As corporate environments can vary in substantive ways around the globe, so can corporate governance. Apart from different geographical approaches to corporate governance (three models are dominating: the Anglo-US model, the German/European model and the Japanese model, which mainly differ in the controlling parties that govern a company), governance mechanisms depend on companies’ ownership structures, which can be vastly different. Therefore, sceptics have been pointing out that aiming to define global standards of good corporate governance would be misleading as there couldn’t be one ‘golden standard'.
Yet, there are certain aspects that universally comprise good governance. The International Corporate Governance Network names the following eight:
Principle 1: Board role and responsibilities
The board should act on an informed basis and in the best long-term interests of the company with good faith, care and diligence, for the benefit of shareholders, while having regard to relevant stakeholders, including creditors.
Principle 2: Leadership and independence
Board leadership calls for clarity and balance in board and executive roles and an integrity of process to protect the interests of minority investors and promote success of the company as a whole.
Principle 3: Composition and appointment
There should be a sufficient mix of directors with relevant knowledge, independence, competence, industry experience and diversity of perspectives to generate effective challenge, discussion and objective decision-making.
Principle 4: Corporate culture
The board should adopt high standards of business ethics, ensuring that its vision, mission and objectives are sound and demonstrative of its values. Codes of ethical conduct should be effectively communicated and integrated into the company’s strategy and operations, including risk management systems and remuneration structures.
Principle 5: Risk oversight
The board should proactively oversee, review and approve the approach to risk management regularly or with any significant business change and satisfy itself that the approach is functioning effectively
Principle 6: Remuneration
Remuneration should be designed to effectively align the interests of the CEO and executive officers with those of the company and its shareholders to help ensure long-term performance and sustainable value creation. The board should also ensure that aggregate remuneration is appropriately balanced with the needs to pay dividends to shareholders and retain capital for future investment.
Principle 7: Reporting and audit
Boards should oversee timely and high quality company disclosures for investors and other stakeholders relating to financial statements, strategic and operational performance, corporate governance and material environmental and social factors. A robust audit practice is critical for necessary quality standards.
Principle 8: Shareholder rights
Rights of all shareholders should be equal and must be protected. Fundamental to this protection is ensuring that shareholder voting rights are directly linked to the shareholder’s economic stake, and that minority shareholders have voting rights on key decisions or transactions which affect their interest in the company.
Of course, today’s governance must and has expanded to include measures that help identify ESG risks and bring sustainability practices on the way. Whether it’s reviewing the board’s authority in light of new governing responsibilities to help transition to sustainable business conduct, drawing up new policies or implementing procedures to address sustainability issues, governing boards today have to look at environmental and social impacts as much as at the financial performance and make decisions from this broader perspective.
In practice this means that boards of directors have to vastly increase their remit, and, on top of the more traditional tasks, need to dive deep into issues such as land use, energy, water, and emissions; human rights, equal opportunity and diversity; as well as ethics and other internal standards that not only apply within the organisation, but also to a firm’s supply chain.
One question that often comes up is, how a board’s risk oversight role applies to ESG-related risks. While a number of ESG-related risks, such as for example supply chain disruptions or labour practices would automatically be covered by the board’s responsibility to oversee risks and how they’re being handled, governance experts suggest that boards should make a particular effort to address ESG risks. As part of this process, company boards should ask management to identify any emerging ESG issues or trends that could materially impact the company and how best to allocate corporate resources towards managing the most critical of those ESG risks.
Our second and third article about corporate governance will shine a spotlight on the most pressing ESG issues company boards are currently facing as well as highlight how the pandemic has further affected corporate governance and will shape it over years to come.