Environmental, social and governance factors have increasingly been gaining importance in business due to growing awareness among consumers, investors, regulators and society in general about companies’ impact on the world.
I’ve found the “G,” governance, is often overlooked in business discourse. However, this can lead to a board of directors and senior management that is not truly committed to sustainability. In these instances, companies can be seen as greenwashing, which can have severe financial and reputational consequences.
I believe governance is the first criterion companies must address. Strong corporate governance will allow them to effectively incorporate the “E” and “S” of ESG into the business strategy. Governance is key to avoiding falling into empty environmental and social virtue signaling.
Just as the world is rapidly changing, it is essential that boards and senior management zoom in on their “G” to respond to new requirements and demands. They must always be attentive to the corporate trends that are defining 2023 and that, though diverse, converge on the correct implementation of ESG criteria.
These are seven areas I believe companies should prioritize to strengthen their corporate governance.
1. Independence
Independence is an essential value for a board’s effectiveness in achieving strong governance, as I highlighted in a previous article, “Five Pillars Of Good Corporate Governance.” Companies must foster this independence, as it can help prevent possible conflicts of interest, improve objectivity and impartiality in decision making and discover new perspectives for strategic decision making. This, in turn, helps ensure the short- and long-term interests of the company.
To get started, companies must ensure they have a significant number of independent senior executives who do not have commercial or personal relationships that could compromise their impartiality. Based on my experience, I also encourage companies to consider establishing term limits for management positions to prevent individuals from being perpetuated in the company. This change allows an organization to develop a broader vision of the business, as well as improve the diversity of the organization. Additionally, it is important to carry out periodic evaluations of this independence.
2. Diversity, Equity And Inclusion
Diversity can be understood through various criteria, such as gender, nationality, age, disability, ethnicity and even race. Today, companies should emphasize the value of diversity in boards of directors and senior management positions, as this will also allow them to have different perspectives and experiences to make better decisions. In addition, diversity contributes to greater innovation, creativity and flexibility.
A study by the Credit Suisse Research Institute identified a positive correlation between increased gender diversity on boards and improvements in financial returns, ESG performance and the stock market, a press release by the company said. Likewise, research by McKinsey found that companies with diverse teams outperform their competitors.
3. Performance Evaluation
Board performance evaluations represent an opportunity to improve effectiveness and strengthen corporate governance because they help identify strengths and weaknesses and demonstrate a commitment to continuous improvement. These evaluations also promote good leadership by reviewing the structure, dynamics and decision-making processes of the board while favoring stakeholders’ trust. Self-evaluation is the most common way established by boards to evaluate their performance. However, companies can also consider getting an external evaluation from a third party to help improve objectivity. (Full disclosure: This is a service my company provides.)
4. Executive Compensation
Increased attention is being paid to compensation and benefits for CEOs and senior management, as they can be considered excessive in light of the global economic crisis. At the same time, I’m finding that the very conceptualization of goals is under increased scrutiny because not only should their mere short-term achievement be evaluated, but also the way in which they are achieved.
How goals are achieved matters more than ever. For this reason, companies must implement a comprehensive, fair compensation system that encourages good performance in terms of both productivity (short-term) and ethics (long-term.) The system should find a balance between competitiveness and equity of payment and opportunity throughout the organization.
5. Stakeholder Governance
Boards of directors and senior management must take into account the interests of their stakeholders—customers, workers, suppliers, communities, shareholders and others—when determining the values, strategy and general direction of the company. This is a sign of recognition toward all stakeholders since they are, in one way or another, influenced by the company’s operation.
A good relationship with them is key to determining the business’s success. Stakeholder governance requires the supervision and active involvement of the board of directors, who should always consider the impact that their short- and long-term strategic decisions may have on these groups.
6. Cybersecurity
The rise in technological crimes has increased companies’ concern for cybersecurity since cyberattacks can cause them significant financial losses, damage to reputation, exposure of private information and other negative consequences, including for the people who comprise the organization and its customers.
Boards must guarantee their company has cybersecurity measures in place and create a culture of prevention as technology advances and sophisticated new cybercrimes emerge.
7. Sustainability
The growing demands from regulators, investors and consumers are having an impact on the profitability and other financial results of companies that do not commit to ESG criteria. Companies must prioritize this issue from a strategic point of view in order to mitigate risks and position themselves successfully in terms of sustainability in a rapidly changing world. Boards of directors must emphasize their sustainable actions with clear agendas and measure the effectiveness of their results so these practices go beyond marketing. All of this requires strong corporate governance that is aware of its impact and committed to acting sustainably.
Taking these seven trends into consideration reinforces board and senior management performance. Having an effective corporate government that is capable of looking at the impact its business has on the environment and its stakeholders is a current factor of success. Not only does the economic value of the company matter, but also the coherence among its actions, values and purpose.
By Susana Sierra
Published: Forbes
