Corporate Governance and Sustainability in Contemporary Organizations
Updated: Jun 24, 2021
As we look at contemporary organizations today, we see the increasing need to promote sustainability within our businesses. But, what is Corporate Sustainability and how can it be achieved?
As highlighted by the Diligent Corporation (Diligent Corporation 2018), in recent years a lot of light has been shed on the social responsibility of organizations, growing concerns on the impact that companies have on the planet’s resources, and even more companies are finding that they need to demonstrate their accountability and transparency to their shareholders and communities; all of which contribute to the financial growth or decline of organizations.
Corporate Governance encompasses the techniques used and the people who govern our company. It includes shareholders, stakeholders, Board of Directors (BOD), company management and employee interaction and includes the collaboration of all facets of the organization inclusive of individual, economic, social, financial, ethical and institutional goals and strategies. (The Asset Management Working Group, 2014)
Corporate Sustainability is an expansive management strategy that is concentrated on harnessing opportunities and mitigating risks incurred, by real-world challenges, to produce valuable contributions to the development of our organization’s economic, social and environmental surroundings. (The Asset Management Working Group, 2014)
Use of corporate governance nurtures corporate sustainability as it helps companies achieve their goals, are able to reduce risks and attract new investors and shareholders. This is underpinned by Elkington’s “Triple Bottom Line” theory which emphasizes profit, people and planet and aims to measure the financial, social and environmental performance of a company. According to Elkington, (Kenton & Berry-Johnson, 2021) if companies tend to look at profits and concentrate only on corporate governance, without understanding that sustainability needs to be included in charting strategy, then they will never be able to measure the cost of capital, nor generate a true return on investments made, thus causing that competitive edge to dissipate.
The role of ethics
The role of ethics extends from the moral principles of those in management to the code of conduct applied to customers and business associates. According to UNEPFI, (The Asset Management Working Group, 2014) Business Ethics and the management of it “is essentially one of the most significant aspects of good corporate governance.” Codes of Ethics need to be specific and are related to the managerial decisions made, behaviour, culture and policies within the organization (Tadele & Madhu Sudana Rao, 2014). The Board of Directors can influence all of these by removing opportunities that tempt staff into behaving unethically.
Contrastingly, management that does otherwise, pays a heavy price as seen in 1987 by the CEO of the Beech Nut Nutrition Company. The CEO found out that the concentrate used in their “100% pure apple juice” was a sugar and water concentrate and rather than destroying that stock, the CEO allowed its continued use because the company was meeting its cost-control goals. Other employees noticed the issue with the concentrate and the one employee that did flag it, was accused of not being a team player and did not have a favourable annual performance review. In 1987 the FDA investigation cost the company $25 million dollars. Therefore, we can see that if a Code of Ethics was established and upheld by the management; the development of a culture of good employee relationships, positive interaction towards its customers, openness about organizational issues, a positive working environment by providing employee rights, work safety and work-life balance was sustained and emphasized, long-term sustainable strategies would have been nurtured. (Biana & Joaquin, 2020)
The effectiveness of the BOD
The effectiveness of management, specifically, the BOD, play a key role as they steer the organization and promote sustainability through the decisions they make. A larger board size is more favourable as they are able to have greater access and collaboration with diverse stakeholders encompassing the financial, social and environmental aspects of the organization (Kouaib, et al., 2020). The diverse larger board will also bring a wider range of resources, moral values, skills and experiences. The higher the need of the organization for collaboration in decision making, the larger the board should be. (Gardazi, et al., 2020)
Influence of Gender on the BOD
Another factor that contributes to the effectiveness of the BOD is the gender of the members. Men are usually chosen for these leadership roles but according to (Gardazi, et al., 2020) women are able to contribute more due to their social intelligence and collaborative decision making. Women are more apt to moral obligations, affection, sympathy and empathy to social issues, therefore due to their complex moral reasoning they have higher expectations of their CSR which would positively impact sustainability for organisations as a whole. (Kouaib, et al., 2020) (Naciti, 2019) (Bamidele Fakoya & Nakeng, 2019)
Duality of CEO and Chairman
CEO duality enhances the cost of conflict of interest and decreases firm performance (Mahmood, et al., 2018). CEO’s tend to be more concerned with financial gains of the organization than with social and environmental issues. Organizations where CEO duality is present tend to work towards the desire of the CEO rather than that of the stakeholders. This leads to poor corporate performance and eventually non-existent corporate sustainability (Gardazi, et al., 2020). (Naciti, 2019)
This influences the inclusion of external or internal BOD. According to (Madhani, 2017) internal BOD are strategic oriented as they have more knowledge about their companies and are able to quickly improve the performance of their organizations. They are usually current or former executives of the organization and naturally work hard to maximise shareholders profit. Outside directors are mainly incorporated due to their links to provide resources to deal with external and internal factors affecting the business. They pay greater attention to the external aspects of the business. Therefore, there needs to be a balance between both the management of internal factors and external factors. This would mean that the BOD needs to be a balance of members from both inside and outside of the organization to promote sustainability through CSR. (Naciti, 2019) (Bamidele Fakoya & Nakeng, 2019)
