Corporate governance’s new trend: profit over planet

Key points

• Corporate governance has been focused on social licence to operate.
• Attention appears to be shifting to the need for revenue and profit.
• Technology and regulation remain priorities for directors too. 

The past half-dozen years of corporate governance thinking have focused on what were once considered marginal issues for most companies – concerns over how the broader community sees them and expects them to behave. In particular, corporate governance specialists have scrutinised companies’ social licence to operate. This social licence is the general permission to operate that is granted to a company by society as a whole. The idea started in the mining industry two decades ago; now non-mining companies talk about it too.

In 2019 the US-based Business Roundtable captured this concern over companies’ social licence when it revised its longstanding Statement on the Purpose of a Corporation. In a landmark change, the revised version declared: “We share a fundamental commitment to all of our stakeholders” – not just shareholders, but consumers, employees and other community groups. Signatories to that Statement ranged from Amazon’s Jeff Bezos and BlackRock's Larry Fink to JPMorgan’s Jamie Dimon and News’s Lachlan Murdoch. And in Australia, the Hayne Royal Commission further intensified this focus on the social licence by setting out requirements for ethical corporate behaviour that former High Court judge Kenneth Hayne felt met “community standards and expectations”.

These community standards and expectations were not just Hayne’s invention. The Committee for Economic Development of Australia, a largely business-funded non-profit, found in a 2019 survey that 72 per cent of Australians believed business should place equal importance on economic, environmental and social performance. And as recently as 2022, the Australian version of Edelman’s annual trust survey reported that all three major categories of business stakeholders – consumers, employees and investors – will make key decisions about companies based on their brands and values.

These and many other signals have provoked reaction across the globe. Notably, a number of businesses have sought to align themselves with initiatives for social equity and environmentalism.

The focus moves to profit

In 2024, the focus of corporate governance appears to be shifting slightly. Faced with the prospect of tough conditions over the rest of the 2020s, boards now appear to be moving towards a new top priority: improving their businesses by delivering services and products to customers.

Few experts doubt social and environmental aims and that “social licence to operate” will remain prominent in companies’ governance. Nevertheless, for the next few years, earning that social licence may run second to earning higher revenue and profit.

Despite a laser focus on profits, sustainability remains an important focus for boards.

The US provides examples of companies scaling back their broader social aims. In August 2024, global vehicle-maker Ford flagged changes to its diversity, equity and inclusion (DEI) program, including ending participation in an LGBTQ advocacy group's ranking system. In a statement, Ford said it would comment less on “the many polarizing issues of the day”. Several other companies have made similar changes, including the JPMorgan Chase bank, motorcycle maker Harley Davidson, home improvement retailer Lowe’s, and entertainment giant Disney. The latter company collided messily with the presidential hopes of Florida governor Ron DeSantis over Florida’s so-called “Don’t Say Gay” rule. Returning Disney CEO Bob Iger suggested that the company needed to return to being “entertainment-first”, adding: “It's not about messages”.

Companies may find it easier to downplay less traditional aspects of their role as research casts doubt over the returns to environmental, social, and governance (ESG) performance. A major 2024 study by three European business and finance academics describes itself as the most comprehensive analysis to date of the relation between ESG ratings and stock returns. On the one hand, the authors note that “it has been possible to ‘do good without doing poorly’.” On the other hand, they also find that the prices of strong ESG stocks have not consistently done better than poorer ESG performers.

Less grand aspirations

Professor Pamela Hanrahan is the emeritus professor of commercial law and regulation at UNSW Business School and a consultant at law firm Johnson Winter Slattery. She says the penny has dropped for many large businesses: mere corporate statements of good intent can end up feeding cynicism and suspicion. She agrees with Disney’s Iger that it’s not all about messages.

“Some [corporate leaders] had grand aspirations to make their business a force for good”, she notes. “They'd have those purpose statements saying ‘the purpose of the bank is to enrich people's lives’. And you’d go, ‘No, it isn't; it’s selling money at a margin to produce a return for shareholders. 

