The ICGN Future Leaders Committee aims to integrate the perspectives of early career professionals into ICGN’s policy work. Following its appointment in January 2025, the Committee decided to focus on three key themes: capital markets competitiveness, executive remuneration and board effectiveness. Its members have produced videos and articles to share their insights and stimulate debate on important corporate governance issues. The views expressed are those of the individual members of the Future Leaders Committee and do not necessarily reflect the positions of the ICGN Secretariat or its members.
Board effectiveness
How can investors further incorporate board effectiveness considerations into their proxy voting and engagement policies?
Written by Katie Thomas, Analyst, Sustainable Investing, AIMCo, on December 16, 2025
An effective board can guide strategic direction and support long-term value creation, while maintaining accountability to stakeholders. Board effectiveness is characterized by diverse expertise, strong governance practices, and a culture of accountability and engagement. Key factors that contribute to board effectiveness include thoughtful board composition, clear and consistent disclosure practices, and meaningful engagement with both management and shareholders.[1] Investors can help support board effectiveness considerations by incorporating requirements that support and measure board effectiveness into their proxy voting and engagement guidelines.
Proxy voting guidelines can include board effectiveness requirements on board composition — which can include requirements for diversity, skills and experience — and requests for clear, transparent disclosure on such requirements, including potential voting action against directors for insufficient disclosures.
Shareholders can also engage directly with board members or senior leaders to help support board effectiveness and promote transparency and accountability. By integrating board effectiveness considerations into their engagement guidelines, shareholders can better understand the dynamics of the board and the mechanisms in place to ensure effective governance. Board engagement also allows shareholders to understand how boards are overseeing emerging governance risks, which may include topics such as cybersecurity and the responsible use of AI.
Proxy voting and engagement policies are important mechanisms for shareholders to support board effectiveness, and shareholders could consider ways to further integrate these considerations into their policies and guidelines.
[1] Paula Graullera Castillejos, ‘How Diverse Leadership Teams Boost Innovation’, S&P Global, 2024 April 1, https://cdn.ihsmarkit.com/www/pdf/0424/Stakeholder-Governance_SP-Global_April-2024.pdf [accessed 8 August 2025].
How can investors go beyond classic indicators of good governance – independence, diversity, skills – to understand the actual environment the Board operates in?
Written by Joseph Insirello on 16 December, 2025
Corporate governance has evolved significantly in the last 30 years, evolving into a more formalised discipline supported by robust standards, regulatory frameworks, and a growing global community of stewardship professionals.
This progress has brought much-needed structure and quantitative indicators of good governance — independence, diversity, committee composition, tenure. Yet these are still just proxies. They tell us little about how a board actually operates in practice.
Investors are often left assessing governance behind a veil of ignorance, with significant informational asymmetry between companies and shareholders. We cannot observe board meetings directly, and interactions with directors are often rehearsed or follow the meeting agenda too closely. The result can sometimes be a kind of scripted back-and-forth — providing little insight beyond annual reports and company disclosures.
To truly evaluate board effectiveness, it is fundamental to turn to qualitative cues: the relationships among directors, their willingness to challenge management, and the interpersonal dynamics that underpin decision-making. These factors require judgment, experience, and a degree of emotional intelligence — attributes not captured in any checklist.
- The role of board engagements
Regular engagement with board chairs and non-executive directors provides insight beyond disclosures. A board may meet formal requirements — well-structured committees, independent members, regular meetings — yet still fall short in practice. What matters is the quality of oversight, challenge, and judgement.
Academic literature supports this distinction between structure and behaviour, arguing that effective boards rely less on formal independence and more on the “dynamics of questioning and challenge” that occur behind closed doors [1]. Similarly, the FRC’s research into board culture highlights how behavioural factors — trust, openness, and constructive dissent — are often stronger indicators of effectiveness than box-ticking exercises [2].
High-profile corporate failures have underscored the risks of boards being overly reliant on management or lacking grip on key financial and operational issues. The lesson is not simply to appoint more independent directors, but to understand whether independence is supported in practice — culturally and behaviourally.
- “Know your Director”
Reviewing director biographies can reveal interesting overlaps and skill distribution, beyond what is usually captured by a so-called ‘skill matrix’. Boards with high levels of sector expertise can still be vulnerable to groupthink, particularly where directors have similar professional backgrounds or overlapping networks.
Empirical studies have shown that relational and social ties between board members and executives can reduce the likelihood of effective monitoring². In controlled companies, or where founders remain active, board oversight can be constrained even when governance arrangements appear compliant.
Investors should also pay attention to ‘overboarding’ and workload. Research has linked excessive board commitments to diminished monitoring quality, particularly in complex or highly regulated firms [3]. In assessing effectiveness, the key is not just who sits on the board, but how they contribute in practice — and whether the environment supports independence of mind.
- A “diversity of diversities”
The business case for gender and ethnic diversity is well established [4], and disclosure in this area has improved markedly. But there is still a tendency to define board diversity too narrowly. A board composed entirely of directors from one country or with the same educational background, however diverse by ethnicity and gender, may still lack the breadth of thinking needed to respond to complex, multi-dimensional risks.