Board committees also play a role in achieving sustainability through ESG. (Salvioni, et al., 2013) states that board committees are set up in order to perform specific tasks and assist in the decision making process. A few committees may be mandated by law or policy such as audit, remuneration and nomination committees. These are now known as CSR committees. According to (Salvioni & Gennari, 2019), the establishment of these committees are significantly influenced by social responsibility, the views and engagement of stakeholders. The implementation of committees increase the efficiency and effectiveness of the board’s tasks and are aimed at supporting responsible business conduct. They provide consultative functions to the BOD so that they are aware of the competitive, economic and socio-environmental impact of their decisions. These committees aid in improving corporate governance through preventing corruption, attending to stakeholders and monitoring corporate performance, They provide sustainability as they reduce and mitigate risks, build shared value and protect the environment. (Karaman, et al., 2020)
Importance of Mission, Vision and Strategy
To maximize productivity and ensure that organizations are doing work directed towards corporate sustainability, members of the organization must be provided with a clear mission, vision and purpose. It is necessary for mission statements to aid in identifying the organization's strategic intent, goals, values and behavioural standards. The vision of the organization should be challenging so as to spark the ingenuity of all employees, this is what underpins the mission of the organization. The purpose of the organization should be used as the template for CSR and by extension ESG strategy. CSR helps develop the confidence of the stakeholders through promotional and educational initiatives focusing on long term goals to improve human resource and risk management. The consideration of ESG within our CSR allows us to plan for the environmental, economic and social impact that we can make through establishment of comprehensive mission and vision statements. (Kofi Darbi, 2012) , (Cady & Wheeler, 2011), (Dumitrascu & Feleaga, 2019).
Transparency & Accountability
According to (Watts, 2014), organizations must be able to measure how purpose is being achieved. This can be done through transparency and accountability. Transparency allows the building of credibility and trust. It ensures that management will not be caught in unlawful behaviour, as their conduct can be investigated. This should be implemented through a culture of honesty, respect and openness, publication of company information and resolution of conflicts of interest which promotes a culture of good governance and sustainability, and subsequently builds upon the established code of ethics. Accountability allows organizations to show responsibility for actions taken; management is accountable to the BOD and to the shareholders. To preserve accountability, procedures should be implemented to verify the integrity of the financial reporting and quality of information disseminated. These aspects allow for informed decision-making which aligns sustainability to the values and disclosure highlighted. (Fung, 2014)
As stated by Elkington’s Triple Bottom Line theory, achieving sustainability can be only done through a model of environmental, economic and social performance which creates enduring value for multiple stakeholders. Enterprise Risk Sustainability Management (ESRM) requires the integration of ecological, socio-economic and corporate risk factors through tailoring the current ERM. Once this framework is fully integrated into company strategy, it minimizes potential losses whilst utilizing new business opportunities that arise from the sustainability plan. This includes new products, services, technologies that meet, develop or improve sustainability needs, risk performance and support creation of sustainable communities. (Kucuk Yilmaz & Flouris, 2010) (Laing, et al., 2021)
All of these aspects for achieving corporate governance and sustainability are supported by a strong management framework. This framework according to (Biswas, et al., 2019) should incorporate:
Accountability through regular audits, publication of contracts, tenders, budgets & accounts. Transparency that allows public access and review to documents, feedback on openness and fairness, publication of regulations and standards. Participation by local leaders and the public, for assessing the outreach into the community. The effectiveness achieved through addressing problems, responding to complaints, policy implementation, employee relations and management. The achievement of equality, inside and outside of the organization inclusive of employees and citizens. Vision, Planning and Civic Capacity must also be fulfilled through integrity in vision statement, consistency between internal and external development plans, rewarding good administration / work and having a long term private-public commitment.
Documentation of and planning for societal, environmental and economic impacts to achieve sustainability along with legitimacy and bureaucracy of the organization must highlight codes of conduct and enforcement of laws. Additionally, emphasis must be placed on Service Delivery through active and dedicated maintenance on staff relations and public satisfaction. This creates alignment between goals, organizational structures and strategies.
Lastly, in striving to achieve good corporate governance and sustainability we must remember that governance is crucial not only for businesses, but also for society. To increase corporate competitiveness the foundation of a code of ethics together with establishment of a mission, vision and purpose is imperative. Legislative processes were created to safeguard societies against risks and to prevent issues from arising or recurring. Therefore, excellent corporate governance must emphasize the importance of this foundation and incorporate the effectiveness of the BOD through establishment of board committees and a diverse BOD, which increases public trust and confidence in company executives. (Diligent Corporation, 2018)
Corporations that understand how their operations affect the environment develop an innate sense of social responsibility that fuels sustainability. Sustainability is concern for the future and is in a corporation's best interest to be socially responsible and inventive as these attributes assure long-term success and are visible in the organization and society. (Meath & Schrobbach, 2020)