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Environmental and social issues like climate change and human trafficking are becoming increasingly prominent in today’s corporate world, but governance is taking a back seat. Environmental, social, and governance, or ESG, is becoming a top priority for investors, stakeholders and consumers as a tool to evaluate a company’s practices and risks.
Over the last few years, environmental imperatives combined with popular social movements have propelled these issues up the corporate agenda, yet a focus on all three has been linked to better financial outperformance.
Understanding the G in ESG
Governance refers to the logistics, decision-making process, and different regulations surrounding corporations, along with the distribution of rights and responsibilities among different participants like board of directors, shareholders, and stakeholders. Governance determines who sits at the board table, how these directors gather information and make decisions, and how they communicate with stakeholders and each other.
The goal of governance is to help create a better company through things like ethics, diversity standards, company culture, or the sustainability of day-to-day operations.
Where governance can fail…
- Diversity: Having a lack in diversity on your board can be a disadvantage and limit your bottom line. A diverse board offers wider perspectives, makes more robust decisions, fosters innovation, tends to be more agile, and better reflects the business’s investors, customers and community.
- Executive pay: Multi-million pay packages for CEOs, particularly those seen as poor performers, can give your business a bad reputation. Public distrust can stem from the perception that executives are overpaid compared to their employees.
- Multiple board positions: Unlimited seats for boards directors can lead to conflicts of interest, compromising their loyalty to one company’s stakeholders over another’s.
- Compliance: Failure to fulfill obligations such as information disclosure, auditing, accounting, and complying with regulations can damage a business’s revenue and longevity.
- Creating and implementing policies: Governance determines that a business is behaving ethically, that it pursues policies in the interests of its stakeholders, that is does not negatively impact the environment or social responsibilities.
Why the G matters
Understanding governance risks and opportunities in decision-making is critical, as poor corporate governance practices have stood at the core of some of the biggest corporate scandals.
On the flip side, good governance practices have strong positive impacts, such as fewer instances of bribery, fraud, and corruption over time. Good governance helps investors realize the promise of their environmentally and socially responsible investments' namely, stability and value over time.
How to improve your ‘G’
- Focus on board composition — Today's organizations must have the right mix of people sitting around the boardroom table.
- Communication and transparency to stakeholders — Stakeholders want proof that a company and its board have sound governance practices in place. Boards must identify a format and channel that are straightforward to prepare and easy for shareholders to digest.
- Get the right technology — Governance tools have emerged to help boards analyze their composition, measure success, benchmark against peers, identify inefficiencies, and stay updated with industry trends.