Academic work has highlighted the value of cognitive and functional diversity — including differences in professional experience, worldviews, and approaches to risk [5]. This is particularly relevant for boards overseeing companies in transformation, or those exposed to fast-moving issues like climate transition, AI, or reputational risk. Without a range of perspectives, boards may struggle to challenge assumptions or anticipate non-linear change.
Conclusion
As governance professionals, we should be cautious not to reduce board evaluation to a checklist. Independence, diversity, and expertise remain essential, but they must be interpreted in context. The real test of governance lies in how boards respond to complexity, how they engage with alternative viewpoints, and how they exercise judgement under uncertainty.
As research shows, board effectiveness is behavioural as much as structural. Our role as long-term investors and stewards is not only to assess frameworks, but to understand how boards actually operate — and to support practices that promote accountability, resilience, and constructive challenge.
[1] J. Roberts, T. McNulty and P. Stiles, ‘Beyond Agency Conceptions of the Work of the Non-Executive Director: Creating Accountability in the Boardroom’, British Journal of Management, vol. 16, Supplement S1, 2005.
[2] Financial Reporting Council, Corporate Culture and the Role of Boards, London, Financial Reporting Council, 2016.
[3] O. Faleye, R. Hoitash and U. Hoitash, ‘The Costs of Intense Board Monitoring’, Journal of Financial Economics, vol. 101, no. 1, 2011.
[4] C.G. Ntim, ‘Board Diversity and Organizational Valuation: Unravelling the Effects of Ethnicity and Gender’, Journal of Management and Governance, vol. 19, no. 1, 2015, p. 167–195.
[5] L. van den Berghe and A. Levrau, ‘Evaluating Boards of Directors: What Constitutes a Good Corporate Board?’, Corporate Governance: An International Review, vol. 12, no. 4, 2004.
How can boards effectively manage and demonstrate oversight of nature-related risks within their companies?
Written by Ramiya Krishnan, ESG Analyst, Manulife Investment Management on December 9, 2025
As investors, we understand that nature underpins the global economy with over $44 trillion in GDP—more than half of global economic output—moderately or highly dependent on natural systems.[1] When ecosystems degrade, supply chains falter, regulatory pressures mount, and consumer trust erodes.
But nature is deteriorating. And with that, the risks to portfolios are rising. In the World Economic Forum’s Global Risks Report 2025, [2] biodiversity loss and ecosystem collapse were ranked as the second most severe risk over 10 years. That’s why board effectiveness on nature-related issues is no longer optional, it’s a core indicator of long-term resilience and strategic foresight.
This is where frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) come in, providing a structured way to assess and disclose nature-related risks, and opportunities.
Nature-related risks like water scarcity, land degradation, and biodiversity loss can impact asset values, supply chains, and credit ratings. They can trigger regulatory shifts, reputational damage, and systemic financial instability. Conversely, nature-related opportunities such as ecosystem restoration, sustainable land use, and biodiversity-positive innovation represent a growing frontier for long-term value creation. Companies that invest in nature-positive strategies can potentially unlock new revenue streams, enhance supply chain resilience, reduce regulatory and reputational risks, and strengthen stakeholder trust.
Boards that demonstrate effective oversight of nature-related dependencies, impacts, risks, and opportunities are better positioned to navigate the transition to a nature-positive economy. To be truly nature-positive, it’s no longer enough to simply stop the activities that harm the environment, we must also restore degraded ecosystems to reverse the current trajectory. To safeguard long-term value, Boards must be equipped to govern these risks and seize emerging opportunities in nature-positive transitions.
Here are five key questions every investor should be asking when evaluating board effectiveness
First, oversight. Does the board have formal oversight of nature-related risks and opportunities? Is this embedded in governance structures—like audit or sustainability committees?”
We want to see that nature is not just a side topic, but a core part of board-level risk management.
Second, competence. Do board members have access to the right expertise—on biodiversity, ecosystem services, and nature-related financial risks? Boards don’t need to be ecologists, but they do need to understand how nature loss can affect business performance.
Third, integration. Is nature embedded in strategic planning, risk management, and capital allocation decisions? Are nature-related risks considered alongside climate and other ESG factors when making long-term decisions?
Fourth, disclosure. Is the company aligned with frameworks like the TNFD? Are disclosures clear, location-specific, and decision-useful? As investors, we rely on transparency. We need to see how nature-related issues are being measured, managed, and reported.
And finally, stakeholder engagement. Is the board overseeing meaningful engagement with First Nations and Indigenous Peoples, Local Communities, and other affected stakeholders? These groups aren’t just impacted by corporate activities, they often hold deep, local ecological knowledge. Their understanding of local ecosystems, seasonal patterns, and biodiversity is rooted in generations of lived experience. When companies include this knowledge in their nature strategies, it does more than improve ecological outcomes. It builds trust, strengthens legitimacy, and fosters local support for conservation efforts. And ultimately, we believe that can lead to stronger, more sustainable results for nature, for communities, and for the business.
Leading boards are showing us what good governance looks like.
