What was the similarity between Disney, OpenAI and Southwest Airlines? They all encountered boardroom tensions recently, thereby grabbing the headlines for all the wrong reasons. And a couple of them got murky. Take OpenAI for example. Its CEO Sam Altman, often projected as the poster boy of generative AI, got chucked out from his own company in November 2023, only to return, all within six days.
In 2024, Southwest faced a major dispute as activist investor Elliott Investment Management intensified its boardroom battle and called for a special shareholder meeting to change the airline’s leadership.
The low-cost American carrier hit back by saying that its CEO Bob Jordan was the “right leader” to successfully execute the venture’s strategy to improve financial performance and drive shareholder value. And in the battle of Elliott vs Jordan, it was the latter who had the last laugh.
Tensions between corporate boards and investors persist, and it’s something completely normal. Disagreements (going by human nature) are bound to emerge, be it in our friend circle or during a corporate board meeting. In the second case, improved corporate governance practices help find an amicable solution.
According to a Harvard report, what unfolded in OpenAI and other corporate biggies, since 2023 now reflects a growing consensus that many of the “disagreements” stem from poor corporate governance. This trend is backed by another McKinsey study, which revealed that around 70% of recent activist investor demands have focused on governance reform.
Neil Shah, Director of Content and Strategy at Edison Group, said, “Addressing these governance issues, especially complex topics like executive pay, isn’t straightforward. However, adopting best practices can help rebuild trust between boards and investors.” Now the question here is: what are the fixes?
Focus on regulation
“One crucial step for companies is ensuring they fully understand and comply with industry regulations. Failures in this regard have led to significant scandals, such as the collapse of the cryptocurrency exchange FTX, where poor due diligence and asset handling were partly to blame. FTX’s CEO, Sam Bankman-Fried, later admitted ignorance of many regulations, highlighting the need for boards to ensure compliance at all levels,” Neil Shah added.
Instead of relying solely on legal departments to handle regulations, corporate boards need a comprehensive strategy that will cover regulatory monitoring, compliance programmes, regulatory engagement, and risk management. With new regulations like the European Commission’s Corporate Sustainability Reporting Directive (CSRD) on the way, boards must prepare by understanding the requirements, developing data reporting systems, and adopting frameworks like the Global Reporting Initiative. This will help big businesses avoid the pitfalls of ‘greenwashing’ or ‘greenhushing’ as they navigate sustainability efforts.
“Board accountability is vital in preventing scandals and ensuring proper governance. Recent years have revealed numerous examples of companies faltering due to a lack of clear roles and transparency. One notable example is the UK Post Office scandal, where the board repeatedly failed to address management issues. Similarly, the Federal Deposit Insurance Corporation (FDIC) faced allegations of employee mistreatment that went unaddressed by its board,” Neil Shah added, while suggesting boards include experts in key areas like supply chains and Environmental, Social, and Governance (ESG) to improve accountability.
These professionals will clearly define roles and responsibilities for board members, ensuring the latter can effectively oversee management, regulatory compliance, and transparency.
Improve the communication game
Neil Shah also stated that improving communication with shareholders is another key reform area every big business should look after. The use of outdated communication methods, such as paper-based ballots, has caused friction between investors and corporate leadership.
“A lack of communication has led to misunderstandings, with investors accusing companies of secrecy. ExxonMobil shareholders, for example, criticised management in 2023 for not disclosing the financial impact of its net zero proposals. Digital investor relations should become standard practice, allowing more transparent and efficient communication. This would enable boards to share documents and proposals with shareholders, while also facilitating early feedback ahead of AGMs. This approach would reduce conflicts, especially as many proxy disputes are resolved before AGMs,” Neil Shah said.
Another thing corporates can do is plan the meeting ahead of time and stick as closely to the planned topics as possible. While the meeting may provide opportunities to discuss other topics, it is essential to keep the focus on the main issue at hand to ensure that the event yields a productive outcome.
The host of the meeting or an appointed attendee can take the role of guiding the discussion agenda and keeping the participating stakeholders focused on the topic. This will save everyone’s time and help drive productivity within the company, apart from promoting corporate transparency.
Few other points
Apart from working on the regulation and communication fronts, businesses and their boards need to be on the same page on cyberattacks, which are becoming a regular threat. Data security, confidentiality, and system resilience should be the top focus areas in board meetings, given that any incident of data breach and subsequent blackmailing by threat actors (for ransoms) will only erode the stakeholder trust, apart from denting the affected company’s brand value.
Another area where companies and their boards need to find amicable solutions is executive compensation.
In the words of Neil Shah, “While there is a strong business case for competitive executive pay, boards must be transparent and communicate the benefits of attracting top talent to investors. Benchmarking executive pay against competitors can help ensure compensation is appropriate, and clear communication can reassure shareholders that these decisions benefit the company long-term.”
Another contention area is ESG policies. These policies will increasingly play a crucial role in corporate governance, particularly as regulations now require companies to promote sustainability, either through initiatives or operational activities. Boards should help the companies set ESG targets, bring in experts, and ensure compliance. At the same time, it’s essential to communicate the impact of ESG measures to avoid shareholder dissatisfaction.
The boards should set diversity targets and appoint members to promote inclusivity throughout the company. Creating subcommittees dedicated to this goal can ensure that diverse voices contribute meaningfully to corporate decision-making.
“While issues like executive compensation and ESG will continue to spark debate, the broader challenges surrounding corporate governance are solvable. By adopting straightforward reforms, companies can significantly enhance their governance practices and meet the demands of today’s business environment,” Neil Shah noted.
Effective corporate governance hinges on clear communication, accountability, and strategic decision-making during board meetings. By embracing transparency, sticking to rules and regulations, and encouraging collaboration, businesses can not only resolve boardroom tensions but also build trust with stakeholders and position themselves for long-term success.