Why Companies Should Prioritize The ‘G’ In ESG
Over the past two decades, a cascading series of global studies, white papers and United Nations development goals has led to the adoption of long-term benchmarks for corporate environmental, social and governance (ESG) initiatives. The combination of these sustainable development targets helped kick-start a movement that’s swiftly become a dominant factor in the financial investment world. The development, implementation and monitoring of ESG initiatives have now become a corporate badge of honor. Yet, all three of the ESG components haven’t exactly experienced an equal share of the spotlight. Environmental and social programs can be quite relatable and are simple to comprehend, measure and track.
But what about governance? Governance of what, exactly? Is it meant to be an internally facing initiative or does governance also apply to external factors? Both? As an executive of a legacy company who has expended a great deal of effort to promote the importance of their own internal governance, I feel it’s high time that “G,” the red-headed stepchild of ESG, is given its due.
What Governance Is
To begin, let’s clear up any misconceptions about governance’s role. Defined, it’s an internal structure of carefully planned rules, regulations, practices and processes—all of which have a direct correlation to how a company is managed and run. The systems and operative controls that make up internal governance are typically put in place at the Board of Directors level. The Board is then tasked with putting these strategic aims in place, monitoring their effectiveness and regularly reporting the results to shareholders and stakeholders. Governance initiatives should be reflective of the values of the company. And, from what I’ve seen, they’ve been demonstrably proven to have a positive impact on long-term performance and success.
How Companies Benefit From Good Governance
Governance is about establishing greater operational transparency. Ideal programs are integrated directly into corporate culture—a platform that establishes mutual trust and buy-in, both internally and externally. Governance is also about accountability. Once established, each employee—from the CEO down to an entry-level employee—is keenly aware of their role, their function and their own importance in contributing to the collective company’s success. Because governance is heavily vested in operational structure, a well-designed program ensures effective and efficient decision-making. Sound decisions lead to better performance, thereby fostering calculated and steady growth.
How Governance Applies To The Bottom Line
The primary goal of any public or privately traded corporation is to achieve profitability. And a good internal governance program increases efficiency, lowers risk, eliminates waste and reduces capital costs—all of which can positively impact the share price. This, in turn, can boost credit ratings and maintain investor confidence, allowing companies to raise more capital while also providing the opportunity to borrow money at a lower rate.
Establishing and maintaining a sound internal governance plan can produce internal and external benefits. But the architecture and design that go into building an appropriate governance structure take time, effort and careful consideration. It’s definitely not a one-size-fits-all proposition. Let’s review some best practices that organizations should consider in building a proper governance structure.
Planning And Participation
Whether you’ve already established a governance structure or you’re ready to re-tool your existing platform, getting started requires buy-in from all corners. Organizations need to secure participation from the Board level on down. Governance is a comprehensive project that requires a collective effort on behalf of the entire workforce. A significant amount of good governance practice lies in establishing strategies and reducing risk—and you’ll never have a complete picture without widespread participation throughout the process. For many organizations, the initial stages are also a time to reconsider the Board’s makeup. If diversity in age, ethnicity, gender, skill sets and corporate titles are all vital considerations, how does your organization currently measure up? Make sure that whoever serves on the Board or governance steering committees is provided an equal voice in contributing to the overall effort. Clear expectations matter, so encourage both collaboration and accountability—the twin pillars of governance infrastructure.
Monitoring, Reporting, Evaluation And Course Corrections
Whether new or revamped, your governance plan should be a fluid process and not a “set it and forget it” initiative. Make your expectations clear on monitoring the effectiveness of your plan, and ensure the board establishes routine monitoring, reporting and evaluation procedures. After all, if you’re not consistently measuring your governance plan’s effectiveness, what good is all the effort? Just the same, expect that adjustments will be necessary. A key component of effective leadership is the ability to implement course correction when necessary—regardless of the significance to overall operations. Best practice means having the motivation—and courage—to institute actionable change whenever necessary. There will no doubt be challenges to establishing sound and admirable corporate governance. A diverse board with various viewpoints, backgrounds and experience will offer many perspectives to consider, and unanimity may never be routine. But unless you want your organization to function like our current Congressional leaders, make sure that compromise is a principal expectation.
The reason so many companies—from entrepreneurial startups to legacy businesses—get governance wrong has much to do with the attention level afforded to this crucial initiative. Often, this is due to an overzealous amount of external company focus. For instance, businesses that rely on client-based revenue will break their backs in an effort to please them. Companies that sell goods and services place a significant amount of time and effort into tracking the latest sales figures. Yet, they do so at the expense of neglecting their own house, bringing to mind a couple of well-worn phrases: “The cobbler’s children have no shoes” and “Physician, heal thyself.”
In the world of ESG initiatives, notifying your shareholders that you’ve eliminated the such-and-such amount of annual waste, or that you instituted an admirable initiative to reduce your carbon footprint is the easy part—the “ES.” It’s the “G” that likely needs more of your attention.