One best practice we’re seeing is the appointment of a dedicated “nature representative” at the board level. This could be someone from the existing leadership team or an external advisor with deep expertise in biodiversity and ecosystem services. Their role is to guide the board in understanding and addressing nature-related risks and opportunities, ensuring that these issues are not just acknowledged, but actively governed as part of strategic decision-making.
Another key step is conducting an initial assessment of the company’s interactions with nature. The TNFD, recommends using the LEAP framework to guide this process.
LEAP stands for Locate, Evaluate, Assess, and Prepare:
- First, Locate where the business interacts with nature across operations, supply chains, and geographies.
- Then, Evaluate the company’s dependencies on natural systems and the impacts it has on ecosystems.
- Next, Assess the material risks and opportunities that arise from those interactions.
- And finally, Prepare by developing a strategic response and reporting transparently to stakeholders.
Leading boards are also aligning with TNFD’s recommended disclosures, giving investors clear, comparable, and decision-useful information.
Lastly, and importantly they are disclosing how community engagement informs their nature-related strategies. This includes:
- Reporting on stakeholder engagement processes or outcomes in TNFD-aligned disclosures.
- Where possible, demonstrating how nature-positive actions benefit both the business and local communities.
- Working with affected stakeholders to track progress and impact.
Nature risk is investment risk and as investors, we must demand board-level accountability, transparency, and action.
[1] J. Fraser, “Nature and the board: What directors must understand and act on”, Climate Governance Initiative, n.d., https://hub.climate-governance.org/article/nature-and-the-board-what-di… [accessed 13 August 2025].
[2] World Economic Forum, “Global Risks Report 2025”, 20th edn (Geneva: World Economic Forum, 2025) https://www.weforum.org/publications/global-risks-report-2025/
How can boards contribute to the successful delivery of climate transition plans?
Written by Gladys Lam, Stewardship Analyst, HSBC Asset Management, on December 9, 2025
Good governance is a key element when we analyse companies from an investment stewardship perspective. It involves implementing strategies to address risks associated with companies and stakeholders. Climate risk is becoming one of the priorities, given its financial and economic impacts on companies and stakeholders. To navigate the challenges of climate change, companies are encouraged to develop transition plans to adapt to risks associated with moving to a lower carbon economy. Boards and governance bodies play a role in overseeing how companies manage climate risks and opportunities.
Boards are responsible for systematically assessing and managing risks, including regulatory, physical, and transition risks. This oversight ensures continuous evaluation of potential impacts, as the company may be affected by climate risks either directly or indirectly through our relationships with customers, which could result in both financial and non-financial impacts.
Climate change also presents opportunities. Investment in renewable energy supports the transition to a sustainable future. Board involvement determines the approach, appetite, policies, processes, and controls, which reflect on how climate risk continues to evolve in the real world, and improve how the company embed climate risk factors into strategic planning, transactions and decision making across businesses.
The Board takes overall supervisory responsibility for the company’s ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. This allows investors to better assess risk profiles and evaluate the adequacy of companies’ climate strategies over the short, medium, and long term.
In summary, boards play a role in managing risks, steering climate initiatives, and ensuring accountability. Their leadership builds resilience and fosters trust, enabling companies to effectively navigate the challenges and opportunities posed by climate change.
How can boards demonstrate that they’re not just informed, but actively engaged in shaping and overseeing AI governance within their company?
Written by Rajveer Dhanoa, Investment Officer, Sustainable Investment and Strategies, California State Teachers Retirement System on 2 December, 2025
Boards can demonstrate active engagement in AI governance not just through oversight, but by embedding it into how they structure discussions, build expertise, and influence key decisions.
This includes making AI a regular part of boardroom conversations, ensuring the board has the right skills and formal governance structures, integrating AI considerations into broader business planning, and tracking clear, measurable outcomes.
This kind of governance evolves alongside AI adoption and helps ensure innovation is pursued responsibly, transparently, and with long-term, value in mind.
One way boards can do this is by making AI a regular agenda item. Consistently including AI updates in meetings signals that it’s a long-term strategic priority. According to recent research by Deloitte, fewer than 14% of boards discuss AI regularly, making this a clear opportunity for leadership to really stand out. [1]
Another important approach is using a board skills matrix to track the expertise needed for effective oversight. Just like boards use these matrices to help oversee material sustainability risks, like climate change, or to ensure diversity, they can also add competencies such as data ethics, digital strategy, or algorithmic risk. This helps identify gaps and guide director recruitment or targeted training, so the board is better equipped to engage with AI-related risks and opportunities.
Formal structures also matter. Boards can update committee charters – especially for the audit, risk, or technology committee to ensure AI governance is clearly assigned and documented. Some companies go further by creating internal AI councils or algorithm review boards to evaluate high-risk models before deployment. These mechanisms reflect a deliberate, forward-looking approach to governance.
Boards can also require AI risk reviews during major strategic decisions. For example, before approving a major investment or acquisition, boards can ask whether AI is involved and how risks like bias, data misuse, or regulatory exposure are being managed. This brings accountability directly into the business planning process.
Finally, oversight should be tracked and included as a regular board agenda report. Boards can ask for measurable outcomes such as key performance indicators related to AI fairness, accuracy, and ethical use and consider independent audits of high-impact AI system. This creates a feedback loop between governance and business impact, reinforcing the board’s strategic role.
