Corporate governance has come to the fore as directors and executives recognise that they are responsible not just to shareholders, as in the past, but to a wide range of stakeholders, reports Douglas Blakey

Customers, partners, employees and communities must be considered, as well as shareholders. Regulators and non-governmental organisations command attention.Few, if any, directors or executives would argue that they have no responsibility for the environment, especially as the effects of climate change grow more evident and more dire.

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Governance is central to GlobalData’s ESG framework. GlobalData has developed a framework to help companies understand and address their responsibilities across the three main areas – environmental, social and governance (ESG) – once termed simply as sustainability.

Organising the topic in these three areas makes it much easier for companies to assess where they stand. GlobalData’s framework goes deeper and defines four key areas within each of the three main topics.

Within corporate governance, these are corporate structure, risk management, corruption and bribery, and ethics. Then, within each area, the framework identifies several contributing factors and mitigating actions to help companies identify where progress is needed and create action plans.

A holistic approach

GlobalData recommends that companies take a holistic approach to sustainability that addresses all three of its major aspects: environmental, social, and governance.The GlobalData ESG framework is designed to help clients build trust with society and set them on a path toward sustainable success for their companies and the planet.

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The chart below summarises GlobalData’s ESG framework. Companies can use it to assess their sustainability policies, performance, and progress. It will help them identify and mitigate factors that contribute to negative consequences and pursue actions to improve ESG performance.

It provides a checklist for CEOs to ensure hat their management policies and practices address all aspects of sustainability.

Environmental factors

Environmental performance measures the energy a company consumes, the waste it generates, the natural resources it uses, and the consequences for ecosystems and habitats.An overarching factor is climate change, which is increasing the frequency and force of extreme weather events. Climate change and instability also cause uncertainty that, in turn, increases corporate risk and delays investment.

Social factors
Social performance assesses a company’s engagement with its workers, customers, suppliers, and the local community. It covers human rights, diversity and inclusion, health and safety, and community impact.

Inattention to these factors can damage corporate brands and reputations and bring legal and regulatory penalties.

Governance factors
Governance assesses how a company uses policies and controls to inform business decisions, comply with the law, and meet obligations to stakeholders.

Governance failures – for example, aggressive tax avoidance, corruption, excessive executive pay, or relentless lobbying – cause reputational harm and loss of trust.

Why companies must take governance seriously 
Simply put, governance is what determines whether a company will deliver results to stakeholders, however it defines stakeholders and however it defines results. Free-market advocate Milton Friedman once proselytised the view that corporations were responsible only to one stakeholder – its investors – and results were almost purely financial.Today that view seems almost quaint. Investors still hold significant sway, but few executives would publicly proclaim they are responsible only to investors. Instead, nearly all would acknowledge responsibility to a broader group of stakeholders. The best-run companies tend to be those that take the broadest and longest-term view of stakeholders, risks, and responsibilities.

Even the Business Roundtable, the association of US CEOs founded in 1972 that long espoused Friedman’s view, has come around. In 2019, the organisation published a new Statement on the Purpose of a Corporation, signed by 181 CEOs who committed to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”. The statement acknowledged the importance of a healthy environment.

How to improve corporate governance 
The overarching lesson is that corporations face so much disclosure and must answer to so many different watchdogs that it is difficult to avoid accountability, and there are rapid and severe consequences for lax governance.Good governance alone may not ensure long-term success, but it is a necessary component. So how is it achieved?

  • Develop and adopt vision, mission, and values statements that define your corporation and establish accountability at all levels;
  • Define ESG success for the company and recognise that it is entwined with financial success. Commit to integrated assessment and disclosure of ESG and financial performance;
  • Establish a team to drive ESG performance, headed by a C-level executive;
  • Incentivise ESG performance by tying it to a portion of executive compensation;
  • Appoint more independent board members to widen the board’s vision and sense of responsibility;
  • Increase board-level diversity to drive greater diversity throughout the organisation;
  • Embrace transparency, understanding that secrecy tends to grow like mould and cause internal rot. Take the long view, recognising that stakeholder scrutiny will only increase.
BlackRock – leading by example
BlackRock CEO Larry Fink used his annual Letter to CEOs in 2020 and 2021 to give guidance on ESG issues, including board-level diversity, environmental sustainability and the need for companies to consider all stakeholders when making decisions.He called for portfolio companies to improve disclosure in areas such as workforce diversity, supply chain sustainability and protection of consumer data. Fink argues that sustainable practices are essential to the long-term health and success of the business.

BlackRock, which has more than $8.6trn under management, has significant power over its portfolio companies in how it manages its holdings and through support for activist board members to drive change within these companies.

Fink is arguably the most important man in private finance; his words signal changing winds in the investor world toward sustainability.