No Rules, More Consequences

Governance has new pressures, but accountability remains

Business is no stranger to change. Technologies evolve, markets open, and competition intensifies. Company leaders are accustomed to navigating these forces and have established playbooks for managing these risks and opportunities.

But a different kind of change is underway, and I’m not sure boards and management teams are equipped to lead through it.

The nature of accountability itself is shifting.

I encourage you to think about that in the context of what I’ve been writing about lately: uncertainty.

Operating a business requires interacting with and managing a diverse range of stakeholders, including shareholders, regulators, customers, employees, and the broader value chain, among others. Some of those stakeholders directly impact business operations, including the regulatory frameworks that dictate how a company runs.

I wrote about this and new intractable problems it creates two weeks ago in Ungoverned, and made the recommendation to start building and planning for these complex issues. Still, there are parts of that under the company’s control and parts not. If the company operates in a system of low accountability, the risk remains high, no matter how well its internal affairs are managed.

It matters if your company is well-governed, but it also matters if the system is. Like the old saying goes, it’s turtles all the way down: every company rests on the governance, resilience, and integrity of others.

And when formal regulatory structures retreat, each of those turtles is left to fend for itself.

In this environment, accountability hasn’t disappeared. The source of it originates elsewhere. Investors, courts, and stakeholders are stepping into the space once occupied by legislation and enforcement. These aren't necessarily new channels of accountability, nor are they codified in law, but they are very real and functional.

Today, these forces are reshaping the governance landscape in ways boards can’t afford to ignore.

Shareholders: Proxy season heats up

The US is currently creating a low-regulatory environment under the banner of business growth, including efforts to limit state legislatures' oversight of AI. Texas is shielding board directors from accountability, and Delaware, long the staple of stable business law, is making changes to keep pace.

These changes create a lopsided operating environment that allows businesses to operate unfettered.

And this isn’t escaping the notice of shareholders. As companies have set their environmental and social targets over the past five years and continued to report on their progress, there has been a shift in the focus of proxy resolutions towards governance issues, such as CEO pay, binding majority shareholder votes, and a broader recognition that governance influences all areas of ESG.

Jackie Cook, Senior Director of Morningstar, put it this way recently in an interview:

Corporate governance has broader appeal across the spectrum of investor views on environmental, social, and governance issues. So, in a way, it sidesteps the ESG debate, because good governance measures are really about keeping management accountable.

I speculated that this may go further as the SEC starts to chip away at ESG proxy resolutions. One unintended consequence is that the only lever left for shareholders to pull will be through individual directors.

Whether investors ever realize the value that these individuals bring to companies remains to be seen, as this shift is slow going.

But it could start with the trend to make proxy votes binding. From there, campaigns targeting individual directors are the next logical step.

We have seen Vote No campaigns against directors from activists get close recently, but have yet to see a real upheaval. Still, the numbers against directors at companies like Harley-Davidson (just around the 50% threshold of support for the targeted directors) are higher than what we typically see for environmental or social proposals (around 23% support, as of last year).

In the long run, shareholders will have their say on where accountability lies.

Whistleblowing moves up the chain

We’ve already seen the success that Costco has had over the past few months by sticking to its purpose in DEI efforts. Purpose alignment is one way to ensure accountability, while whistleblowing is quite another.

Yet, who could’ve called that executives would join in the whistleblowing?

As reported in The Grocer recently, a group of executives came together to raise concerns in a memo about climate resilience. This is no simple ‘let’s continue to save the world’ note, but a powerful call to address the risks of food security.

The memo, available online here and addressed to “our Investors, Directors, Owners and Creditors,” doesn’t place blame anywhere, but it does ask for accountability.

The state of the world is not something to blame on food company CEOs or Boards. But they are going to need to properly respond to it for the sake of our companies, the customers we serve, and the communities from which we source.

When it comes to materiality, I can’t think of a better three-pronged focus than the company, its stakeholders, and the value chain. The memo also strongly calls out other ESG themes that I’ve been writing about here for a while, including A Failure to See Systems (see page 3) and considerations for the long term.

Some of what they are asking brings accountability for change to specific corporate teams, such as risk, legal, finance, commercial, investor relations, and extends to external players, including investors. And still, the board bears responsibility as well. In another callout from the memo, we find an ask for:

A significant increase in dedicated executive and board-level focus so that these issues do not get lost in short term commercials.

In other words, let’s recognize we’re accountable for the long-term success of the company, not just the next quarter’s numbers!

Courts signal climate liability

Another place where accountability is showing up (and loudly) is in the courts.

Nearly a decade ago, a Peruvian farmer named Saúl Luciano Lliuya claimed that the glaciers above his hometown were melting, thereby increasing the risk of catastrophic flooding. He sued German energy giant RWE, not for the direct cause, but for their contribution to overall climate change, and its local result.

This past week, the court dismissed the case as the threat to his farm wasn’t imminent (less than 1% over 30 years). Still, we’re seeing more and more of these cases. In ESG Mindset, I wrote:

The risk of litigation around sustainability claims and greenwashing, environmental damage with human consequences, or possibly even emissions contribution with the effects of climate change are rising. Between 1986 and 2014, 800 cases were filed, but there was an increase to over 1,000 cases filed between 2015 and 2021 with the cases more often looking to drive a societal shift.

The real story here isn’t the dismissal. It’s the court’s signal that accountability is shifting to new terrain.

In a press release issued by the court (and translated in my browser), it was noted:

If there is a threat of impairment, the polluter of CO₂ emissions may be obliged to take measures to prevent it. If he finally refuses to do so, it could be determined even before actual costs are incurred that he must pay for them in accordance with his share of the issue – as the plaintiff demands.

Several media outlets are interpreting this as opening the door to future litigation if the threats or damage are serious. This is a big deal.

For companies built on an extractive and low-accountability mindset, externalities and trade-offs may have to be answered for.

Pressure remains constant

Shareholder votes, whistleblowers, and emerging legal precedents aren’t anything new. From a distance, they may seem disconnected, but they’re converging on a single point: the demand for meaningful governance to hold companies accountable in an era of diffuse accountability.

At the core of this accountability are people making the decisions.

Boards may feel unencumbered by traditional oversight, and even emboldened as ESG resolutions decline and regulations are rolled back, but the reality is more complex. Accountability hasn’t vanished. It’s just moved, becoming more ambient, more distributed, and more unforgiving.

In this operating environment, companies with resilient governance don’t wait for regulation. Its leaders read the signals, see the system, and act with foresight. Whether pressure comes from the ballot, the boardroom, or the bench, accountability will find its way in.

Future stakeholders won’t just reward boards that follow what’s codified. They’ll remember the ones that had the foresight to act before they were forced to.

In the short term, the question is this: Will your company’s governance evolve before the pressure erupts?