Governance in the Year of the Tiger

Gong Xi Fa Cai! In this Year of the Tiger, I would like to start off my thoughts on Governance.

I was invited to moderate a panel in July last year, and I asked the panellists why they felt that good governance, at business, corporate and government level is important. At foundation, good governance practices can decrease fraud and scandals that affect stakeholders. There are virtues of being an sustainable company and that relates to returns. A business that has its eye on sustainability makes strategic planning considering impact on stakeholders, society and environment and takes steps to mitigate harm. In studies, countries that have done the same have outperformed countries that do not practice the same level of governance.

All good. We know why sustainability is important, and that good governance is part and parcel of one's sustaining power.

But how do you govern for such performance? What are the building blocks of governance, I asked?

The answers were eye-opening. It is not just one, but a blend of levers that one pulls. Someone emphasised setting and laying out the road-map to a target to achieve carbon neutrality by 2027. 2027? I raised my eyebrows. But he was steadfast and sure. He made sure that we understood that their company had made a commitment using a Science based target, no less (the gold standard for carbon reduction target setting), and he was at pains to emphasise that this went beyond legal compliance. That this was driven from grassroots of the company, upwards meeting top down support for technology building, information gathering and sharing, establishing guidelines and policies to those at the ground level. Bottom up efforts tranlate by acquiring the practical knowledge, without which they would not be able to align goals. It comes from training and collective engagement from all stakeholders.

And I believe that this formula, is applicable to all organisms within society, be it government, municipality, organisations, communities, families or individuals.

Is it legal? Is it moral? Is it ethical? Is it the right thing to do? The role of ethics within governance is another tricky one, because I notice that people have a way of justifying or rationalising actions along only 1 paradigm ie legality, without taking into account these other values. I'll talk of this in a separate posting.

Anyway, I share my wrap-up of the session-

ESG is not an end in itself, but process for performance. So how would you govern for the process and the performance?

The components, or levers for good governance begins with a culture of compliance, and a demonstration that there is a code of conduct (policies, procedures) being observed by the management and the board. As Zaki has mentioned, one way for demonstrating that there is an observance for best practices is through third party certifications, and these practices will build the good habits that form the corporate culture.

Zaki emphasized that it is important to set targets surrounding environmental and social issues, which brings positive reputational benefits, as well as profitability. Avi said that The way to signal that the business is mindful of the ESG matters is to show movement or rate of change for the better that is responsive to the urgency of the matters.

Institutional investors in particular are very concerned that businesses and companies can share this data via public disclosures, in a way that is both quantitative and qualitative, as what is not measured cannot be managed. Notwithstanding, there are still challenges as to the collation and quality of data, not to mention the various sustainability metrics available against which companies can report.

The question was asked whether companies can “do” ESG and yet be profitable. Sujatha very wisely reminded us that the regulators have provided a holistic approach to sustainability, and that all initiatives be it financial, social or environmental must be balanced, taking into account the stakeholders of the enterprise. Determining what is material to stakeholders and incorporating this into strategy is also part of the work required.

Careful and considered decisions as to allocation of capital is therefore demanded of the board and the management, as investments must be made towards sustainability goals in addition to financial goals.

Avi also highlighted that there are differences between emerging and developed markets, particularly as to the rights of stakeholders eg minority shareholders.

I would add that having the appropriate board oversight, and putting into place the structures for exercising this oversignt, as well as having the necessary risk management, control systems and 3rd party assurance is also very important. Governance also needs to extend to human capital, taking into account diversity, equity and inclusion.

One challenge is for smaller companies with small teams – perhaps the way round this is leveraging technology.