Regulation and activism reshape corporate governance: The 2023 forecast for European businesses


With increased global attention on enhanced corporate ESG oversight and maximising shareholder value, businesses in Europe are finding themselves in the spotlight.  

In a recent post by Diligent, the company highlighted some of the key trends around European corporate governance in 2023.

Insightia, a Diligent brand, in their latest Corporate Governance in 2023 report, discusses how the intertwining elements of the current cost-of-living crisis and new regulatory measures like the Corporate Sustainability Reporting Directive (CSRD) are pushing ESG factors to the forefront of considerations for institutional investors.

Insightia Editor-in-Chief Josh Black observed, “Recent regulatory changes are set to dramatically reshape how issuers supervise and report on ESG-related risks. Furthermore, they will influence how investors engage with companies on these crucial issues. We anticipate a busy 2023 for activism, with undervalued companies and rising inflation making attractive targets for activists.”

A pivotal development is the adoption of the CSRD in November 2022, which marks a significant step towards greater ESG accountability. It mandates EU companies to not only comply with upcoming European Sustainability Reporting Standards, but also ensure third-party audits of their reports.

Compliance is expected from companies already covered under the EU’s Non-Financial Reporting Directive (NFRD) starting in 2024, with the first reports expected in 2025. Other large corporations are required to comply by 2025, submitting their first reports by 2026.

Insightia’s report, prepared in partnership with White & Case and Alliance Advisors, highlights the escalating shareholder concern over the financial sector’s continued fossil fuel financing. Shareholder proposals and lawsuits are being utilised to voice these concerns.

Simultaneously, institutional investors are putting CEO pay structures under the microscope. The spotlight is on compensation plans that don’t align with wider employee pay and the rising cost of living. In 2022, record highs were reached in FTSE 350 executive pay, with an average total CEO realised pay of £3.03m.

Shareholder activists are becoming more vocal in their push for the sale of undervalued companies in a bid to unlock more value creation opportunities. Rising interest rates and inflation are restricting growth options, fuelling this demand.

The report details that 15 companies faced demands for a sale and/or acquisition of a third party in 2022, up from 13 in 2021. However, there was a decrease in opposition to M&A transactions, from 29 in 2021 to 15 in 2022.

Black noted, “Europe’s preference for more private activism could lead to more public board disputes in the future, especially in markets that allow investors to call shareholder meetings outside of proxy season.”

With a comprehensive overview of company data, business leaders can identify potential issues quickly and respond effectively, reducing the organisation’s vulnerability to shareholder activism threats.

Diligent recently launched Board Reporting for ESG, a ‘first-of-its-kind’ dashboard to provide a full view of an organisation’s ESG posture.

Read the full post here.

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