Sustainability Chapter 9: Sustainable Governance PDF

Sustainable Governance Much like a ship at sea, an organization has many people on board: passengers, crew, officers and the captain. The officers and captain, much like a board of directors and CEO, are responsible for a successful voyage and safe arrival at harbor. The “G” in ESG stands for Gove...

Sustainable Governance Much like a ship at sea, an organization has many people on board: passengers, crew, officers and the captain. The officers and captain, much like a board of directors and CEO, are responsible for a successful voyage and safe arrival at harbor. The “G” in ESG stands for Governance, or “helmsman” in Latin, from which the word was derived. In this chapter, we’ll explore some of the many facets of corporate governance, how its measured, and what constitutes good leadership in sailing the ocean In This Chapter, waves. We’ll Cover: Governance Criteria and Goals Measuring Governance Anti-Corruption ISO 37000 The Four Pillars of Good Governance What is Governance? Governance “The system by which companies are directed and controlled” Although the two words sound similar, Governance is NOT Government! Governance is concerned with the leadership, policies and practices within an organization, whereas government is the system governing a political entity.  The Importance of Good Governance Builds trust with Acts as a Increases efficiency Can translate to of operations such as investors and North Star for rising share supply chain and public officials your stakeholders prices customer service Guides leadership Reduces risk Emboldens Facilitates long-term by establishing a of financial your financial viability, baseline set of rules loss caused by stakeholders, opportunities, and and controls. waste and increasing returns corruption resiliency to setbacks  Aims of Corporate Governance Motivate managers. Keep your Protect trusted Ownership of assets. organization off the capital. Right to receive front page of the Reporting. profit. Right to vote. news Disclosure, Maintain transparency. Shareholder Reputation Accountability Rights Upholding moral Leave the company Ensure sustainable principles promised by better than how growth, both financial the company’s mission you found it. and ESG metrics. statement Stewardship Performance Ethical Behavior  Your Organization’s Sustainable Governance Process 1 ESG Metrics Pictured right is a process an Co 2 organization might take when ai y Su 6 Da ctio Ch ppl ll e n evaluating how to improve ta n or build sustainable governance. The process starts broad, evaluating which material ESG R cs epo i issues are present, and th rti 5 E 3 delineates down through all g n organizational operations which Diversity governance affects. 4  Corporate Governance in Austria Corporate Governance in Austria works within a stringent set of regulations and legal frameworks. Emphasizing the foundational principles of corporate governance such as, transparency, accountability, and long-term value creation. Besides the standard corporate governance principles, there are a few unique aspects about Austria’s corporate governance: Two-Tier Board Disclosure System Requirements Stock corporations work within The Austrian Corporate a series of checks and Governance Code (ÖCGK) balances. Their boards consist sets stringent reporting of both a Management Board requirements for (Vorstand) responsible for daily companies entailing operations, and a Supervisory financial disclosure as well Board (Aufsichstrat) steering as transparency behind strategic corporate decisions. decision-making  ISO 37000 Outcomes and Principles ISO 37000 is a series of standards including management of: Performance over time Value generation Anti-bribery; Stakeholder engagement Whistleblowing; Accountability Legal risks; Leadership measurement Oversight of the above Data and decisions Strategy Purpose Social responsibility Key : Main outcomes Primary principles Responsible Stewardship Effective performance Foundational principles Ethical Behavior Enabling principles  Pillars of Governance There are four main pillars of Corporate Governance. Note that depending on the source, the names of these may change, but the ideas Accountabili Stewardshi Transparen Integrity behind them remain the same ty cy p  Stewardship Stewardship posits the idea of leaders leaving the company better than how they found it. Namel,y that corporations should serve the best interests of all stakeholders, including employees and suppliers, even if doing so doesn’t maximize profit potential. Steps for Implementation: Benefits: Board members embrace Stronger relationships with all Stewardship via internal stakeholders policies Engage with stakeholders Proactive approach to ESG issues and understand their Dissuades corruption concerns Integrate ESG directives at Spurs creativity in all levels of a strategic level business Promote ethical leadership from board to management level  Accountability Accountability Guidelines Set clear expectations for Stakeholders of all levels take comfort in knowing every level of stakeholder that those who make poor decisions will be held from board-member to