In today’s global landscape, companies are navigating a complex array of challenges that are more diverse and demanding than before. They face increasing pressure from a broad spectrum of stakeholders to not only adopt sustainable practices but also uphold their role as responsible corporate citizens within society.
On the one hand, more people are aware of their environmental impact, leading them to seek products and services that cause the least possible damage to the planet. On the other hand, investors prioritize companies that act according to environmental, social, and governance (ESG) standards, recognizing that such companies not only demonstrate higher financial returns but also possess a stronger ability to mitigate risks. Moreover, regulatory bodies are increasing their demands for companies to assess and disclose the impact of their operations, measuring and reporting accurate and consistent data on their dedication to sustainability.
Adding to the pressure, all these demands occur in the context of economic crisis, geopolitical conflicts, technological disruption, climate change, flaws in democratic systems, widespread institutional distrust, and high corruption levels. This multifaceted landscape makes it even more challenging for companies to maintain and enhance their reputational capital, secure financing, meet legal obligations, and operate sustainably.
To navigate these new demands from stakeholders and take on a complex global scenario, 21st-century companies must begin by reinforcing their corporate leadership. This key step lays the foundation for creating sustained long-term value, paving the way to establish solid governance that incorporates sustainability into the core of the business strategy.
We understand corporate governance as the set of actions and mechanisms that provide companies with the appropriate incentives for their boards and executives to protect the interests of the company and its shareholders. This approach facilitates effective oversight to promote the efficient use of resources and the creation of long-term value. It allows the business strategy to be oriented in harmony with the context in which it operates, grounding it in an ethical culture rooted in values and principles and ensuring that all processes and decisions are purpose-driven.
Furthermore, addressing the “G” in ESG criteria is crucial for companies, as it highlights the importance of decision-making processes and fraud prevention while improving risk preparedness. By focusing on strong governance, companies can ensure their stated values and purposes are genuinely integrated into their business strategies rather than being mere superficial claims aimed at appearing sustainable without true commitment (i.e., greenwashing).
Effective governance also enhances a company’s ability to actively engage in environmental and social initiatives, ensuring these efforts are not only genuine but impactful. Companies with strong governance are more aware of their impact on their stakeholders, have the capacity to respond to their needs, and remain more resilient in the face of future challenges.
How to measure the “G”
Companies often prioritize the environmental and social aspects within the ESG framework as their outcomes are more immediate, easier to measure, and more visible. However, this focus can lead to the temptation to engage in practices like greenwashing.
When companies are inconsistent between what is said and done or define themselves through marketing actions that do not reflect their values, the truth inevitably comes to light. In an increasingly transparent and conscientious world, such inconsistencies can lead to significant financial and reputational damage, underscoring the critical significance of genuine and consistent practices across all aspects of ESG.
Therefore, talking the talk and walking the walk is now more valuable than ever, and to achieve this, it is not enough to have good intentions or wave fashionable flags. Companies need to be very clear about their values and purpose, especially in a changing and uncertain landscape, where the trend will be to adapt—but with conviction and not as an empty slogan—through aligned and collaborative work.
To do so, it is key to focus on the “G” as the bedrock that will support a true commitment to the “E” and “S.” Sturdy corporate leadership will allow companies to cover sustainability beginning with the core strategy and avoid falling into social and environmental activism. Thus, these companies will be able to respond to new demands and requirements and will always be attentive to corporate trends.
Corporate governance is often difficult to measure. Information comes from various actors operating independently within the organization, with various policies, procedures, and reports that hinder accurate and consistent data. In addition, policies and procedures are often ineffective, leaving the organization exposed to risks. Finally, the multiplicity of international standards creates confusion and makes it challenging to design a clear roadmap.
It is important for companies to have tools that allow them to ensure and measure good corporate governance. They can do so through the evaluation of five key pillars.
Effectiveness of the board of directors
The board of directors plays an essential role in protecting the company’s financial situation, designing the business strategy, and complying with the defined values and ethical principles. However, for these actions to be put into practice, the board of directors must be effective and have an appropriate structure, ensuring independence and diversity for informed decision-making. Responsible leadership is required, where not only expertise and knowledge matter but so do other skills that align with the demands and requirements of the current economic context. In addition, boards of directors must have periodic inductions and evaluations to identify inefficiencies and encourage continuous improvement.
Compensation and remuneration
Establishing a good compensation and remuneration system for board members and the executive team will help attract and retain the best talent while at the same time adequately encouraging their collective and individual performance. The remuneration and incentive structure must focus not only on achieving short-term objectives but also on the long term, always ensuring integrity and ethics on the way to the goal.
