The natural reaction to scaled back governance measures is complacency, but boards must stay vigilant to maintain and enhance their reputations, says Corporate Governance Institute.

There is an emerging global trend of cuts to red tape, as governments roll back on promised reforms that boards might see as overly bureaucratic. This transition has been triggered by a number of factors, including a shifting political landscape, efforts from countries and states to stay attractive to businesses, and pushback from companies against the compliance burden.

A recent example is the decision of the US State of Delaware, long considered a tone-setter when it comes to corporate law, rushing to pass new rules to relax restrictions in areas like shareholder-led lawsuits and conflicts of interest. Similarly, the European Commission is watering down key sustainability reporting rules (CSRD) to make them more accessible for directors and executives to manage.

According to Ciaran Bollard, CEO and Director of the Corporate Governance Institute, despite regulators making life easier for companies, business decision-makers must ensure they maintain high standards to remain compliant in a turbulent market.

Bollard said: “In essence, the grip of the watchdogs and regulators is loosened, and it’s not the first time we’ve seen something like this. The direction of travel is clear: regulators are making life easier for companies. A few years ago, the mood was all about tighter oversight and more transparency. Now, that has morphed into a tug-of-war and no one knows where the balance should be.

“Governments want their jurisdictions to stay attractive to businesses, but the entire landscape of enticing investment is much more competitive. Delaware doesn’t want to lose its crown as a corporate epicentre of America and the EU is keen to avoid antagonising entire industries while it pursues its sustainability agenda. Softening governance rules is one way to hold onto investment.

“Additionally, companies have made plenty of noise about the growing compliance burden. Ultimately, many don’t have the expertise to manage new rules. In Europe, firms have been incredibly vocal about the complexity of CSRD and what it will do to their balance sheets. It’s no coincidence that the EU is delaying parts of that directive, considering the number of boards crying out for help.

“If you’re sitting on a board, this all might sound like good news and, in the short term, it probably is. Some of the more challenging governance overhauls – especially around sustainability reporting and personal liability – are either off the table or delayed. This is a relief for any business scrambling to find the right talent for compliance roles.

“However, nothing about the current trends suggests that the focus is on undoing baseline governance standards. Shareholders, employees, activists, and the media are still watching. Just because regulators are readjusting doesn’t mean expectations are lower. Boards are still being judged by their decisions, values and transparency. The court of public opinion hasn’t gone anywhere.

“While lawmakers work out where to balance accountability and opportunity, rules are being written in a rushed, more reactive way. This can create uncertainty for directors, who will wonder where to turn for clarity, who to hire for compliance, and how to strategise for success.”

Bollard concluded: “Governance rules are being softened in key jurisdictions because the atmosphere around more rules has changed. We don’t know where this trend will end up, but for the moment it means a short-term reprieve for directors struggling to keep up and a heightened sense of uncertainty. It does not mean a total relaxation of governance standards built over decades. That would take far more to undo.”