accountable. Corporations with a culture of staff. Practice empathy, even compliance make stakeholders feel a sense of when a poor decision was justice and fairness throughout the organization. made Provide accessible Accountability goes hand in hand with resources for what is Transparency, in that it sets consequences for expected of them Continual feedback provided unethical conduct, and actions that may betray based on an individuals’ the trust of stakeholders. performance  Integrity Integrity Guidelines. Remind all stakeholders of the company’s values and mission statement for all strategic decisions and operations. Protect open communication and whistleblowers. Provide incentives for ethical behavior Stakeholders of all levels find themselves more loyal, more invested, and likely to work Tie integrity directly into performance harder for a company that displays Integrity metrics in its practices. Integrity can be seen as a company upholding its original mission statement, and achieving it by following a moral compass.  Transparency A company that’s working towards a better world for all its stakeholders needs to show it has nothing to hide. Transparency shouldn’t just be about proving your firm harbors no corrupt practices, but as a point of pride showcasing your company’s operations. Guidelines for Crystal-Clear Transparency: Robust Data collection ensures reliable reporting Comprehensive reporting Easy access to reports via website, newsletter or other channels stakeholders will use Targeted transparency on key material issues  Governance Effectiveness KPIs Strategic Objectives Taking an overarching, long-term goal, such as “become the leading manufacturer of EVs by 2030” and break it down into achievable steps. Measuring each of these steps shows if your firm is on track to meet its objective. Operational and Financial outcomes Operations, e.g., supply chain logistics, directly affect financial outcomes. In turn, better financial outcomes allow you to reinvest into better operations. Business leaders that understand this and implement it as part of their KPIs have a competitive advantage. Reporting As covered in chapter [X], reporting can be an expensive but necessary investment into not only improving the optics of your organization’s ESG commitment, but also building trust with shareholders, prospective investors, and stakeholders. Hierarchy of Laws Impacting Governance Int’l Commercial Law International / EU Legal EU Law Order Constitution Legal Acts National Legal Order Other Binding Laws Case Law Regulations for External Mandatory specific types of organizations (e.g., Regulation utilities, companies z listed on stock exchanges, External Voluntary Regulations Standards (ISO, etc.) etc.)EN, Sectoral Standards Internal Voluntary RegulationsCode ethics of conducts, Other policies  Long-term Value Creation Looking at the business landscape today, it’s clear which companies 20 years ago chose “play to win” rather than “play not to lose.” Amazon and Microsoft both invested large sums of money into their cloud- computing infrastructure, and their market value today is a testament to that play. This is an example of Long-term Value Creation (LTVC). Eschewing short-term profits, making risky yet well-considered investments into projects or incentives that will grow the company further down the line, rather than next quarter. LTVC isn’t just about growing profits, but about creating value for stakeholders as well. Another example of sustainable governance initiatives paying dividends for companies that look beyond the horizon.  Effective Governance Checklist Business leaders should ask themselves these questions: What policies do I have in Who owns the policies by place? function? What are the other leaders in Do we have a policy on pertinent our sector doing? Are they issues? transparent or opaque about E.g., a leather shoe company their practices? having an animal rights policy? Do we have a handle on our advanced metrics? i.e., footprint, energy, water, waste, diversity of board, management and workforce?  Measuring Sustainable Governance ( 1 / 3 ) Along with Social Sustainability, Corporate Governance is difficult to measure. The practice of which aspects have not been completely agreed upon or have a standard set between all regions and corporate entities. The following slides detail the main criteria, which may have different labels depending on who you ask, and fall under the same basic categories such as board composition and diversity, compensation, shareholder representation, etc.  Measuring Sustainable Governance ( 2 / 3 ) Board Ownership and Management, ,Qualit Board Structure Shareholder Rights y and Integrity “The experience, track “The board’s “A company’s constitution record and actions of a structure should and ownership structure company’s board allow for sufficient should respect outside should reflect its ability oversight, shareholders’ rights as they to provide strategic representation, would for the board, leadership and accountability to its management, and major oversight.” shareholders.” holders.”  