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Around the world, the corporate governance landscape is shifting, as efforts to improve business practices and policies gain support and momentum. The wave of reform has become visible everywhere — from tough new regulations in Japan to sovereign wealth funds such as Norway’s Norges Bank Investment Management taking a more active approach to investments — and it is certain to continue to rise.

Three factors are driving these developments. First, today’s deep economic uncertainty has broadened ordinary people’s awareness of the influence that companies have on politics, policy and their own daily lives.

Second, there has been a burgeoning awareness among governments that economic growth requires a proactive regulatory approach. Robust and resilient economies need strong businesses, and to build strong businesses, governments must play a role in ensuring high-integrity oversight of business activity. Firm stewardship and country stewardship are increasingly linked, and authorities now recognize that ensuring good governance now is far less costly (both financially and politically) than paying for the consequences of bad governance later.

In Japan, the Financial Services Agency enacted a Stewardship Code in 2014, with a Corporate Governance Code from the Tokyo Stock Exchange entering into force this June. By creating a more equal environment among shareholders, ensuring more disclosure and transparency, specifying the responsibilities of boards and requiring outside independent directors on boards, the codes enshrine changes that make Japan more attractive for foreign investors. More generally, Prime Minister Shinzo Abe has emphasized that good corporate governance is critical to long-term economic growth and prosperity.

Toshiba’s recent accounting scandal — the company was found to have inflated its profits by $1.2 billion over several years since 2008 — presents an opportunity for Japan’s government to demonstrate its seriousness about the new regulations. Toshiba CEO Hisao Tanaka and other senior executives have had to resign; the interim CEO apologized to Abe’s office; Norio Sasaki, the company’s vice-chairman and former CEO, has quit his posts on government panels; and the former chairman of Toshiba’s audit committee has stepped down from the government accounting panel.

In the US, the Securities and Exchange Commission enacted a rule at the beginning of August requiring public companies to disclose the pay gap between workers and CEOs.

The European Union and its member states are also taking an increasingly active approach to corporate governance, including regulations concerning boardroom diversity. Italy, France, Spain, Norway and others have all enacted boardroom gender quotas, with companies required to fill 30-40% of independent board seats with women. The latest example can be found in Germany, where, after much debate, new quotas require that from 2016 large companies fill 30% of non-executive board seats with women.

The third, and perhaps most important, factor underpinning recent changes in corporate governance has been the sharp rise in cross-border investing. Sovereign wealth funds, pension funds, global investment banks and hedge funds do not invest only in their own backyard. They scour the planet looking for places to put their money, and they expect companies that receive it to play by rational rules.

The Olympus scandal of 2011-2012 — when investigations in Japan, the UK, and the US revealed that company executives falsified accounts to hide losses — is a watershed example of a traditional closed corporate culture coming up against international scrutiny. As the full extent of the cover-up was revealed, foreign investors, such as GIC Pte Ltd (Singapore’s sovereign wealth fund), rebelled.

Singapore sold nearly all of its 2% stake almost immediately, and other foreign investors and analysts reacted similarly. It was a turning point for Japan, as the country’s clubby investment culture came up against global transparency and accounting standards. Things have not been the same since, either for Japan or for companies’ understanding of the expectations and influence of international investors.

International investors are in a unique position to encourage, or even enforce, global best practices in corporate governance. If such investors show they are willing to withdraw financing, they will gain influence in bringing about sustainable change—to the benefit of us all.

This is especially true if investors are guided by principles that go beyond financial returns. Global funds that uphold high ethical standards concerning labour practices and environmental protections are safeguarding the global ecosystem on which they, and the rest of us, depend. As they establish and implement such principles, the resulting momentum has been changing corporate governance and behaviour across industries and regions. This is evident from several high-profile examples. CalPERS (the California Public Employees’ Retirement System), a $300 billion pension fund, has published its corporate governance principles, which include boardroom diversity, fair labour practices, and environmental protection. Norges Bank Investment Management, Norway’s $870 billion sovereign wealth fund (the largest in the world), has also pushed for changing governance rules, including separating the role of chief executive and chairman and better reporting by firms on how they are addressing climate change.

The shift in emphasis on best-practice corporate governance is real, and it is here to stay. It comes from people finding and raising their voices, from politicians recognizing the importance of corporate governance for sustainable economic growth and from influential investors putting genuine pressure on companies to change their behaviour. Firms and boards ignore this trend at their peril.


Lucy P. Marcus is CEO of Marcus Venture Consulting.

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