Ultimately, an engaged board will treat AI governance as a core part of its responsibility. It will build the right skills, ask the right questions, and create structures that ensure AI supports sustainable, responsible growth.
[1] Deloitte, “Successful AI Oversight May Require More Engagement in the Boardroom”, Deloitte Insights, 7 October 2024.
What is effective corporate governance for fostering innovation?
Written by Eriko Maruyama, ESG Specialist, Nomura Asset Management on 2 December, 2025
Fostering innovation is essential for driving Japan’s economic growth and addressing urgent environmental and societal challenges. Given Japan’s declining and aging population, along with the increasing frequency of extreme natural disasters, improving labour productivity, revitalizing the economy, and building resilient social systems have become critical priorities. Innovation plays a pivotal role by enabling new ideas, products, and services that can transform both society and the economy.
Research consistently shows that diversity—especially on company boards and executive teams—is a key driver of innovation. Diverse leadership brings a range of perspectives, which enrich decision-making and spark creativity. For example, a study by the Boston Consulting Group found that organizations with diverse leadership achieve significantly better innovation outcomes. These companies report an average innovation revenue of 45%, almost double the 26% seen in organizations with below-average diversity. [1]
However, simply increasing diversity in numbers is not enough. A study by Nomura Asset Management introduces the concept of “faultlines,” which refers to the degree of divisions that can form within a team when members’ characteristics—such as gender, age, and professional experience—align in ways that create distinct subgroups. For example, if most male members are senior engineers and most female members are younger researchers, the faultline is high. On the other hand, a low faultline means these characteristics are more evenly distributed, reducing divisions. This research shows that boards with lower faultlines can better leverage diversity, resulting in improved Return on Assets.[2]
In Japan, gender diversity at the board and management level has improved, rising from less than 2% female board members in 2013 to 10% in 2023. [3] Despite this progress, faultlines seem to remain high. Many Japanese companies have management boards where executive officers also serve as directors—known as executive directors. These executive directors make up half the board, with 97% being men. [4] In contrast, female directors tend to be non-executive members, often coming from academic or legal backgrounds, which differ from the typical executive directors’ career paths. This imbalance in professional backgrounds may contribute to increased faultlines, which could lead to divisions within the board and potentially affect corporate governance effectiveness.
To address this, institutional investors should advocate not only for increased female representation but also for diversity in professional backgrounds, particularly among executive directors and candidates in Japan. Encouraging transparent remuneration and nomination processes can create incentives for companies to cultivate more inclusive leadership. By promoting diverse talent and fostering a culture of inclusion, I believe we can significantly enhance innovation.
[1] Lorenzo, R., Voigt, N. and Tsusaka, M., ‘How Diverse Leadership Teams Boost Innovation’, Boston Consulting Group, January 2018, https://web-assets.bcg.com/img-src/BCG-How-Diverse-Leadership-Teams-Boost-Innovation-Jan-2018_tcm9-207935.pdf
[2] Manabe, K. and Morita, K., ‘Board Diversity and Corporate Value: From the Perspectives of Multidimensionality of Diversity and Faultline’, Proceedings of the 32nd Annual Conference of the Japanese Finance Association, Nomura Asset Management Co., Ltd., Innovation Lab Department, 1 March 2024.
[3] Gender Equality Bureau Cabinet Office, ‘Visualization of the Percentage of Women on Boards’, https://www.gender.go.jp/policy/mieruka/company/yakuin.html
[4] Aya, T., ‘Survey on Gender Balance in Boards of Directors (2024 Edition)’, Japan Research Institute, Ltd., https://www.jri.co.jp/column/opinion/detail/15271/
What can improve investor confidence in the Board’s ability to identify and address potential effectiveness issues before they escalate?
Written by Prashilta Naidu, Corporate Governance Director, Sodali & Co on 2 December, 2025
Governance failures often expose deep-seated weaknesses in board oversight, sometimes without any obvious red flags. Financial deterioration, reputational damage, and shareholder value loss can be traced back to an ineffective board as a key root cause. In many cases, the missing link is true independence – not just in board composition, but in mindset, behaviour, and boardroom dynamics.
As such, encouraging strong board independence is one of the most powerful ways to improve investor confidence in a board’s ability to identify and address issues before they escalate.
Where available, company disclosures on corporate governance practices and cultural oversight, and the priorities and activities of regulators can be useful starting points to frame approaches for direct engagement. Building on this background research, investors can use the following framing questions to explore the Board’s level of understanding of and responsiveness to potential independence, and ultimately, effectiveness issues:
- How do you consider director tenure on your Board?
Director tenure is often used as an indicator of independence, as longer tenure may indicate a director has become “entrenched”, leading to inflexibility in their thinking and potential complacency. This has led to the consideration or introduction of tenure limits by regulators, investors and proxy advisors. However, a review of the academic literature suggests there is no clear consensus on the impact of longer tenure on a director’s effectiveness; instead, varying on a case-by-case basis.[1]
- How is company culture discussed and measured at a Board level? How does the Board demonstrate that they are setting and living by an appropriate organisational culture? Do you consider the measures you use as being fit-for-purpose for your industry, strategy, risk appetite and current context?
