The changing face of corporate governance

As global competition reshapes governance, tougher rules are giving way to looser standards. Dan Byrne explores what this shift means for directors, regulators and long-term corporate accountability

We are in a new governance era: increased regulation is being replaced by a race for competitiveness. It might look good on the surface, but there are potential risks to consider.

When it comes to corporate governance, the pendulum has swung away from heavier rulebooks and increased pressure from lawmakers.

For the past two decades, and especially since the Great Recession, governance, compliance and oversight have focused on more regulation: tougher codes, stricter rules, higher penalties and greater risk. That era is slipping away in response to the current political mood.

Now, lawmakers are demonstrating a higher degree of urgency than before, as they look to ensure their jurisdictions remain competitive in a more polarised world.

Rules are being relaxed

The logic is simple: if regulation feels too heavy or receives significant pushback, companies will move or hold off on investment.

Combine this with a new world order marked by greater competition between traditional allies and the breakdown of old international promises to work together on economic issues.

The result? It is now crucial that regulators listen to businesses unhappy with the rules.

To safeguard their competitiveness, countries and states are rethinking how far they can push businesses on compliance. This means looking at fundamentals like:

• Director liability: how far personal responsibility stretches if a scandal breaks.
• Shareholder rights: particularly their privileges to examine sensitive corporate information and hold directors and executives to account.
• Governance standards: the evolving rulebooks governing how directors should operate.
• Reporting requirements: the changing landscape of what companies need to report, how often and in how much detail.

This new era means loosening requirements in any of these areas goes a long way to building a reputation as “a good place to do business”

Three examples of the new governance era

This phenomenon looks different depending on where you are in the world. The US, for example—historically more laissez-faire, depending on court rulings for standards—will differ from countries in the European Union, which are subject to greater state intervention, alternating governance structures and other political priorities.

With all this in mind, here are three examples of the new era in action on the ground.

The DExit debate in the US

For decades, Delaware has been the poster child for corporate incorporation in the United States. In recent years, however, shifting moods in state court decisions—perceived to disadvantage directors—have made states like Nevada and Texas more popular.

Some high-profile names like Tesla have already left Delaware because of this, prompting debate over a potential “DExit”.

There is no urgent indication that the DExit trend will be as wide-reaching or final as the “Brexit” that inspired its name.

In fact, numbers show a very healthy number of companies remain in Delaware. Nevertheless, the state has passed Senate Bill 21 (SB 21) to give legal backing to many court decisions through the years, and reassure directors.

With shareholder representatives criticising this as a “billionaires’ bill”, however, the message is clear: stay here and we will make the ground more stable beneath your feet.

The UK’s shifting governance code

Following several high-profile corporate failures, UK lawmakers promised a tougher corporate governance code.

In January 2024, it was announced the reforms had been watered down significantly.

Competitiveness certainly played a part: Britain couldn’t risk scaring away firms post-Brexit, given its severe economic troubles.

Of course, the UK did hold an election in mid-2024, and the new Labour government promised, in principle, to stick to stricter laws. Little has since come of these promises since, however, indicating the status quo of “watering down rules for competitiveness’ sake” is here to stay.

The EU and CSRD

Europe’s landmark Corporate Sustainability Reporting Directive (CSRD) was hailed as a revolution in environmental, social and governance (ESG) transparency.

However, industry pushback quickly followed. It was too broad, too complex, and firms didn’t have the capacity to comply with the proposed deadlines.

Again, officials came out with a watered-down proposal, reducing the scope, delaying deadlines and reducing reporting requirements.

As with the UK, competitiveness has been cited as a crucial reason why this watering down was necessary. The EU’s attempt to lead on ESG disclosure is still historic, but it’s also a reminder of how strong ambition can be cut short in this new era of governance.

What this means for directors

For directors, this trend will carry a lot of good news.

Watered-down requirements mean less pressure, fewer demands and lower personal risk. In most cases, this is absolutely accurate. There are just two essential points to bear in mind:

• Watered-down standards or new laws don’t detract from the baseline governance requirements that, over time, have escalated significantly. There remains a lot on the shoulders of directors, and being adequately prepared is the only way to mitigate risk.
• There is no clear indication as to where the balance between regulation and competitiveness will eventually settle, both within individual countries and across borders. This creates difficulty in long-term risk planning and decision-making because you don’t know what you will need to do to comply with the rulebooks, say, five years from now.

The authentic takeaway is that this new era demands vigilance. Directors must treat uncertainty itself as a risk factor, even if the regulatory culture is shifting to a pro-director mindset.

High standards are still the norm, enforcement remains fierce and reputational damage moves faster than any cycle of reform.

Dan Byrne is a journalist with the Corporate Governance Institute