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Companies will face more scrutiny than ever in 2020. Investors require strong, predictable growth and increasingly value environmental leadership. Employees and consumers seek companies that exhibit social awareness. There is heightened economic, geopolitical and legal uncertainty with increased questions about the role of the corporation in society.

General counsel must help executives and directors understand changing expectations of firm behavior. It is the GC's job to ensure that management builds these expectations into strategic planning and that directors can fulfill their duty of care and oversee critical corporate decisions.

Social and Governance Issues for 2020

Companies have many stakeholders, often with competing interests. But when more than one stakeholder group—consumers, employees, investors, advisory firms, etc.—express interest in a common issue, it becomes a pressure point. Here is a stakeholder-based look at 2020 pressure points.

Proxy advisory firms: Institutional Shareholder Service (ISS), a leading proxy advisory firm, updated its 2020 guidance with an increased focus on issues such as environmental disclosures, sunsetting multi-class share structures, restrictions on rights to amend bylaws, and requirements for a formal plan toward board diversity (if it doesn't already exist).

Institutional and activist investors: In 2019, investor proposals touched on a range of issues including board diversity (a record-breaking 59% of the 432 independent directors added to S&P 500 boards over the past year were women or men belonging to minority groups); gender pay equity proposals; M&A (record 99 shareholder campaigns); and scrutiny of executive compensation. Talent management and environmental practices are also top areas of focus. Large institutional investors are demanding better oversight and disclosure around E&S matters such as climate change, political expenditures and corporate culture.

Employees and consumers: 74% of employees want companies to take a stand on social issues regardless of if they are relevant to their business. 62% of consumers buy goods from companies that reflect their values and beliefs. Employees—perhaps aided by the tight labor market—feel some ability to demand action and organize.

Environmental and social concerns are increasingly shared across stakeholder groups. Influential players, such as BlackRock's CEO and the California Public Employees' Retirement System, have endorsed the importance of ESG, and ESG-focused investments have soared. When employees push for it, companies are investing in cleaner supply chains and new laws begin to push toward carbon reduction. Companies should engage with E&S while they can still help set standards.

From Fire Fighting to Fire Proofing

Awareness of issues, however, does not help management and the board take effective action. What's more, the issues of the day change quickly. The GC must prepare the board and management to effectively respond to new environments, expectations and issues. GC should take the following actions.

• Prepare to act through uncertainty. Management and the board need timely information about changing conditions and a clarified role in risk and crisis management.

• Pressure test strategic assumptions. Gartner's Corporate Governance and Board Management Survey shows that 78% of companies expect to spend more board time discussing strategy and competition in 2020. GC should use this time to pressure test strategic assumptions (e.g., 50% of our customers will shift to digital channels in the next two years), and monitor strategic trends (e.g., a new market entrant reaches 5% market share) to identify triggers to act.
• Resist legal conservatism. Uncertainty increases Legal's natural conservatism. 8 in 10 lawyers feel more comfortable being conservative in today's uncertain environment. This legal conservatism makes companies 5 times more likely to forgo business opportunities that legal recommendations have made less attractive, and 4.25 times more likely to suffer delays in capturing business opportunities. GC must create the processes and signals to cultivate and reinforce risk-taking know-how among staff, so their legal departments stay aligned with business needs and goals.
• Ensure clarity on crisis management. Make the board and management clear on their respective roles and responsibilities to enact the crisis response plans, including the stakeholder (regulators, customers, vendors, etc.) communication plan.

Frame Stakeholder Engagement

As noted, companies should track the interests of their key stakeholder groups to understand the sources of future business pressure.

• Synthesize stakeholder feedback. GC should ensure communication channels with key stakeholder groups, frame stakeholder issues for board consumption (highlight what they are and how they align to company values), and consider their feedback as part of strategic decision-making.
• Engage with stakeholders. According to Sullivan and Cromwell, a higher percentage of shareholder campaigns were settled than in 2017 or 2018, growing from 15% in 2017 to 19% in 2019. And while the number of shareholder proposals covering environmental, social and political topics have grown, 48% of the proposals were withdrawn after company engagement.
• Build ESG into strategy. Disclosure is now expected. By 2018, 86% of the companies in the S&P 500 released their sustainability efforts, according to the Governance & Accountability Institute. Whether by law, pressure or materiality, companies need processes for understanding their environmental footprint, understanding expectations across their supply chain, and overseeing meaningful environmental and social disclosures without exposing the company to unnecessary liability.

Treat the Board as a Strategic Asset

In a Gartner survey on board management, only 61% of companies took any action based upon director evaluation results. Only 24% have a policy for director removal based on under-performance. And almost half of directors believe one or more director(s) should be replaced on the board. Investors "want to see board members with expertise tied to the risks most relevant to the company's strategy."

Treating the board as a strategic asset means investing in its performance. GC should discuss board education needs and evaluation results with board and committee chairs. A focus should be placed on addressing the skill gaps either identified in board evaluations or revealed through changes in corporate strategy or market conditions. The effectiveness of the board does not require an education process that comprehensively covers all issues, but instead prepares the board to oversee rapidly changing conditions.

Effective governance is the ability to balance competing stakeholder interests. GC need to invest in management and the board's ability to act through uncertainty, frame stakeholder engagement, and evolve oversight to meet changing conditions.

Abbott Martin is a Vice President at Gartner's legal practice.