Corporate governance in 2023: a year in review

Corporate governance in 2023 has been a storm of conflicting priorities and new directions. 

Here’s a rundown of the biggest stories in governance this year – things that sum up the twelve months we’ve had and shape what we can expect in 2024. 

Artificial intelligence exploded onto the scene in 2023 as businesses worldwide raced to embrace it. 

At its core, AI has brought countless new capabilities to businesses but has raised just as many questions along the way. What’s a good code of ethics for using AI? Will AI lead to job losses? What kind of control do we need to maintain if our business uses AI? 

As you should expect, it falls to the board to oversee the process of answering these questions. 

There can be no doubt about it now: AI is a significant milestone not just in business but in how we live full-stop. If boards are to adapt genuinely, they need strategies that embrace the potential and safeguard against risk, just as with any other element of business.

2023 has seen a continuing trend of more responsibilities for directors. Often, this responsibility comes from regulators; sometimes, it comes from investors or other stakeholders. 

One thing is certain, though: directors are rapidly losing any remaining wiggle room to be “rubber-stamp” individuals. Modern board roles carry serious accountability; many directors are starting to appreciate that and adhere to new standards. 

The trouble is sometimes the new standard overstretch the director – so much so that we now have concerns about overboarding, exhaustion, and undue stress. 

How will that play out if the trend of more responsibility continues?

Was it ever going to be anything else?

Environment, social, and governance is becoming the most polarising topic in business. Not everywhere, of course – most of the hostile rhetoric comes from the United States – but the US is a big economy with a significant global influence. If there’s a debate there, it will spread.

It appears the debate isn’t even touching on the heart of the issue anymore. 

This year, Larry Fink, CEO of BlackRock Inc., the world’s largest investor, admitted that he is reluctant to use the term “ESG” anymore – the term, not the principles, which remain a strong cause within BlackRock’s investment strategy. 

It indicates that the debate has shallowed itself to a point where people only argue about labels. Investors like BlackRock might avoid the term “ESG” to avoid getting caught in the debate, but the underlying principles remain the same. 

Ultimately, the crux of the ESG debate is not the rhetoric; it’s the money. Directors need to constantly remember to focus on investment patterns if they want to see how aligned ESG is with their business strategy. 

And right now, despite falls in ESG investing, it remains a multi-trillion-dollar industry. And now that jurisdictions like the UK and EU are trying harder to integrate the principles into business law, the trend will likely continue.

There are a few to choose from this year:

The board dismissed the evidently popular CEO Sam Altman in a decision made behind closed doors with utmost secrecy. And as the world’s attention predictably turned their way, they could give no answers. 

Soon, Altman was rehired after around 70% of the company’s staff threatened to resign and join Microsoft (a significant OpenAI investor).

The board subsequently agreed to undergo a major reshuffle for more accountability and transparent decision-making. 

When it comes to governance, the real crime of OpenAI’s board was how it did nothing to explain such a monumental business call and immediately lost the trust of three quarters of its workforce. It’s governance 101: you cannot do this as a director.

Once a fledging startup dedicated to workspaces, it pushed itself far beyond its means over several years (with a lot of thanks to former CEO and founder Adam Neumann). In November of this year, it formally filed for bankruptcy. 

Governance woes included overspending, unsustainable costs, a botched IPO in 2019, and eccentric, downright poor leadership from Neumann. The board removed him some years ago, but the effects of his leadership are still being felt.

2023 was the nail in the coffin for the former CEO and founder of cryptocurrency exchange FTX, Sam Bankman Fried. 

Once described as a “poster boy” for crypto and his fledging business, he could do little to hide the problems at FTX, spurred by the claim that the company held a significant portion of its assets in its own crypto token, FTT. 

Bankruptcy ensued, fraud and bribery charges followed, and Bankman-Friend now faces decades behind bars after a court ruling in November. 

It’s a true lesson in bad governance, with failures including, but not limited to:

• Compromised systems integrity.
• Faulty regulatory oversight.
• No centralised control of the cash that it handled.
• An inaccurate list of bank accounts and account signatories.
• Inaccurate bookkeeping.
• Luxury purchases made by employees in the Bahamas with corporate funds. 
• Inaccurate registering of these assets with government authorities.

It was a bank dedicated to tech startups, but in March 2023, it collapsed completely, sending shockwaves through the banking industry that worried analysts for weeks afterwards. 

The real reason behind its collapse has a lot to do with governance, but in this case, it was governance decisions made years before when it invested in US government bonds in a near-zero interest rate environment. 

When the inflation crisis took hold, interest rates rose in the US, and the bond prices plummeted, leaving SVB scrambling to repay debts. When customers rapidly withdrew their funds en masse, little else could have been done. 

This case wasn’t bluntly filled with foul play like Bankman Fried’s, but it does give us lessons in risk and shows us that while SVB made what they thought was a sound financial decision years ago, the ramifications now were too much to handle.

Activist investors buy enough of a stake in a particular company to force a change at the governance level. 

The reason is often an ideal or principle, and in this day and age, those principles are often related to environmental or social efforts. They can also be related to maximising profits. 

Activist investors have scored some big wins this year, if not in governance changes, then in proving that from now on, they are a force to be reckoned with. 

Examples of activist pressure this year include Salesforce (over financial potential), Peloton (where they wanted the CEO removed), and Shell (where opposing activists are battling over the company’s climate commitments). 

Sometimes, activists succeed, and sometimes they don’t. But they are increasingly being heard, and that’s what will matter for boards that are on their radar. 

When activists gain a significant enough stake, you can bet that one of the first groups of people they will target is directors. 

Corporate governance in 2023