The G in ESG: How to incorporate sustainable governance practices in your business
If you’ve been following our articles for a while (thank you!) you’ll know that we talk a lot about the holistic nature of ESG being the key to its success as a business driver. ESG isn’t just about doing one good thing, it’s about being good, across the board, creating value for present and future generations with every decision. If you’re new here (welcome!), we talked about the E (environment) and S (social) in ESG in previous posts – check them out if you’d like a refresher on ESG fundamentals.
Today, we’re tackling the least talked about and likely the least understood part of ESG – the G, governance. Governance is a broad and complex term, and unless you’re a bit of a policy wonk at heart, it can feel like a cure for insomnia. But governance doesn’t have to be boring – in fact, it’s really the foundational element to your ESG strategy, because without good governance, nothing really ever happens. Or worse, things that shouldn’t happen, do.
There is growing criticism that current approaches to corporate governance undermine efforts at sustainability in other areas. In 2020, the Harvard Law School Forum on Corporate Governance released a statement from corporate law experts from universities across the globe, which didn’t pull any punches. They said, “The current model of corporate governance needs reform. There is mounting evidence that the practices of shareholder primacy drive company directors and executives to adopt the same short time horizon as financial markets…. The result is a “tragedy of the horizon”, with corporations and their shareholders failing to consider environmental, social or even their own, long-term, economic sustainability.”
Although structural governance systems may benefit from reform, implementing sustainable governance practices in your own organization doesn’t have to be complex. In fact, it’s likely you have some strong policies and approaches already. At its core, governance is about the way that decisions are made within an organization – who makes them and why, their transparency, their impact on stakeholders including investors, employees, customers, members of the supply chain – even the local community. The Inter-American Development Bank puts it nicely: “Corporate governance practices translate the culture behind which decisions are taken in a company.”
When businesses are governed well, everyone benefits. Studies show that companies with sustainable governance practices thrive, frequently outperforming the market.
So, given ESG is about a holistic approach, covering environmental, social and governance sustainability across an organization, how can you bring sustainable governance into your business, or build on what you already have?
Here are three steps your company can take to become a leader in sustainable governance.
Build a Board for the Future
In smaller companies or those with newer Boards of Directors, the board can play a more passive role, responding to issues raised by management reactively, rather than playing a role of stewardship. Skilled boards guide the organization through complex decision-making, considering a diverse range of stakeholders who may have conflicting interests and demands. They provide clarity on, and lead in accordance with, the company’s values, purpose and strategy, prioritizing sustainable growth and integrity in decision-making.
As part of this, ensuring a diverse Board is critical. Diversity brings a variety of perspectives to the table, which supports better decision making. Board composition is an increasing focus area for investors, and multiple studies have shown that diverse boards increase long-term company value.
Engage with Investors to Prioritize Long-term Decision Making
Consulting firm EY recently conducted a survey amongst its clients, looking to understand leading approaches to sustainable governance, centring on the question, ‘Will there be a next if corporate governance is focused on the now?’
Findings revealed that many organizations looking to implement sustainable practices struggle to make their actions match their rhetoric, because of pressure from investors to focus on short-term solutions. The report noted “Investor pressure on short-term earnings risks (is) causing companies to redirect capital and human resources from long-term strategic initiatives to meet short-term financial goals.”
Instead of capitulating to investor pressure, the firm suggests establishing a strategic approach to engaging with investors to build trust, establish common ground and garner support for long-term strategies. They also recommend establishing consistent decision-making practices that emphasise long-term sustainability at both board and managerial levels.
Align Incentives to Sustainability Targets
Multiple reports have noted that a key impediment to achieving long-term sustainability objectives is that company executives are typically heavily incentivised to achieve short-term financial goals.
An NGO Policy Briefing to the European Commission for its Action Plan on Financing Sustainable Growth, recommended linking the flexible remuneration components of salaries for board members and executives to measurable sustainability targets. It also recommended that dividends should only be paid out subject to meeting the company’s sustainability targets.
As ESG or ‘impact’ investing sees record returns, with the majority of sustainable funds outperforming their peers over one, three, five and ten years, there are powerful reasons for companies to pursue sustainability as a strategic objective. If shareholders and investors benefit financially from sustainable practices, the ripple effect for prioritize long-term thinking across all aspects of decision making will be significant.
Bold ideas, but as we’ve said before, sustainable leadership requires bravery!
Has your company implemented governance practices to support your sustainability objectives? How have the changes made a difference to your organization? Let us know – we’d love to hear your experiences.
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