- What reporting does the Board receive on compliance, cultural breaches or whistleblowing?
- Can you describe your recent engagements with other stakeholders, such as regulators, suppliers, customers, community members or activists?
- How can the Board engage with employees outside of management? Can you describe when this occurred?
Investigations following major governance failures often indicate a breakdown in a Board’s ability to provide robust challenge and accountability amongst Board directors and of management, indicative of groupthink and a lack of true independence. This sense of complacency or being too collegiate is also reflected in the Board’s understanding and oversight of organisational culture, including through how the Board engages (or does not engage) with external stakeholders. The power dynamics of a founder-led organisation adds additional complexity, as founders naturally have strong passion for pursuing growth; even where their approach does not align with the rest of the Board and may come at the expense of good governance and risk management.
To support the discussion, there are potential research opportunities to dig deeper into Board independence, including other issues such as related party transactions, and the intersection with board dynamics and culture. Importantly, research should also consider cultural and corporate governance nuances across jurisdictions.
Board independence and its interplay with board effectiveness is a complex issue; there is no single “silver bullet”. However, responsible and transparent stewardship requires considered and constructive engagement, particularly on the challenging issues. Collectively, we can drive the conversation, ultimately to enhance sustainable economic and societal growth.
[1] C. Clements et al., ‘The relationship between director tenure and director quality’, Int J Discl Gov’ vol. 15, 2018, p. 142-161; L. He, R. He & E. Evans, ‘Board’s influence on a firm’s long-term success: Australian evidence’, Journal of Behavioural and Experimental Finance, vol. 27, 2020; MSCI, ‘Do Entrenched Boards Help or Hurt Stock Performance?’ MSCI [web blog], 2015
Renumeration
What does executive compensation tell us about Board effectiveness?
Heloise Courault, Senior Corporate Governance & Stewardship Analyst, AXA Investment Managers, part of BNP Paribas Group on 25 November, 2025
Executive compensation plays a central role in corporate governance, the agency theory, and the relationships between investors, Boards, and management:
- Boards, by designing and approving the CEO’s pay, are able to ensure the CEO acts in line with the strategic orientations set by Boards. Effective Board oversight of executive remuneration should therefore contribute to address the information asymmetry between Boards and management.
- Similarly, investors outside the Boardroom lack access to inside information, but have a financial interest to ensure that Boards and management teams act in the company’s long-term interest. Therefore, they can leverage on executive remuneration disclosure to anticipate potential future management behaviours (e.g. by looking at which performance metrics the Board is focusing on in the design of a variable plan), but also gauge the dynamics between Boards and management.
Because of the role played by executive compensation, the way it is set and structured may signal a potential imbalance of powers between the Board and the CEO, which could be the early sign of a governance issue. For instance:
- Excessive remuneration: cases when remuneration is repeatedly and significantly increased year after year, one-off cash awards and other retention plans, or golden parachute and large severance agreements (making the CEO’s revocation costly), while sometimes justified and well explained, could also in some cases reflect the CEO’s high bargaining power and level of influence over the Board.
- Insufficiently stringent performance targets: for instance, bonuses showing little variability over the years regardless of the company’s performance, minimum performance thresholds or targets set well below market guidance, can lead investors to question why Boards are accepting payouts to the CEO even when the targets they set are not achieved.
- Poor Board accountability: repeated and significant shareholder dissent on remuneration proposals without any visible reaction from Boards, high turnover within the Remuneration Committee, or low tenure of non-executive directors compared to the CEO could affect the level of Board accountability on remuneration issues, and may be signs that Boards are not acting as stewards of shareholders’ interests, but rather are under the sway of the CEO.
These examples demonstrate how it can be beneficial for investors to closely examine how executive remuneration is set and structured, as it may reveal broader issues related to Board functioning and the Board’s ability to independently and effectively oversee management.
An in-depth analysis of the structure, process, and governance around executive compensation may actually help investors undercover the potential signs of a weak Board.
How can executive compensation drive better investment outcomes?
Written by Landon Shea, Investment Stewardship Associate, AllianceBernstein on 25 November, 2025
Executive compensation is more than just a retention tool – it’s a capital allocation decision, and a direct expense. Incentives are a financially material governance issue and getting them right is critical for driving durable value creation.
When evaluating executive pay plans, investors must ask: Is this cost driving long-term value?
To answer that, I look for the three D’s: Disclosure, Difficulty, and Direction.
First, Disclosure. Without clear disclosure of targets and achievements, it’s difficult to evaluate whether incentives are truly performance-based or just disguised entitlements. If an issuer truly has a sound compensation plan, then they should feel confident enough to disclose it. And issuers which cannot pre-disclose for “competitive reasons” should provide transparent retrospectively disclosures.
Second, Difficulty. Performance targets must be rigorous. Issuers with unambitious targets for their executives are unlikely to outperform – this can include setting targets below prior years actual achievement, targeting merely median performance versus peers, or using non-GAAP metrics with excessive adjustments.
