The ‘G’ in ESG: Why Governance Matters

By Stephanie Dolmat on August 24, 2022 at 1:30pm

This post is the second in a three-part series on the topic of environmental, social and corporate governance (ESG), authored by Robert Half’s Senior Director of ESG, Stephanie Dolmat.

ESG standards play a vital role in helping businesses navigate today’s evolving landscape and challenges. Of these standards, governance may not create as much media buzz as environmental or social issues. But it’s just as important to organizations, if not more so. Here’s why.

What is governance?

Governance is the way a company is controlled and managed by its board and executive management. It’s a critical element of overall business strategy and performance, covering issues such as:

  • Decision-making — Who makes key decisions, and what processes do they use?
     
  • Business ethics and leadership — How are the company’s ethics described? How does management demonstrate these values?
     
  • Transparency, reporting and accountability — Is information about the company’s strategy, management and performance communicated clearly and comprehensively to stakeholders? What mechanisms are in place for the company to show progress on stated goals?
     
  • Board of directors leadership — Does the board have the right balance of competencies, experience, company knowledge and independence? Do the members work together to help ensure long-term success?
     
  • Privacy and data security — Are there effective controls to protect how customer and employee data is collected, managed, used and stored?

Why strong governance matters

A successful ESG strategy begins with governance. Say you want to create a sustainable business model or introduce a corporate social responsibility program. You need a clear strategy, effective leadership and sound decision-making to achieve your goals.

Put another way, before you can build up the “E” and the “S,” you need an effective governance and leadership structure firmly in place.

Here’s why governance is so important to an organization:

It promotes success in ESG initiatives

Having a successful ESG program calls for companywide collaboration. That’s because developing initiatives is just one part of the puzzle — you need to track and measure progress, understand the outcomes of your efforts and, crucially, ensure that it all fits into one cohesive vision.

This means you need a governance structure to support that collaboration, with a driving force that starts from the top — from the board of directors to senior management and then down through the organization.

It boosts investor confidence

Today’s investors expect more than just consistent financial performance. They want assurance that a company’s accounting is accurate and transparent, its business practices are ethical, and its board of directors is balanced and strategic.

Investors look at governance to understand a company’s potential. For businesses, strong governance can lead to a better reputation and the likelihood of raising more capital.

It strengthens workplace culture

As key stakeholders in the business, employees need a positive work environment to perform at their best and remain satisfied with their jobs. That’s why an organization’s culture must be guided by ethics and integrity, clear decision-making processes and transparent leadership.

4 tips for building and maintaining a solid governance infrastructure

Now that you’ve seen why governance is important, what’s next? Here are four ways to build a strong framework within your organization:

1.    Review decision-making processes

Picture a company where three separate committees are all discussing the same proposal because no one knows who is authorized to approve the decision. Or one where a senior manager wastes precious time making hiring decisions several levels down.

Slow and poor decision-making doesn’t just affect a business’s operations; it also drags down staff morale. Start by identifying the bottlenecks — unclear organizational roles, convoluted handoff processes or perhaps an overreliance on consensus. Now comes the harder part of working with your teams to clarify who makes which decisions and the best way to make them.

2.    Set high ethical standards

Good corporate governance isn’t just about compliance. It’s hard to overstate the fact that it’s also about embedding ethics and integrity into the culture. Design and implement a program for your staff — initiatives could include updating onboarding processes with courses on ethics and compliance or offering training on issues like data privacy and data protection.

3.    Regularly review your board structure

Your board of directors plays a fundamental role in overseeing strategy and risk management, so it’s important to make sure they have the right qualifications, skills and attributes. Reviewing this leadership structure every year is worthwhile to ensure relevant expertise and diversity.

4.    Maintain stakeholder trust through IT security

With rapidly evolving security threats and privacy risks, your shareholders, customers, suppliers and employees need to know that you’re doing all you can to protect their data. You can do this by adopting privacy and data protection standards, plus embedding privacy and security into the design and architecture of your IT systems and business practices.

Governance plays a critical role in shaping the corporate landscape. It drives the success of ESG programs, affects investor confidence and influences workplace culture. Getting it right is crucial for the long-term success of your business.

Follow Stephanie Dolmat on LinkedIn.

More From the Blog...