Governance data, unlike environmental or social data, has been compiled by businesses for a while. The criterion of good governance is generally understood and accepted, so the ‘G’ is often excluded during ESG (environmental, social, governance) conversations.
But one look at recent high profile business scandals, such as VW emissions testing and Facebook’s misuse of data, highlights that ineffective corporate governance is still at large. Many companies have suffered significant financial losses and reputational damage, due to poor corporate governance practices. Making the ‘G’ in ESG an important part of discussions.
With assets in dedicated ESG funds expected to grow to US$30 trillion (£22 trn) by 2030, investor interest is peaking. Equally, customers are demanding greater transparency from organisations. Resulting in the front-runners using governance to showcase accountability and improve ESG ratings.
So, what are some of the key governance areas for businesses to disclose within an ESG context? How are boards taking greater accountability for their actions, on behalf of their organisation and key stakeholders?
Research shows time and time again the benefit of diverse boards. More women on the board brings superior stock price performance and greater profitability. It also creates better representation and helps bring conversations around flexible working and equal pay to the fore. Diversity in opinion and experience also greatly improves exposure to risk, reducing the likelihood of corruption.
Coca-Cola has gone a step further with diversity requirements, threatening to withhold fees from law firms that fail to meet minimum standards. The company demands that for each new legal matter, at least 30% of each of the billed associate and partner time must be from ‘diverse attorneys’, and at least half of that must be from black attorneys.
Some businesses are incorporating governance that links diversity targets to executive remuneration too, making boards more accountable for their actions. Providing unconscious bias training, creating inclusive workplaces, and interrogating talent practices regularly with a D&I (diversity and inclusion) lens, are just some of the governance processes businesses are incorporating to improve workplace diversity. Creating a multi-pronged attack, businesses are fully acknowledging that D&I is a core ESG issue. Embracing a diverse board and understanding the benefits it can bring.
- Corporate transparency
With trust at an all-time low, customers are demanding greater transparency from organisations. From an environmental and social perspective, it is a simpler consumer explanation. Reducing water consumption and eradicating the use of labour below minimum wage, for example. Explaining governance is less clear cut. But all ESG elements are intertwined, meaning that governance is central to the success of environmental and social initiatives.
From a purely governance perspective, better corporate transparency may include implementing a framework in which employees can speak up if there are concerns over unethical behaviour. Creating reporting mechanisms, such as employee hotlines for staff to disclose sensitive information confidentially. This helps companies to better manage risk, whilst holding employees accountable for their actions.
Investors are also demanding greater transparency in accounting, assuring them that accurate methods are being deployed, and allowing stockholders to vote on important issues. Investors may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favourable treatment and, of course, don’t engage in illegal practices. Stakeholders have wised up to corporate smoke and mirrors, and underhand transactions, demanding greater transparency and improved governance from organisations as a result.
- Safeguarding privacy
Data breaches are common media fodder these days, but companies do have to abide by strict rules and procedures to protect the information of its stakeholders. And whilst governance calls for mastering not just the letter of laws but also their spirit, it’s important that organisations get in front of violations before they occur.
Cybersecurity is central to modern day operations. Businesses must ensure that not only are their own cyber practices robust, but their suppliers are too. By putting governance processes in place to comply with the law, and meet the cyber security needs of external stakeholders, organisations can better regulate both internal and external operations.
Investors are also increasingly scrutinising cyber practices within an ESG framework. Not only can an attack affect reputational damage, but financially breaches are estimated to cost $4 million (£2.9m) per company. Investors are keen to see what governance measures are in place to protect a business from attack, how stakeholder data is safeguarded and what support and training is in place to avoid future breaches.
With ESG criteria being an increasingly popular way for investors to evaluate a company and make financial decisions, businesses must ensure that their governance is sound – underpinning all processes. From diversity to cyber security, businesses are being more transparent about key areas they are actively monitoring or looking to improve. By putting in effective measures, shareholders and customers will be reassured that the company is taking ESG reporting seriously.