Thomas Mytton, an international governance specialist, argues that governance is a far more important component of ESG even though the E and the S have always garnered more attention.
- Governance will become more prominent as the world enters an elongated period of interrelated economic, environmental, and geopolitical challenges.
- Organisations will need to rely more on their own governance systems to demonstrate resilience and maintain and build confidence externally in their services and activities.
- It is important to demonstrate to boards and to an organisation’s wider stakeholder community that there is more than just meeting base-level compliance requirements – there is now an imperative to go further.
We have all seen the positive shift that companies are making when it comes to the environmental and social aspects of sustainability. We have heard about ‘carbon reduction’ pathways, ‘net zero’ targets, and stakeholder-focused initiatives that are all part of a company’s approach to delivering positive change within its value chain.
To date, less attention has been paid to the third element, the ‘G’ of ESG: Governance.
The G is integral to achieving the E and the S
Yet, a company’s governance structure, underpinned by its organisational culture, behaviours, and relationships, is integral to achieving the environmental and social sustainability ambitions that are being set. This is a fundamental part of ensuring greater business performance and competitive advantage for companies across the globe in every sector of the economy.
Corporate governance has been recognised as “the way in which companies are governed and to what purpose.…it ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced”, according to The Chartered Governance Institute UK & Ireland. Outside of the legal requirements, it tends to be overlooked and downplayed as a purely compliance-driven element of running an organisation and one where a minimum level of effort is required in order to tick the relevant box.
Corporate governance is, however, much more than solely a process, or bureaucratic structure-focused compliance mechanism. Good corporate governance serves as the enabler to provide company boards, shareholders, and stakeholders with the level of oversight, assurance, and confidence needed to ensure that a company is meeting its strategic, performance and regulatory expectations. Additionally, it is vital to the delivery of an organisation’s ESG goals and to adhere well to appropriate disclosure standards.
Recent research has shown that 49% of global investors want organisations to ensure that they maintain effective corporate governance. This will become even more prominent as the world enters an elongated period of interrelated economic, environmental, and geopolitical challenges.
A report by the Institute of Directors proclaims that “Governance is King”, and rightly so. In order to meet the aforementioned challenge, organisations will need to rely more on their own governance systems to demonstrate a level of resilience and to maintain and build confidence externally in their services and activities. It is important to demonstrate to boards and to an organisation’s wider stakeholder community that there is more than just meeting base-level compliance requirements – there is now an imperative to go further.
The day-to-day running of a company or organisation must meet a set of compliance requirements. Organisations, however, can capture significantly more value, whilst demonstrating more openness, transparency, and accountability, by going beyond these minimum requirements through the application of a set of core good governance principles.
Core principles of good governance
- A clear vision, purpose, and values supported by a credible strategy;
- Investment in effective leadership, adequate capacity, and relevant capabilities;
- Clearly defined roles, responsibilities, and systems of accountability;
- Clear and effective processes for identifying, prioritising, and managing material issues and risks, coupled with transparent disclosure of performance;
- Appropriate and accurate information is effectively processed, tested, and challenged to inform decision-making;
- Structured, consistent, and transparent internal and external stakeholder engagement;
- Robust systems and processes to ensure innovation, learning, and continuous improvement;
- A positive organisational culture that underpins and supports the delivery of all of the above.
I believe that embedding these principles enables organisations to demonstrate the openness, transparency, and accountability that stakeholders have come to expect and demand. It will also drive optimised and enhanced performance, as internal and external stakeholders embrace these principles and they become embedded within organisations.
Culture eats strategy for breakfast
Much as the age-old Peter Drucker saying, “culture eats strategy for breakfast” continues to ring true today, the same can be said for the value of culture in the application and pursuit of good governance. Discussions on governance tend to focus on the processes and structures of an organisation, but in reality, whilst these are all essential components, their effectiveness depends entirely on organisational culture.
Looking at some of the largest corporate governance failures in recent history, such as the Volkswagen emissions scandal, we see culture, and specifically poor behaviours and damaging relationships, at the centre of governance crises. In the case of Volkswagen, this is despite what were perceived as effective governance processes being in place. This is a recurring theme with these failures, demonstrating the importance of culture in any organisation.
In the UK, culture is rightly listed as a core element of the current UK Corporate Governance code, which companies must comply with or explain. In particular, it stipulates that boards must establish a clear Corporate Purpose, Values, and Business Strategy, and ensure that these are appropriately aligned with culture.
Whilst this makes sense in theory, a report from the Financial Reporting Council found that, in practice, companies are still not meeting this mandate – a demonstration that going beyond simply meeting compliance is still lacking. Pressure is now mounting on leaders to recognise culture as a core element of their organisation’s governance. Gone are the days of thinking a governance and accountability framework will do the job alone. This is even more pronounced in the rapidly changing world of ESG, where it is critical that companies show a willingness to demonstrate their culture in action as both the right thing to do and a means to advancing in the marketplace.
There is much to be positive about as ESG evolves, including efforts to contain and reduce greenwashing and encourage and strengthen the setting of ambitious targets, which are supported by good governance practices that align with corporate goals. Consistent, globally recognised standards continue to evolve to ensure companies do as they say they do and increase the overall level of openness, transparency, and accountability, ultimately building stakeholder trust and driving better results. With this, the importance of ‘G’ in helping organisations deliver on their ESG agenda is now becoming clear for all to see.
The opinions of guest authors are their own and do not necessarily represent those of SG Voice.