This is Allens

The scrutiny that investors and other stakeholders apply to boards and governance practices has increased significantly this year. Some directors are telling us they're experiencing the most uncertain times in their board careers, impacted by the unpredictability of the market, rise in regulation and geopolitical factors.

ESG-related issues have occupied the minds of boards over the past decade or so, but the social and governance considerations have been particularly front of mind in 2024.

People now clearly understand the importance of good governance and processes, and how they impact a company's value and opportunities. Boards are thinking carefully about organisational culture and conduct, the welfare of their employees, psychological safety and employees' right to disconnect.

There will be a competitive advantage for boards who can quickly respond to governance, culture and conduct concerns.

We've seen numerous high-profile cases this year involving governance, culture and conduct concerns. Just as they did for cyber crisis management five or so years ago, we're starting to see boards run simulations for culture and conduct risk. We're working with clients not only to minimise the risk of a potential crisis, but to effectively manage issues when they do arise. In this context, boards also continue to be attuned to cyber-related risks, particularly continuous disclosure obligations in the event of an actual or suspected cyber incident.  

Another interesting development this year has been the increasingly active involvement of shareholders in governance, from board composition and executive remuneration matters, to broader ESG-related matters. Super funds, in particular, are more actively exerting their influence to engage with companies on these matters, which, in part, may be driven by their own ESG mandates and pressure from members. This includes super funds and other shareholders pre-emptively undertaking due diligence on their investment companies, seeking to understand how these companies are actively managing their social- and governance-related risks.

We've also seen a huge focus this year on preparations for Australia's incoming mandatory climate-related financial disclosure regime. We are already hearing feedback from clients on the need for significant uplift in governance procedures to comply with the new requirements.

The consequences of ineffective governance, or culture and conduct concerns, can be substantial for an organisation – not just a temporary (or longer-term) hit to share price, but increased risk of takeover bids from opportune bidders, and of formal complaints and whistleblower investigations, litigation and regulatory investigations.

On the flipside, we see opportunities for boards. When you have the right governance processes in place, they should be seamless. There will be a competitive advantage for companies whose boards are reviewing and refreshing their governance procedures, and are agile and can quickly respond to governance, culture and conduct concerns if and when they arise.