Third, Direction. Over the long run, executive pay should move in the same direction as company performance. That means tying a meaningful portion of compensation to multi-year performance, not just short-term stock price movements.
Executive compensation raises many questions about fairness and retention, but I find it most useful as a tool for understanding a company’s priorities. I think that companies which deliver on the three D’s are not only more likely to win shareholder support, they’re more likely to win in the market. In the words of Charlie Munger: “Show me the incentives and I’ll show you the outcome.”
How does the world’s largest sovereign wealth fund evaluate executive pay – and does this create alpha?
Written by Shilpi Nanda, Policy Advisor, Norges Bank Investment Management on 18 November, 2025
At Norges Bank Investment Management, the world’s largest sovereign fund, we have developed an approach to CEO compensation that often differs from practices in many markets where we invest. This approach creates real value for our $1.8 trillion fund.
The first difference is time horizon. While we monitor quarterly results, we’re a generational fund thinking decades ahead. We want CEOs to similarly think long-term and to have skin in the game. Their shares should be locked up for at least five years, preferably ten – even after they leave the company. This is a simple and transparent way of aligning CEO interests with shareholders.
The second difference is what we measure. While performance-based share units are popular in some markets such as the US and UK, we carefully scrutinize these plans. We’re often critical that complex performance schemes can distract from cleaner stock exposure. We believe pensionable income should be a minor part of total pay, with no golden parachutes that let CEOs cash out early. This approach helps maintain legitimacy and shareholder trust.
Third, simple beats complex. We prefer straightforward stock ownership over elaborate performance schemes with shifting targets. Why? This makes pay opaque and hard to evaluate for investors and other stakeholders. Simplicity lets everyone focus on building long lasting value.
Here’s our key insight: In the long run, all shares are performance shares. Stock prices fluctuate short-term, but over time, good companies show good stock performance through good management. Most CEOs want to succeed – give them simple stock ownership that motivates without distractions.
Does this approach create alpha? Our US market research suggests yes. We analyzed $628 billion across 1,800 companies from 2017-2023, and those with complex performance units consistently underperformed companies with simpler structures. These complex schemes drove 90% of CEO pay growth while exceeding target payouts. They delivered less good results for shareholders and cost more.
We don’t just vote against poorly designed packages. We engage with boards constructively and work at the market level with regulators, proxy advisors and relevant stakeholders to promote better practices globally.
The bottom line: CEO pay should create value. Our focus on transparent structures helps identify truly long-term companies – exactly where we find the best returns.
Why is integrating Environmental and Social metrics into executive remuneration important, and what are the challenges and best practices associated with it?
Written by Jordi Debrulle, Corporate Governance Analyst, Amundi, 18 November, 2025
As a responsible investor, I believe it is important to emphasize the role of executive remuneration as a key mechanism for aligning corporate strategy with long-term value creation. Integrating Environmental and Social (E&S) metrics into remuneration frameworks is therefore a crucial element.
Why? Firstly, because it enhances value creation: when accurately chosen, E&S performance is correlated with long-term financial performance and resilience. By linking executive pay to E&S outcomes, we ensure that corporate leaders prioritize sustainable growth that benefits shareholders.
Secondly, because it helps identify and mitigate risks: Companies that neglect ESG risks such as climate change, diversity gaps, or governance failures—face increased operational, reputational, and regulatory challenges. Embedding E&S metrics encourages companies to proactively address these risks.
Finally, because it also drives accountability.
ESG metrics are considered by some to be somewhat vague and to potentially result in higher executive compensation due to more easily achievable targets. That can happen, but this is true as well for other type of performance metrics. There were remuneration scandals well before the integration of E&S KPIs. So I believe the right answer is not to abandon ESG KPIs, but for shareholders to apply the same level of scrutiny to all performance metrics and clearly communicate their expectations to companies. The debate should not focus merely on the inclusion of E&S metrics into pay but more importantly on the robustness of both the sustainability strategy and the related KPIs used by the company.
Some important requirements:
- Alignment with Corporate Strategy: The KPIs must derive from the company’s material sustainability issues.
- Rigorous and Quantitative Targets: E&S KPIs should include some measurable goals. This ensures clarity, while subjective metrics dilute accountability.
- Internally Driven: Companies should avoid reliance on external rankings but develop internal and company-specific metrics, directly linked with the strategy of the company.
- Disclosure and Transparency: Investors need to see sufficient disclosure of the metrics used, along with transparent E&S targets and methodology.
To conclude, I would also highlight that executive remuneration can be a great engagement topic to understand what are the company’s strategic priorities, and to assess the capacity of the board to set challenging targets. This engagement allows shareholders to grasp the specifics of each company, especially when interacting with a member of the remuneration committee. But that would be a topic for another video capsule…
Competitiveness
How can robust legal protections for shareholders strengthen competitiveness by assuring investors that they have recourse against corporate misconduct?
Written by David Haughan, Investment Officer, Woodsford on 11 November, 2025
Robust legal protections for shareholders play a vital role in strengthening the competitiveness of the listing venue and wider capital markets in a number of ways. First, they give investors’ confidence that the market is comprised of well-run companies that believe they can comply with legal requirements. Second, they support investors’ ability to engage with companies effectively, as the right to legal recourse means that there is an ultimate form of escalated engagement if all other engagement fails. Third, they ensure that investors’ capital is protected when an egregious corporate governance failure occurs.
