hear no evil, speak no evil, see no evil portrait representing corporate governance of the past

Governance Issues

Management has become business critical. Corporate governance determines the roles and actions of a person or people, rather than the processes of a company. The aim of implementing Governance tactics is to increase management effectiveness and minimize legal and ethical challenges. Examples of good governance include rules about individual use of money, conflicts of interests, disbursement of profit and recruitment of family members. It also focuses on the disclosure of key decisions and meetings by business partners, investors and owners. If a company is going to be sustainable, it must focus on the three P’s: People, Planet, and Profit.

Climate Change and Corporate Governance

ESG is now increasingly being used in boardrooms as a collective of checks and balances of how a business interacts with its own community and the communities it serves. It encompasses a host of spheres such as climate change and the larger sustainability of the business industry. It also includes health and safety, development of customer satisfaction and employee retention. How a company manages all of these issues is through Governance. The climate is changing, both outside and inside the walls of corporate governance.

Corporate Governance and Long-Term Success

Crucially, evidence indicates that both risks and opportunities are still central to long-term commercial success. Investment, and the access to capital, still drive and define the form of actions taken by a company. But accountability to people and planet are now equally crucial. Proper Governance is what will determine future viability as the world evolves out the age of mass production, the digital age and into the fourth industrial revolution.

5 Common Issues that Arise in Corporate Governance

Corporate governance is the phrase used to describe the balance between members of the corporate structure with an interest in the way that the corporation is being run. A company with very poor policies could be subject to legal suits, sanctions and litigation for reputational damages. In turn, this may lead to a loss of investment.

Post Pandemic Corporate Governance

With the pandemic having exposed the inequities in society, poorly designed and executed policies will expose a company to lawsuits or fines. Today, any negative news travels fast and gains momentum quickly online. The 5 governance issues that corporate leaders (non-corporate entities governance issues) and boards should look to avoid are conflicts of interest, oversight issues, accountability issues, transparency and ethics violations.

…policies are designed to prevent conflict by eliminating corruption and fraud…

Conflict of Interest Issues and Corporate Governance

Conflicts of interest occur when an individual’s personal interests compromise his or her judgment, decisions, or actions in the workplace. For instance this could include taking gifts, nepotism, inter-relationships or other family, friendships, financial and social factors. Corporate governance conflict of interest policies are designed to prevent conflict by eliminating corruption and fraud.

You may also want to read What is ESG?

Oversight issues and Corporate Governance

Good Corporate Governance requires substantial management control of operations. The board exists to protect shareholders interests by acting as a check and balance on executives actions. Without this oversight, a company risks losing control of the wheelhouse. At the same time, too much control can lead to a lack of stimulation, leading to stagnation and limiting economic growth. The Board maintains the interest of shareholders as well as an awareness of the company’s daily operations and ways it can achieve its objectives.

Accountability issues and Corporate Governance

Each level and division of the corporation needs to report, and be accountable to, another system of checks and balances. Without accountability, one division could make decisions which endanger trust or cause investors to lose confidence. Once that happens, it will be twice as hard to get that confidence back. The actions of each echelon of the corporate structure should be accountable to shareholders and the public. Especially now, accountability is a key component for effective corporate governance and necessary in maintaining trust with all stakeholders.

Transparency Issues and Corporate Governance

Transparency requires that every company report its profits and losses with accuracy. Overinvestment or a decrease in profits can severely undermine the company and its relationships with investors. Lack of transparency may also expose the group to penalties from regulators. It is important that a company disclose this information when its shares are being traded to those who make investment in it.

Business Ethics Violations and Corporate Governance

It is the responsibility of boards to make their judgments in the best interests of the shareholders. It is a company duty to protect the general social well-being of all people, especially those in its community. Common ethics violations include discrimination, safety violations and poor working conditions. They may also include releasing of proprietary information, bribery, forgery and theft. On the opposite spectrum their is lapsed licensing, sexual harassment, greenwashing and the handling of sensitive information.

Corporate Governance Can Improve Your Reputation

You may reach a larger audience and expand markets by developing ‘scenarios’ of corporate governance and determining how businesses are governed. They include firms that might be interested in working with you or utilizing your goods and services.The more internal information you provide, the more transparent your business will appear. This may be used to increase consumer confidence in the firm. And it may be utilized throughout your communications, both internally and externally, to influence and inform. It can also be a powerful tool for informing and attracting government departments, new workers, reporters, vendors and suppliers.

They may be utilized to establish new revenue and increase business and market share, as well as decrease expenses and liabilities. They also benefit employee retention and brand recognition for the firm and portfolio companies.

