engagement.
  • Most investors continue to prefer boards to conduct a rigorous evaluation to encourage refreshment, rather than implement blunt age or tenure limits. Investors are reluctant to prescribe the specific manner of evaluation and expect companies to “demonstrate they have the right board to move the company forward.” Investors would like to see more detail on the evaluation process disclosed in the proxy, as is common in much of Europe.
  • Activist investors will continue to influence board decision-making, process, and composition. Expect an increased level of scrutiny of an individual director’s track record of value creation and industry expertise. Activists will further magnify CEO compensation and pay disparity (against other named executive officers) as they benchmark against peer companies. They use this analysis as a potential flag around company culture and as a signal of an “imperial CEO.”
  • Investors continue to promote the relevance of climate change and broader sustainability risks and opportunities as an area of focus. There is a drive toward comparability of disclosures, with institutional investors voicing support for the roadmap laid out by the TCFD guidelines cited earlier. Boards are expected to understand climate risk, but there is as yet no expectation that they will appoint climate change experts to the board.
  • Cyber risk continues to be a major concern. Investors are less interested in adding specific expertise in the form of a single new director but would prefer a cyber-competent board overall. We expect to see more guidance on this from investors next year.

European Union

The European Union enters 2018 in better shape economically, but with a degree of political uncertainty due to recent political events, from Brexit to rising populism. In some European countries, there has been a reaction against globalization and a growing sentiment to protect each country’s most important companies from foreign takeovers. While the UK may see major impact in terms of governance changes, mainland European countries will be focusing on implementing the Shareholders’ Rights Directive against a backdrop of increasing institutional investor engagement and activist investing. Similar to prior years, executive remuneration will remain a hot-button issue throughout the EU.

  • Activists continue to focus on European markets, including the UK, Germany, Switzerland, the Netherlands, and France, as large companies like AkzoNobel, Commerzbank, Danone, Nestlé, Parmalat, and Safran have been targeted. 2018 is likely to see more activity as U.S. and European activists look for new opportunities in Europe.
  • Across the EU, climate change and sustainability remain an investor-driven and governmental focus, and there will be demands for more sustainability reporting, particularly around two-degree scenario planning. Investors want assurance that the quality of board discussions on climate change risk is high. To date, investors are not calling for climate experts to be appointed to the board.
  • Though Brexit subsumes UK politics, there has been some activity on corporate governance. The government is pushing for a thorough review of Section 172 of the Companies Act 2006, which covers director responsibility toward stakeholders such as customers and employees. The Financial Reporting Council is charged with strengthening the voice of employees and other non-shareholder interests at the board level through changes to the Corporate Governance Code. The revised code is also likely to address board oversight of succession planning and corporate culture. Consultation on the Stewardship Code for investors will begin in 2018.


Japan continues to implement a government-led overhaul of its corporate governance system. Following a string of prominent accounting scandals in recent years, there is acknowledgment from investors and other stakeholders that more changes are needed.

  • Institutional investors agree that adopting Western standards will not necessarily result in stronger accountability and oversight if cultural norms are not yet aligned. For example, large global institutional investors often push for companies to have at least three independent directors, but in Japan, the concept of independence is relatively new and not understood in a Western context. Instead of focusing on precise compliance with this standard, institutional investors are focused on more immediate remedies, such as ensuring that the board is not composed of any directors who are former senior executives from the same company and looking for other signs of board accountability. The Tokyo Stock Exchange also is expected to increase pressure on companies to better disclose the existence and role of former senior management on the board, as a recent survey by Japan’s Ministry of Economy, Trade, and Industry found that nearly 60% of companies have a former CEO or president serving as a “special advisor.”
  • Global institutional investors will soon start pushing for gender diversity on the boards of Japanese public companies due to Japan’s low representation of female directors. In some cases, investors are planning to share guidelines with Japanese public companies to help them increase gender diversity on boards.


India has faced some challenges in terms of aligning corporate governance with an evolving business environment. Following several public and high-profile governance lapses, the Securities and Exchange Board of India (SEBI) appointed the “Kotak Committee” to review corporate governance principles. The committee recently proposed a set of tougher corporate governance norms aimed at increasing transparency, strengthening board independence and board composition, and enhancing disclosures. It may take some time for the Ministry of Finance and SEBI to finalize the changes, but boards can still expect pressure to implement fully the spirit of the Companies Act 2013 and existing SEBI regulations in order to further align with international best practices.

  • If the Kotak Committee recommendations are accepted, there will be a greater demand for qualified board members in 2018, as the committee calls on all listed companies to have at least six directors on the board. Independence is a major concern in India and among minority shareholders, so the committee proposes that half the board be independent, rather than one-third as is required now. Related independence disclosures, such as what standard of independence is being utilized, are also proposed to help boost investor confidence.
  • Responding to the trend of appointing a female relative to the board (as a way to comply with the 2013 requirement to have at least one woman on the board), the Kotak Committee recommends that at least one of the independent directors be a woman.


In Brazil, companies and their boards are concerned about the economy and the future of the government. Given the strong differences in the agendas of the country’s leading political parties, Brazilian boards are grappling with political and regulatory uncertainty around next year’s presidential election. Corporate governance still remains a priority as boards further professionalize and improve effectiveness.

  • Institutional investors continue to focus on the importance of minority shareholder rights. Ensuring that board seats are reserved for minority shareholders and the election process is fair and transparent remains a priority for investors. While the new system of absentee/proxy voting being put into place faces some hurdles, institutional shareholders are hopeful that it will greatly increase their participation by not requiring in-person voting.
  • Regarding board composition, there is a move to further professionalize the boardroom. With an eye toward director succession planning and the nomination process, boards are taking steps to reduce government control and politically-driven appointments, which are challenges for state-owned enterprises (SOE). There also is a push for more independent director candidates and refreshment policies that focus on the link between director skills and the company’s strategy.
  • The recent launch of the Brazilian Stewardship Code has been welcomed by investors, who are keen to see its principles adopted (which include implementing a stewardship program, considering ESG issues, and exercising diligence through voting rights). While it is too early to assess the impact of the code, boards should anticipate more engagement requests from institutional investors.
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