Risk and crisis management
In a volatile and changing environment, organizational crisis management has become increasingly relevant. Crises can be internal or external and relate to various factors, such as the economy, climate, health, cyberattacks, incidents of corruption, etc. Organizations must identify the risks they face and be prepared to take them on from a strategic perspective that is in line with their values and purpose. Among the many actions to consider are forming a risk management committee or unit to implement effective policies and procedures and establishing annual internal audit plans and cybersecurity protocols.
Relationship with stakeholders
The success of companies depends on the people who constitute them but also on those who relate to them in one way or another. Therefore, special importance must be given to the relationship with stakeholders, considering the dynamic environment and acting in harmony with them. Investing effort in identifying and creating good relationships with stakeholders increases trust within the ecosystem, reduces uncertainties and problems, and improves decision-making. Good management of stakeholders’ interests will strategically encourage their commitment and help them be promoters and not business detractors.
Ethics and transparency
These two factors are vital for authentic good governance. This will not only guide companies but represent them in front of all their stakeholders. To achieve this, they must ensure that they act in accordance with their stated values and have compliance programs that prevent corruption but also create a culture of integrity that discourages bad practices. This will strengthen the company, making it a solid, competitive, and attractive entity.
Through these five pillars, companies will be able to measure their governance and remain competitive in a dynamic scenario. They are expected to not only worry about business and financial performance but also promote a more responsible, transparent, and resilient business environment.
Let us not forget that what is not measured cannot be improved and that, therefore, focusing on these five pillars is fundamental to ensure effective governance.
Tips to improve corporate governance
Little by little, companies are beginning to understand the significance of prioritizing the “G” within the ESG framework. This has led them to align their actions more closely with the values they have defined to guide them. They are also realizing that by being responsive in their corporate governance to the demands and pressures of their stakeholders, they can simplify their work. This is because they have integrated a sense of accountability and commitment to society and the environment into their core operations.
While some businesses have already made significant progress along this path, many others are still working to strengthen their corporate governance to better navigate the changes as they occur.
Here are some tips to help you strengthen your governance and maintain consistency while responding to an ever-evolving world:
- Generate a real commitment from the company’s leadership to sustainability and best practices, prioritizing a culture of integrity based on the organization’s purpose.
- Ensure a well-selected board of directors with solid and varied experience based on the company’s needs and market trends, achieving sufficient independence and diversity to promote the exchange of perspectives and effective strategic decision-making.
- Implement compliance programs that guide good corporate practices, ensure ethical behavior, and prevent corporate crimes, including those related to sustainability.
- Promote a culture of proactive risk management, which guarantees commitment and shared responsibility at all organizational levels. Starting at the top, create the necessary structures, such as committees, clearly defining roles and responsibilities.
- Constantly review and monitor the quality of policies and procedures to ensure they are implemented appropriately. Well-written policies are not enough; they must also be practical, effective, and align with the company’s strategic and regulatory objectives.
- Constantly evaluate—through clear metrics and performance indicators—the quality of the company’s governance (pillars) to identify areas of progress and close gaps. The main stakeholders should also be included in these measurements, promoting feedback channels and active listening.
Conclusion
In an increasingly complex and competitive business environment, it is essential to recognize the importance of corporate governance in the effective management of companies—beyond financial objectives—since it establishes a framework of responsibilities, rules, and ethical principles that must guide the company’s actions and relationships with its various stakeholders in a sustainable manner.
Being up to date with corporate trends will allow organizations to respond more quickly and effectively to the various changes and demands that arise, whether globally or locally, internally or externally.
Building a strong “G” will allow them to respond through a consistent ESG agenda because if they begin with their governance itself, companies will have integrated the significance of interacting consistently with people and the environment. Without a doubt, “G” is the first step toward responding sustainably to major business challenges.
Takeaways
- Understand the importance of the “G” in environmental, social, and governance standards to ensure that good practices are genuinely integrated into corporate strategies.
- Know the key indicators to measure the effectiveness of corporate governance in the organization.
- Learn about best practices to strengthen corporate governance and consistently respond to a changing environment.
- Understand the risks of falling into bad practices if corporate governance is not prioritized.
- Understand the importance of the role of leaders in facing sustainability challenges, ensuring the proper implementation of good corporate practices and their respective monitoring.
By Susana Sierra
Published en CEP Magazine
