Section 10.1: Corporate governance and sustainability

10.1.1: Introduction to Corporate Governance 

Companies and corporations are regarded as the engines of economic growth and social development of any country. Corporations, especially large multinational corporations (MNCs), can be a major economic, political, and cultural force globally.

For example, a 2015 study identified that the world’s 10 largest corporations made more money than 180 of the poorest countries. This inequality and vast potential power has generated debate about the importance of, and mechanisms for leveling the playing field  by strengthening corporate governance and regulations.

What is a Corporate Governance?

Corporate governance is a structured system of processes by which companies and corporations are directed and controlled. It defines the purpose of the organization and is concerned with the practices and procedures of running an organization in a manner that meets its objectives. A key objective of corporate governance has traditionally been to maximize the wealth of the business owners (shareholders), and ensure effective monitoring of managers who act as agents on behalf of the owners. Increasingly, however, corporations are also being held accountable for how a firm’s actions impacts the natural environment and other stakeholders such as local communities and employees.

Corporate governance can therefore be defined as “a set of control mechanisms that serve to prevent or dissuade potentially self-interested managers from engaging in activities that are detrimental to the welfare and benefit of both stakeholder and shareholder”.

In recent years, there has been a business enlightenment that companies fundamentally operate within societies and communities. Companies cannot afford to ignore the impact its business has on economic, social development, and environmental aspects of our world. The focus of corporate governance has therefore evolved from simply being concerned about “how the companies are directed and controlled” to also consider broader “sustainable corporate governance” issues.

Companies are no longer seen solely as instruments of the shareholders, but also as an entity with responsibilities to the variety of other shareholders that are interested in, and influenced and affected by their activities. Boards and upper management are now expected to look beyond balance sheets and profit margins in order to operate as responsible corporate citizens within the communities and societies where businesses operate. The figure below illustrates a typical corporate sustainability framework.

Source: Next Generation Consultants 2009

10.1.2: Core Principles of Good Corporate Governance

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Good governance is responsive to the present and future needs of the organization, exercises prudence in policy-setting and decision-making, and that the best interests of all stakeholders are taken into account.

The core principles that guide corporate governance policies have to reflect the important role they play in achieving broader economic, environmental and socially positive objectives. Explore the sections below to learn more about each of these principles.

Transparency means that information should be provided in easily understandable forms and media; that it should be freely available and directly accessible to those who will be affected by governance policies and practices, as well as the outcomes resulting from them. The board should ensure that the information provided is an unbiased and balanced assessment of the organization’s financial, environmental, and social governance positions, as well as its performance and outlooks on those positions.

Participation (Stakeholder Involvement)
Participation by all stakeholders, either directly or through legitimate representatives, is essential to good governance. Participation needs to be informed and organized, including freedom of expression and concern for the best interests of the organization and society in general. The board should be responsible for ensuring that an appropriate dialogue takes place among the organization, its shareholders and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.

Responsiveness ( Time Sensitivity)
Good governance requires that organizations and their processes are designed to serve the best interests of stakeholders within a reasonable timeframe. The board has to ensure that all decisions relating to the organization, and of concern to its stakeholders should be addressed in a timely manner and without undue delay.

Equity and Inclusiveness
An organization that provides the opportunity for its stakeholders to maintain, enhance, or generally improve their well-being provides the most compelling message regarding its reason for existence and value to society. The board undertakes the responsibility to protect shareholder’s rights and ensures the equal treatment of all stakeholders. It shall provide and ensure that all shareholders and stakeholders are provided a platform, and equal opportunity to voice their concerns as well as see recourse for any violations of their rights.

Efficiency and Effectiveness
Good governance means that the processes implemented by the organization to produce favorable results meet the needs of its stakeholders, while making the best use of resources – human, technological, financial, natural and environmental – at its disposal. The board should take responsibility and ensure that all available resources are managed and utilized in manner that maximizes their potential to further the economic, environmental and social objectives of the organization. 

Corporate sustainability governance has emerged as a management system that merges and balances the interests of all three pillars of sustainable development – economic, environmental and social within the operational boundaries of the organization. The board should guide the business to create value, and allocate it fairly and sustainably to reinvestment and distributions to stakeholders, including shareholders, directors, employees, customers and the wider community. It should ensure that appropriate investments are made to fulfill its broader environmental and social goals.

Accountability is a key feature of good governance. Who is accountable for what should be documented in policy statements. In general, an organization is accountable to those who will be affected by its decisions or actions as well as the applicable rules of law. The board should clearly communicate to the company’s shareholders and other stakeholders at regular intervals, a fair, balanced and understandable assessment of how the company is achieving its business purpose and meeting its other obligations, commitments, and responsibilities.

Challenges for Sustainability Governance

Implementing corporate environmental sustainability strategies is increasingly becoming standard practice with some companies going further and taking steps to reduce the environmental impact of their products, services, and supply chains.  In conducive market conditions, as a company expands, it is likely to face new challenges that impact the governance of sustainability within its operations. The tabs below identify and highlight some of the factors that contribute to the sustainability governance challenges faced by successful and expanding companies.

Overseas Facilities and Operations
International facilities and operations increase the production capabilities of companies, giving them access to more cost efficient labor markets, cheaper resources, and proximity to consumer bases. However, global operations also present a bigger challenge towards addressing and accounting for organization-wide sustainability compliance.

Deep Supply Chains
As an organization’s operations expand and diversify, so does their demand for resource and component suppliers, service and logistics providers, as well as collaborative partners. An accurate assessment of an organization’s sustainability should be reflective of successes and failures of all its operations, including its supply chain networks. Ensuring consistent adherence to the parent company’s sustainability policy throughout its extensive and deep supply chains presents a significant challenge for corporate governance management.

Differing Political and Legal Systems
Companies operating in foreign countries have to be mindful of the different legal and political systems/processes to ensure that they remain compliant. This may require the company to undertake further certifications or qualifications, above and beyond those stipulated by the parent company, in order to remain operational within that country. The company must also be vigilant to remain politically unbiased to ensure the operational neutrality. These requirement present as further challenges towards operation-wide sustainability governance.

Cultural, Geographic, and Historical concerns
Effectively managing these challenges to limit liability and enhance accountability requires companies to accurately track and report on their activities. Sustainability reporting is a key mechanism that facilitates the communication of information between the company, its stakeholders, and its shareholders.

Effectively managing these challenges to limit liability and enhance accountability requires companies to accurately track and report on their activities. Sustainability reporting is a key mechanism that facilitates the communication of information between the company, its stakeholders, and its shareholders.

Supplementary Resources

Burritt (2003) “Corporate Environmental Governance”

Raut “Corporate Governance and Sustainability Concepts”

%d bloggers like this: