Governance red tape mayhem forces lawmakers into U-turn

Governance red tape is one of the biggest conundrums for every corporate stakeholder: how do you create more accountability without overdoing it on compliance?

The current trend is that governance rules are being loosened. Various factors are feeding the trend, and it differs depending on what jurisdiction you’re in. Still, the goal seems to be making governance more straightforward, or at least rolling back on promised reforms that boards might see as overly bureaucratic. 

The US State of Delaware is a good example. Long considered a tone-setter when it comes to corporate law, the state government has rushed to pass new rules to loosen restrictions in areas like shareholder-led lawsuits and conflicts of interest. 

In essence, the grip of the watchdogs and regulators is loosened, and it’s not the first time we’ve seen something like this. 

In Brussels, the European Commission has promised to water down key sustainability reporting rules (CSRD) to make them more accessible for directors and executives to manage. In London, the UK’s Financial Reporting Council scrapped promised governance rules to ease the pressure on directors. 

The direction of travel is clear: regulators are making life easier for companies. A few years ago, the mood was all about tighter oversight and more transparency. Now, that has morphed into a tug-of-war. No one knows where the balance should be.

Multiple reasons:

Governments want their jurisdictions to stay attractive to business, but the entire landscape of attracting investment is much more competitive. 

These days, you sell your country/state as a place to set up shop by keeping compliance costs down. Delaware doesn’t want to lose its crown as a corporate epicentre of America. The UK intends to look nimbler post-Brexit. The EU wants to avoid antagonising entire industries while it pursues its sustainability agenda. Softening governance rules is one way to hold onto investment.

Companies have made plenty of noise about the growing compliance burden. Ultimately, many don’t have the expertise to manage new rules.

In Europe, firms have been incredibly vocal about the complexity of CSRD and what it will do to their balance sheets. It’s no coincidence that the EU is delaying parts of that directive, considering the number of boards crying for help.

It’s a simple fact: if your neighbour is a better place to do business, companies will move there. 

This fact has plagued lawmakers in Delaware because they are now seeing big businesses moving their affairs to other places like Nevada and Texas, which have far less regulation.  (Corporate governance rules are largely state-based in the US, so crossing a border could make a difference.) 

Ultimately, no one wants to be the strictest in the room. When one regulator pulls back, others often follow suit. It’s like an arms race in reverse.

It’s perhaps the most obvious factor fuelling the corporate U-turn because we hear about it every day: fiscally right governments taking power and abandoning any emphasis on compliance and regulatory standards. This mood spreads, especially when it takes hold in countries like the US, where policy often reaches beyond borders.

If you’re sitting on a board, this all might sound like good news. You’re right to think that because, in the short term, it probably is:

You’ve got some breathing room

Some of the more challenging governance overhauls – especially around sustainability reporting and personal liability – are either off the table or delayed. This is good news for any board scrambling to find the right talent for compliance roles. At last, there’s a reprieve. 

But don’t get too relaxed

Nothing about the current trends suggests that the focus is on undoing baseline governance standards. If there’s any competition, it will never force things to get that far. 

There has been too much evolution of governance over the last few decades to simply erase in a few short years of uncertainty. 

Shareholders, employees, activists, and the media are still watching. Just because regulators are readjusting doesn’t mean expectations are lower. Boards are still being judged by their decisions, values and transparency. The court of public opinion hasn’t gone anywhere.

Uncertainty is the new normal

While lawmakers work out where to balance accountability and opportunity, rules are being written in a rushed, more reactive way. This can create uncertainty for directors, who will wonder where to turn for clarity, who to hire for compliance, and how to strategise for success. Unfortunately, that aspect will continue for the foreseeable.

Governance rules are being softened in key jurisdictions because the atmosphere around more rules has changed. 

We don’t know where this trend will end up, but for the moment:

• It means a short-term reprieve for directors who may have felt out of their depth
• It means more uncertainty as policymakers work out which rules they want to focus on

It does not mean a total relaxation of governance standards built over decades. That would take far more to undo.

Governance red tape: The Corporate Governance Institute