Measuring Sustainable Governance ( 3 / 3 ) Remuneration Auditing and Stakeholder Financial Reporting Governance “Remuneration” or The organization’s All stakeholders, from compensation in any form via financial reporting employees, to suppliers, salary, stock options, overtime should be clear, to managers, should pay, etc. ensures management accurate, transparent have some say in the professionals will be inclined to and scrutinized by a direction of the overall build value rather than hoard it third party source. company, for personal gain.  Anti-Corruption UN Global Compact’s 10th Principle States: “Business should work against corruption in all its forms, including extortion and bribery.” The root reason that Governance has earned its spot in the “ESG” acronym is to fight against corruption, or at least employ safeguards against it. As an organization grows in power and influence, so does the potential for individuals to engage in corrupt practices such as: bribery, gifts and charitable contributions to avoid taxes, giving “favors,” conflicts of interest, political contributions, and bribery either for personal gain or to avoid regulations or other legal ramifications. It’s estimated that the total cost of bribery is around $45 billion dollars, with an annual 2.7% of the global GDP is laundered annually. The onus falls on business leaders to install policies that stifle corrupt practices before they begin.  Anti-Corruption Plan 1 Commit: Anti-corruption must be a core part of your organization’s culture and. All stakeholders must be made well-aware that any sort of bribery or corruption will not be tolerated. 2 Assess: Improve compliance to your anti-corruption policy by knowing what are your greatest risks and preparing for them. 3 Define: Paint a clear picture to your stakeholders what your company’s operations should look like. This goes hand-in-hand with your transparency and reporting operations. 4 Implement: Every step of your value chain and profit centers need to have anti- corruption policies and programs in place.  Tough Decisions: What Would You Do? While it’s easy to talk about “anti-corruption” in theory, it can lead to some very tough choices in reality. The below scenario is a small example of how organizations deal with corrupt practices on a regular basis: It’s late afternoon, Friday. You are at port overseeing a delivery of fresh fish. The local customs official, shakes her head as she looks over her clipboard, claiming that she does not “have time” to approve the delivery before Monday. The delivery will be spoiled by then; you need it today! The customs officer chats about poor wages and no overtime payment, hinting 100 dollars would go a long way to ensuring the shipment is approved today. Do you follow your company’s anti-bribery policy? Or Pay the $100 saving the $10,000 shipment? [Useryour What’s mayreasoning enter response in this behind your decision? text field]  When Worlds Collide Recognizing Risks and Opportunities ESG issues don’t always fall into neatly separated categories. In the real world, they frequently converge to create new risks or business opportunities that affect supply chains, independent industries and ENVIRONMENTAL entire communities. For example, a cloud-computing hosting SOCIAL service may run into controversy over changing data privacy regulations (social), and its server farms may be at risk due to climate-related disasters (environmental), loss of service would result in reputational GOVERNANCE and financial loss (governance).  Key Takeaways Governance may be the most overlooked of the “ESG” issues, but foundational to the success of all other sustainability initiatives. Though they may go by other names depend on who you ask, Accountability, Stewardship, Transparency & Integrity are considered the “four pillars” of Governance. Anti-corruption measures are a core incentive for Governance. Although having a comprehensive policy in writing is a start, actually abiding by it when it comes to tough business decisions depends on the individual. Composition of an organization’s Board of Directors plays a large part in its governance rating. Diversity of backgrounds and genders, experience, and track records play a part in how a company’s governance rating is determined. Writing down a policy and actually following it during a difficult decision are two very different things.  References Investopedia.com Corporate Governance Strategic Objectives KPIs: https://boardclic.com/blog/how-to-measure-governance-effectiveness Ditlev-Simonsen, “A Guide to Sustainable Corporate Responsibility”, palgrave-macmillan, 2022 Simon Julian, “Embracing Stewardship…”, linkedIn, https://www.linkedin.com/pulse/embracing-stewardship-cornerstone-effective-corporate-juli an-maicd/ “Factors Relevant to the Analysis of Corporate Governance” - https://analystprep.com/cfa-level-1-exam/corporate-finance/factors-analysis-corporate-gov ernance/ File, Curtis “Examining the G in ESG: The Role, Best Practices and Metrics for Corporate Governance”, https://www.sustainalytics.com/esg-research/resource/corporate-esg-blog/ examining-the-g-in-esg-the-role-best-practices-and-metrics-for-corporate- governance#:~:text=Corporate%20governance%20metrics%20can%20include,Board %20Structure