January 26, 2022
Corporate Governance and ESG: The Intersection of Profits and Principles
Recent heightened awareness by stakeholders surrounding environmental, social and corporate governance (ESG) topics has made it necessary for companies of all sizes to revisit their system of values and ensure that they reflect evolving stakeholder priorities, in particular as they relate to climate change and social justice. Notably, PwC’s 2021 Annual Corporate Directors Survey found that:
52% of respondents said that ESG was regularly a part of the board’s agenda
What is ESG?
With ESG gaining momentum in the boardroom, let’s take a moment to understand what it really means. ESG represents both a shift in how companies evaluate risks that could impact their organization and in how companies are evaluated by stakeholders on their response to environmental and social issues.
Environmental governance may include clean energy and technology, the use of natural resources, a commitment to minimizing pollution, and more.
Social governance pertains to labor issues, product safety, social opportunity, and community outreach, to name a few.
Corporate governance entails more diversity, higher standards of business ethics, tax transparency, and more.
In the wake of the COVID-19 pandemic which exacerbated many issues, such as racial inequity and social inequality, societal pressure surrounding these issues and issues like them has never been higher. Companies that proactively embrace ESG may be better positioned in the marketplace, and while it is often deemed a cost, it increasingly can be profitable for companies, too.
- Investors and business partners increasingly want to work with (and may be willing to pay a premium for) companies that demonstrate a commitment to environmental and social issues from an operational perspective
- A new generation of employees are attracted to companies that share their values and are at the forefront of environmental and social issues
- Regulation and rating agencies are placing more emphasis on corporate responsibility and ESG from a risk and governance perspective
A focus on ESG can be a competitive advantage with each of the above stakeholders and others. However, like any program, support and accountability for ESG from executive leadership and those charged with governance is a prerequisite for success.
For companies starting out on their ESG journey, the first step is to assess the current ESG landscape at the organization. Once you have this baseline, start with the end in mind.
Where does executive management and the board want the organization to be and what incremental steps are needed?
Based on the future-state response, executive leadership can set both short term and long term goals, and build in accountability checkpoints along the way. Board members are responsible for the long term vision and objectives of the company, whereas executive management serves a more tactical role in taking short term incremental steps to getting the company where it needs to be on time and is accountable to the board.
Board Culture and Composition
Boards are a driving force behind a company’s ethos. Who sits on the board and their background, culture, and characteristics matter. A diverse board improves the dynamic of the organization by offering different perspectives which may make problem-solving easier, and can generate innovative ideas and solutions. The SEC has board diversity requirements as well as some states that must also be considered.
To maintain an independent and engaged board, best practices can include:
Clearly define roles and expectations of board members
Complete periodic evaluations of board members for conflicts of interest
Rotate the board Chair on a regular basis
As mentioned above, the board is responsible for setting the strategy and objectives of the company. As it relates to ESG, board members can ask:
What are we doing to be a good company and how are we getting better?
What are we doing to take care of the environment and our customers and stakeholders?
How does ESG fit into our organizational structure?
By viewing ESG as a strategic objective, leaders can build a common language around the company’s values and understanding of what the company wants to achieve and how each person fits into the larger picture.
Opportunities and Challenges
When a company and its board are committed to ESG, they are upholding their responsibility to evolving stakeholder priorities. Leading by example helps to maintain a good reputation and can actually increase long-term profitability and brand loyalty.
However, challenges can and should be expected along the way. The differentiating factor that will impact an organization’s success and growth is the organization’s response. In a workplace, there may be four different generations with very different values working on the same team. Remaining transparent and setting clear expectations, as well as checking in through every step, may help ease employees through any transitions.
It can also be difficult to carve out time to focus on priorities that may not immediately impact the bottom line and could cost money up front that are for the greater good of the company, the environment and the community. However every little bit counts, and measuring and tracking your progress is a must.
Organizational change can be measured and shared quantitatively through finance reports, ratios, and ratings. It can be measured qualitatively through engagement via surveys and town hall meetings. When employees feel heard they are more satisfied with their work. When they and other stakeholders understand the values of the company, they are more likely to get behind them.
No matter how big or small your goals are when it comes to ESG, a thorough self assessment is always the first step. Once that is complete, it’s important to consider the state of your current board, set goals for the organization, explore areas of opportunity and maintain transparency every step of the way.
Though it may be challenging, a company with an ESG strategy that reflects modern times reassures shareholders, invites coveted talent, and upholds social responsibility for the betterment of everyone.