Matthew Iak is the Executive Vice President of US Energy Development Corp. and member of the Board of Directors.
Over the past two decades, a series of global studies, white papers and United Nations development goals have led to the adoption of long-term benchmarks for environmental, social and governance (ESG) business initiatives. The combination of these sustainable development goals helped spark a movement that quickly became a dominant force in the financial investment world. The development, implementation and monitoring of ESG initiatives has become a badge of honor for the company. Still, not all three ESG components have received the same amount of attention. Environmental and social programs can be very recognizable and easy to understand, measure and track.
But what about the board? Management of what exactly? Is it intended as an internally focused initiative or does governance also apply to external factors? Both? As a board member of a legacy company that has gone to great lengths to promote the importance of their own internal governance, I think it’s high time ‘G’, ESG’s red-haired stepchild, got his due.
What is governance?
Let’s start by dispelling all misconceptions about the role of governance. It is defined as an internal structure of carefully planned rules, regulations, practices and processes – all of which are directly related to how a company is managed and run. The systems and operational controls that make up internal governance are generally implemented at the level of the Board of Directors. The Board then has the task of setting these strategic objectives, monitoring their effectiveness and regularly reporting the results to shareholders and stakeholders. Governance initiatives should reflect the company’s values. And from what I’ve seen, they’ve been arguably proven to positively impact performance and long-term success.
How companies benefit from good governance
Governance is about creating more operational transparency. Ideal programs are directly integrated into the corporate culture – a platform that creates mutual trust and support, both internally and externally. Governance is also about responsibility. Once established, every employee – from the CEO to a novice employee – is well aware of their role, their function and their own interest in contributing to the success of the collective company. Because governance is deeply embedded in the operational structure, a well-designed program ensures effective and efficient decision-making. Good decisions lead to better performance and thus promote calculated and steady growth.
How governance applies to the bottom line
The primary goal of any publicly or privately traded company is to achieve profitability. And a good internal governance program increases efficiency, reduces risk, eliminates waste and lowers the cost of capital, all of which can have a positive impact on the share price. This, in turn, can boost creditworthiness and maintain investor confidence, allowing companies to raise more capital while also giving them the ability to borrow money at a lower interest rate.
Creating and maintaining a sound internal governance plan can bring internal and external benefits. But the architecture and design required to build an appropriate governance structure takes time, effort and careful consideration. It is certainly not a one-size-fits-all proposition. Let’s take a look at some best practices organizations should consider when building a good governance structure.
Planning and Participation
Whether you’ve already set up a governance structure or are ready to re-engineer your existing platform, getting started requires getting involved from all angles. Organizations must ensure that participation is guaranteed from the board level. Governance is a comprehensive project that requires a collective effort on behalf of the entire workforce. A significant part of good governance practice lies in establishing strategies and mitigating risk – and you will never have a complete picture without broad participation in the whole process. For many organisations, the initial phase is also a time to reconsider the composition of the board. If diversity in age, ethnicity, gender, skills and company titles are all essential considerations, how is your organization currently performing? Ensure that everyone serving on the board of directors or on the board’s steering committee has an equal vote to contribute to the overall effort. Clear expectations are important, so encourage both collaboration and accountability: the two pillars of the governance infrastructure.
Monitoring, reporting, evaluation and course corrections
Whether new or revamped, your governance plan should be a fluid process, not a “set it and forget it” initiative. Make your expectations clear about monitoring the effectiveness of your plan and ensure that the board establishes routine monitoring, reporting and evaluation procedures. After all, if you don’t measure the effectiveness of your governance plan consistently, what good is all the effort? Still, expect some adjustments to be needed. An important part of effective leadership is the ability to make course corrections when necessary, regardless of its importance to the overall business. Best practice means you have the motivation and courage to make actionable changes where necessary. There will no doubt be challenges in establishing sound and admirable corporate governance. A diverse board with different points of view, backgrounds and experience offers many perspectives to consider, and unanimity should never be routine. But unless you want your organization to function like our current congressional leaders, make compromise a key expectation.
The reason why so many companies — from entrepreneurial startups to legacy companies — get governance wrong has a lot to do with the level of attention afforded to this critical initiative. Often this is due to an overzealous amount of external business focus. For example, companies that depend on customer-related revenue will break their backs in an effort to satisfy them. Companies that sell goods and services put a lot of time and effort into keeping up with the latest sales figures. Yet they do this at the cost of neglecting their own home, remembering a few common phrases: “The cobbler’s children have no shoes” and “Doctor, heal thyself.”
In the world of ESG initiatives, it’s easy to notify your shareholders that you’ve eliminated the so-and-so amount of annual waste, or that you’ve taken an admirable initiative to reduce your carbon footprint: the ‘ES ‘. It’s the “G” that probably needs more attention.
businesskinda.com Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.