Balance ESG with Returns

ESG criteria don’t actually impact portfolio returns, but they do determine if your company’s actions are sustainable. For example, the oil and gas sector makes huge profits for their shareholders, but it is becoming increasingly apparent that they are more harmful than beneficial. Yet we still need transportation. There appears to be no evidence that ESG criteria might negatively affect portfolio returns, but with the recent increase in major weather events, that we must change. ESG strategies can help prevent the losses caused by poorly organized companies whose labor practices, environmental policies or governance issues result in fines, shutdowns or catastrophic losses.

Origins of ESG and Governance

Green Infrastructure Investment has been growing for the past 30 years. It began with the need to invest in cleaner energy, cleaner technologies and cleaner materials. Over time, it has expanded to include social responsibility as well.

Governance has its roots in capitalism- active management of a company’s affairs within the legal framework that governs them. The earliest forms of ‘modern’ governance date back to 18th century England. This is when the joint stock company formed. These were the first forms of modern-day companies in which anyone could invest and receive a share of the profits for it. And today, Corporate governance is a prime predictor of success across any industry.

Governance Issues and Investor Screening

There are five major categories including: investor profiling, historical screening, predictive screening, environmental and social screens.

The goal of investor profiling is to ensure that they fit properly into the structure of the company. It includes specific information about their background which will help determine if they can adequately represent your company. Historical screening checks for any relevant news or events regarding a particular investor, or business partner. Predictive screening is the process of using historical data to predict future events and determine how they might affect your firm. Lastly, environmental and social screens evaluate an investor’s history to find those who have been involved in unethical practices that can cause negativity for your company.

  • Listed Companies: Governance strategies often influence the implementation of ESG factors.
  • Best-in-Class: A company’s ESG rating is among the highest compared to other companies and they are doing a great job of managing social responsibility and going beyond expectations.
  • Enhanced Engagement: It consists of working with management on specific areas, pushing them forward and encouraging ethical practices.
  • Integrated Approach: ESG strategy is often included as an element of the investment process.
  • Positive Allocation: It involves actively seeking out companies, organizations and funds with both financial and social benefit.

Where Does Governance Begin?

Clients seldom receive a single response when they ask for ESG direction. They should start by defining the goals they wish to accomplish based on the ESG criteria. These answers drive the implementation strategy and other nuances in the strategy. This might include looking at lists of funds that meet certain ESG standards. Some companies create their own list based on the parameters they set up. But it starts with communicating your intention to all of the stakeholders and asking for support to fulfill them.

How Does Governance Fit into an Investment Strategy?

Investors use governance as part of their decision-making process. It’s one factor among many which include company performance, market correlation and risk management. This makes it an important element, but not the only one.

Governance has become a core part of any successful decision-making process for investors and companies alike. It is critical to know that your investment is interacting with other investments in a way that leaves you better off than before and helps improve society as a whole.

Every company needs to define their own governance approach.

Clarity and Consistency are Critical

Every company needs to define their own governance approach. It’s like the Supreme Court building in the United States that is supposed to look like a Greek temple. They say it represents justice and that is exactly what governance should be; an unbiased way of making decisions within business transactions.

The implementation strategy for governance varies depending on each situation. Your response might be a quarterly or annual review of certain companies, or it might be an ongoing process that examines every single investment.

Governance is complex and involves many different elements. However, this also means there are many ways to put together useful strategies as well as implement those strategies for investors and companies alike.

Investment and Asset Optimization

A robust ESG strategy can improve investment returns by shifting money to more promising opportunities. It will assist businesses to generate the right types of behaviors and actions that improve ESG factors.

For example, we can define ‘governance’ as a way to improve company performance which helps build a better world. This requires understanding of what matters most to different stakeholders and making visible the companies that go beyond ESG to make a positive impact.

Get Focussed on the Practical

Top-down ESG claims may also be distracting or too vague. Make sustainability a top priority for all personnel involved in your company. Businesses that proactively engage in projects, carefully consider potential alternatives – especially through input and feedback from industry experts and professionals. If you look at all of the data on what’s required in a value chain, it will provide the most value.

Get Specific with Governance

Large companies often have multiple social, community or environmental projects in motion. According to the corporate lifecycle of different companies, multiple ESG profiles might exist. For some companies like coal or tobacco firms, ESG is more geared to maintaining community ties while prioritizing risk avoidance. “Regardless of the circumstances of your company it will be the CEO’s role to rally support for initiatives that best align to its mission” said John Defterios senior vice president of ESG Strategy & Leadership.

Caveats and Disclaimers

We have covered many topics in this article and want to be clear that any reference to, or mention of business, asset management, fossil fuels, policies, criteria, competitive advantage, circular economy, opportunities, business, broad range, companies, investors, future, management, long term value, focus, countries, costs, risk, benefits, firms, investment, examples, interest, support, affected, efforts, analysis, pollution, report, contribute, communities, development, identified, industry, solutions, team, understanding, success, capital or globe in the content of this article is purely for informational purposes and not to be misconstrued with investment advice. Thank you for reading.