- Legal protections as a signal of market integrity
When shareholders have a right to legal recourse against companies, this creates a credible deterrent against corporate wrongdoing. This deterrent sends a powerful signal that participants in that market are held to high standards and accept accountability. This lowers the risk premium associated with an investment in this market and means that investors should be more willing to commit their capital.
- Legal protections as a stewardship tool
From a stewardship perspective, the right to legal recourse underpins the stewardship ecosystem because it means that litigation can be used as a tool of last resort when all other forms of engagement have failed. When a serious corporate governance failure has occurred and other remedies have been exhausted, investors have enforceable rights to bring companies and directors to justice and uphold market discipline. This reinforces the effectiveness of all other shareholder engagement.
- Legal protections as a capital recovery mechanism
Accessible shareholder rights to recourse also mean that, where a company has misled the market, committed fraud, or failed to uphold corporate governance standards, investor capital is protected. This means that investors can invest with confidence that it will be possible to recover their capital through legal recourse if necessary.
Is executive compensation driving competitiveness — or undermining it?
Written by Pippa O’Riley, Corporate Governance Lead, Schroders on 11 November, 2025
As global markets become more integrated and the war for talent intensifies, how companies reward their top leaders can have profound implications – not just for firm-level success, but also for national economic performance and social cohesion. The challenge lies in designing executive pay structures that attract world-class talent while avoiding the social and economic pitfalls of excessive or misaligned incentives.
Driving Competitiveness Through Talent Retention and Incentives
In highly competitive sectors such as technology, finance, and biotech, both the US and UK rely on dynamic leadership to drive innovation, scale, and global expansion. High executive compensation is often justified as a mechanism to attract and retain the best minds in the face of fierce international competition.
The pronounced differences in CEO compensation across regions underscore varying corporate governance models, cultural attitudes towards executive pay, and regulatory environments. As we found in a recent internal study variable pay opportunities in the US are often double, or triple those that are offered across the pond. [1] This has led to a culture where high pay is celebrated, as it is often a signal of good performance.
UK companies however face more cultural and regulatory constraints. While UK boards face stronger scrutiny from institutional investors and governance codes such as the UK Corporate Governance Code, we have heard from many directors during engagement, that there remains an underlying belief that world-class leadership demands world-class remuneration. Many UK listed firms operate on a global basis and must ensure they have leaders with the global experience and strategic vision to navigate complex, uncertain environments.
Undermining Competitiveness Through Inequity and Short-Termism
However, rising executive pay—especially when disconnected from long-term performance—can undermine competitiveness in both subtle and overt ways.
In both the US and UK, public trust in corporate leadership has eroded in the wake of widening pay gaps between CEOs and average employees. In the US, both Portland, Oregon and San Francisco, California have enacted tax penalties on companies with large pay disparities, following support from voters. In the UK, where social cohesion and stakeholder capitalism hold more sway, outsized pay packages can provoke political backlash and reputational damage. This can discourage long-term investors and reduce a company’s license to operate. Recently, the UK government banned bonuses for executives at several major water companies due to environmental violations, reflecting a move towards holding corporate leaders accountable.
Furthermore, compensation structures overly focused on short-term share price metrics risk encouraging behaviour that prioritises quarterly earnings over long-term innovation, resilience, and employee development.
A Need for Balance and Reform
If designed thoughtfully, executive pay structures can support value creation, innovation, and talent retention. If misaligned, they risk eroding public trust and fostering short-termism.
Ultimately, where boards believe they have a genuine case for paying more due to their global operations, risk of retention of key staff and most importantly competitive performance in a global market, we sympathise that pay may need to be set at higher levels to reflect this. However, boards must be more transparent and intentional in setting remuneration policies that reflect both their own business circumstances, market realities and social responsibilities.
The challenge for boards is not whether to pay competitively, but how to do so responsibly.
[1] Schroders, ‘Comparing CEO pay: a closer look at the UK versus the US’, Schroders, 20 June 2024.
How do companies and investors mutually benefit from high corporate governance standards, and how does this influence perceptions around capital markets competitiveness?
Written by Shane McCullagh, Senior Investment Analyst, Sustainable Ownership, Railpen on 11 November, 2025
Long-term investors like Railpen advocate for strong governance practices at the companies and markets they invest in, consistent with their fiduciary duty to act in the best interests of beneficiaries. We do this because evidence shows that companies with strong corporate governance practices generally perform better over the long-term.
Some companies voice concerns that investor oversight constrains decision-making or increases compliance costs. However, given companies with strong governance are generally shown to outperform over the long-term, are these concerns realised in practice? For instance, companies listing with multi-class share structures at IPO have argued that these structures insulate inside shareholders and founders from the pressures of financial markets, allowing them to fulfil their vision for the company. However, evidence shows that any potential financial advantages for companies of such structures, if they exist, tend to recede quite rapidly over a short period of time following IPO.
