Institutional EYE

Commentary on Corporate Governance Issues

Five trends that will shape the governance landscape in the 2020’s

January 17, 2020

 

 

Discussions on corporate governance that were met with roll of eyes at the start of the decade, now dominate media headlines. While a lot can – and will change in the next ten years, some trends that that will play out and how the governance landscape might change, are discussed below.

 

Shift in focus from G to ESG: Over the past few years boards and investors have woken up to why governance matters. They have realized that they ignore governance at their own peril. During the coming decade, they will be expected to change gear and focus on Environment, Social and Governance (ESG) issues.

 

Auditors, rating agencies and big data: Access to data and public records is changing at an unprecedented pace. All of this will alter the way audit firms and credit rating agencies operate and how markets consume data but also give Fintech firms the ability to muscle in on their territory. They aren’t bogged down by the conflicts or regulatory restrictions that auditors and agencies have. Today the fintech players have the ability to push out data and meaningful analysis in real time, all the while validating data from multiple sources.

 

Increase in professionally managed companies: Indian listed companies are primarily family owned and controlled.  Leave aside the financial sector and you can count professionally owned and run companies on your fingertips. This will change in the coming decade. Regulations, which are centred on a promoter, will change taking into account the new ownership structure, moving from ‘promoter’ to ‘controlling shareholder.’

 

Increased institutional ownership: Expect promoter holdings, that are going down continue to decline, that of institutional investors continuing to increase and the two to equalise. Today investors have stewardship responsibilities thrust upon them by regulators. As these are internalized and integrated into the investment processes, investors will be more empowered and engaged. Expect them to flex their muscles by holding boards accountable.   

 

Board will come under greater scrutiny: The days of name lending and just showing-up at a board meeting and being rewarded, are long past: board members will be held accountable not just for board failures but for how they and their companies perform.

 

An often-repeated statement is that governance is a journey, not a destination. So, it is with what can be expected in the years ahead. These developments discussed are all along a continuum, often overlapping. Expect all these to shape governance practices and impact businesses in the coming decade.

 

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