Hanrahan believes that many boards now understand the medium-term risks of that approach. One risk is that the board will be perceived as hypocritical. “The most dangerous thing that you could ever do as a corporate leader is to be a hypocrite,” she says. “And I think they've realised that they do expose themselves to that risk of hypocrisy, which is so difficult to manage – and justifiably so.” She expects more Australian boards to shelve grand aspirations, and to adopt policies that are more closely related to their particular activities, rather than making claims that they can’t back up with action.

Data suggests a shift

Pamela Hanrahan’s view finds support in a recent survey of board members. Each year, legal firm King & Wood Mallesons (KWM) asks directors and senior leaders to disclose their priorities for the short and medium terms. The firm’s 2024 report collects the views of 251 such people. Their responses (see graph) show one medium-term issue most consistently at the top of their minds. That issue is indeed not about messages or grand gestures. It’s about results – “developing new business models to deliver products/services to customers and/or deliver business outcomes”, as the survey wording puts it.

The survey’s short-term (six-month) priority strikes the same note; 59 per cent of directors and leaders are focused on “pursuing and maintaining profitability”. And when asked about pursuing growth opportunities and taking business risks in just the next 12 months, 61 per cent of the KWM respondents said their attitude towards it was “positive”. Just 12 per cent replied “negative”.

Director and senior leader priorities over the short and long term

Technology’s changing landscape 

The renewed attention to revenue and profit has not pushed other issues right into the background. One continuing governance concern is technology.

Managing cyber risks is still second on the KWM list of directors’ and leaders’ priorities, despite ebbing since 2023. And the need to develop strategies for managing the use of AI (such as ChatGPT), which only emerged in 2023, now ranks seventh in directors’ and leaders’ priorities. But data management and analytics, previously a priority for more than a quarter of respondents, has dropped to be a priority for just 11 per cent in 2024. It was either overtaken by other concerns or allayed by corporate action.

Red tape rising

Meanwhile, managing regulation has risen once again as a major concern for KWM’s survey respondents. In 2024, it has jumped to third on the list.

New sustainability reporting rules seem likely to require board attention. Reviewing Australian current corporate governance trends, executive search and leadership advisory firm Russell Reynolds Associates points out that boards will soon face new reporting requirements around climate change and carbon emissions. These include new disclosure rules from the international Taskforce on Climate Related Financial Disclosures and the International Sustainability Standards Board. Russell Reynolds expects the increased disclosure to in turn add to the pressure on companies to make credible carbon transition plans. And it points out that “all four major banks are now expecting major emitters to present ‘credible energy transition’ plans by late 2025 if they want to remain serviced by the industry.”

Regulation is complicating governance too, with expanded rules and guidelines in the proposed fifth edition of the Australian Stock Exchange corporate governance principles and recommendations.

Says Pamela Hanrahan: “If you think boards spend too much time on compliance and not enough time on performance, that problem is just going to get bigger.” When problems emerge in the business world, she says, Australian governments of all stripes “have a tendency to react by piling on more regulation”.

Owners pile on pressure

Government is not the only force exerting pressure on boards. In 2024, many corporate boards are under sustained shareholder pressure – pressure that seemed unlikely just a few years earlier. According to Russell Reynolds, “more than 10 per cent of ASX 300 businesses received a vote against their remuneration report last year”. That was, the firm says, the largest proportion to receive such a vote since remuneration report laws were introduced. The biggest shock might have been an 82.9 per cent vote against Qantas’s remuneration plan. But Reynolds reports the boards of many other companies, from AGL to Newcrest to Invocare, have wrestled with shareholder backlash. This shareholder pressure reflects dissatisfaction on a whole range of issues, the firm says. As ever, directors will need to keep the owners happy.

David Walker, a former head of policy for the Committee for Economic Development of Australia, is principal of report-editing consultancy Shorewalker DMS.