Companies also shouldn’t overlook the impact of corporate governance practices on the cost and availability of capital. Evidence suggests that well-governed companies are more likely to attract domestic and foreign investors, because investors’ interests are more likely to be protected, and good governance indicates that a company allocates its resources productively and effectively. We see this in our own investment decision-making at Railpen where corporate governance is a key factor.
Good corporate governance standards also impact perceptions of capital market competitiveness. When raising capital, companies are looking for liquidity, a low cost of capital and a high-quality investor base. But for a market to provide sufficient liquidity and cost of capital benefits, investors need to be willing to provide that capital. This in turn means a market that appeals more to investors is better positioned to meet the needs of companies. So we see that corporate governance standards are mutually beneficial to all.
Some companies may be superficially attracted by the opportunity to list in a venue with lower corporate governance standards, but this is short-termist thinking that doesn’t support long-term value creation. For example, when it comes to valuation at IPO, most research finds a positive link between strong governance and firm value. This is in addition to a lower cost of capital.
Of course there may be legitimate concerns around poorly designed regulation or different companies’ unique circumstances, but in general the evidence is clear on the mutual benefits to investors, companies and wider capital markets of well-designed corporate governance standards.
As emerging markets grow in economic influence, do current global governance expectations support or constrain board competitiveness in these regions?
Written by Aisyah Hamid, Associate, Permodalan Nasional Berhad on 4 November, 2025
As emerging markets grow in economic influence, the boards face a question with billion-dollar implications: do global governance standards sharpen their competitiveness or blunt it? These standards which were built on principles such as transparency, independent oversight, diverse skills, and protection of shareholder rights, were largely shaped in markets where ownership is widely dispersed.
Yet a one-size-fits-all application can limit the ability to unlock value if it overlooks local context. In markets like Malaysia, where ownership is often concentrated in families or government-linked companies, boards can benefit from decisive leadership, deep local knowledge, and the long-term commitment of substantial shareholders. These features can be powerful drivers of competitiveness and resilience through market cycles.
However, this value can sometimes be misperceived. The Malaysian Code on Corporate Governance (MCCG) plays a central role in aligning with rising global governance expectations. With requirements such as one-third independent directors, tenure limits, and formal nomination processes, the MCCG provides a clear framework for boards. This is important because poor corporate governance can erode value and constrain the supply of equity capital to emerging markets. [1] I think what matters most is how the substantial shareholder exercises its influence, and how competitive boards anticipate and respond to the growing voice of shareholders.
Here is where shareholder activism becomes a crucial bridge. As one of Malaysia’s largest asset managers with significant equity positions in the country’s leading companies, PNB is always positioned at the forefront of shaping governance expectations. Guided by clear policies on board effectiveness, we continually refine our triple bottom line stewardship model to drive governance effectiveness forward. Our approach includes collaborative engagement with investee companies, guided by clear performance priorities such as dividends and total shareholder return (TSR). Our engagement framework moves discussions through transparent stages from private dialogue to public disclosure with the aim to enhance long-term value creation for all shareholders. This reinforces the accountability mechanisms championed by global governance standards. In our assessments, we also view board competitiveness not simply as a skillset matrix on paper, but as the ability to attract and retain top directors and make strategic decisions.
Ultimately, global governance expectations are a catalyst for unlocking competitiveness when boards view them not as external pressure, but as a framework to recruit top talent, earn stakeholder trust, and make forward-looking decisions. For emerging markets, the prize is clear: boards that achieve world-class standards to enhance long term value creation.
[1] International Monetary Fund, Monetary and Capital Markets Department, (2005). “Chapter IV: Corporate Finance in Emerging Markets” In Global Financial Stability Report, April 2005
What is an emerging area of good corporate governance that you expect could bolster capital markets competitiveness over the next ten years?
Written by Will Farrell, Manager, EOS, Federated Hermes on 4 November, 2025
As investors confront heightened uncertainty over the energy transition, insights into companies’ financial exposure to different energy transition scenarios will be increasingly decision useful. In our view, the due consideration of climate-related and other uncertainties in the financial statements is critical to ensure investors have confidence in how companies are accounting for this heightened uncertainty and their own transition planning. Investors have often struggled to understand how these external factors and commitments are reflected in the financial statements.
We seek to ensure that companies clarify how climate-related financial risks and opportunities, and their own transition planning, have been assessed in the accounts, what assumptions have been made, and how they have impacted their financial statements. We see a valuable role for auditors in bolstering capital markets confidence by confirming that they have reviewed companies’ approaches, verifying that these are consistent with statements elsewhere in corporate reporting, and confirming that the audit has concluded no further challenge is required. Finally, with the uncertainty surrounding this particular topic, we see a role for sensitivity analysis to demonstrate the robustness of the company’s approach against different transition scenarios, enabling investors to understand the potential areas of risk and/or value.
As the standards around the incorporation of material climate-related financial risks and opportunities in the financial statements evolve, we expect that the consistency and comparability of this information across companies will improve, supporting decision usefulness. Ultimately, there is an opportunity for capital markets to proactively support investors in navigating a global environment of heightened uncertainty over the shape and pace of the energy transition, through increased and financially connected transparency. In turn, this should strengthen investor confidence and capital markets competitiveness.
