Why does good corporate governance matter so much for sustainability and development?

Today’s business environment is global and complex. Companies are faced with the opportunities of global markets, but also challenges of unprecedented levels of stakeholder expectations and public scrutiny of corporate values and culture.

Shareholders, investors, consumers, creditors, suppliers, employees, communities affected by the company’s activities and pressure groups exercise growing activism and demand more transparency as well as ethical and sustainable behavior. This includes issues like corruption, impact of corporate activities on the environment, community participation, work conditions, sustainable supply chains, diversity, and other aspects of the acronym ESG (which stands for “environment, social and governance”). Corporate scandals have given rise to numerous activism movements questioning the corporate role in society.

This is where corporate governance comes into play. Corporate governance is about leadership. It is about decision-making with accountability, transparency, responsibility and equitable treatment. Corporate governance practices translate the culture behind which decisions are taken in a company.  Put simply by the UK Corporate Governance Code: “is the system by which companies are directed and controlled”.

The board of director’s role

The modern company must make more than creating value for its shareholders. It needs to build win-win partnerships and to share value with stakeholders. The world is changing rapidly, and corporate boards must be sensitive to the demands of society for a company to thrive. Boards must consider a broad and diverse range of stakeholders, with oftentimes conflicting interests and demands, which require clarity on the company’s values, mission, and strategy.

The role of the board of directors in companies has significantly evolved over time, but still varies a great deal depending on the company’s maturity. A novice or immature board usually acts on matters brought up by executive management in a passive and formal manner. The company’s growth and maturity, however, requires a board with a prominent role in defining corporate strategy and supervising management. A modern and mature board will include ethics and ESG concerns as part of the strategy discussion, expanding the exercise to a more profound discussion about sustainability and the impact of the company in society.

Sustainability as a competitive advantage

Sustainability can be perceived by a company’s board as a business opportunity or as a costly inconvenience. The way a company perceives sustainability, and how it decides to incorporate it in its business strategy and in its relationships with stakeholders will eventually determine whether sustainability can become a competitive advantage, reducing costs and risks, and increasing revenues and intangibles, such as reputation and customer loyalty.

Companies like Unilever or Natura have strengthened their brands based on strong corporate governance and sustainability. Unilever’s sustainable living brands continue to drive higher rates of growth as compared with other product lines. On the other hand, major environmental and social disasters, for example, the fairly recent Samarco Mineração dam collapse, located in Bento Rodrigues, Brazil, or the Deepwater Horizon oil spill, in the Gulf of Mexico, can be traced back to corporate governance failures.

For sustainability to become a competitive advantage, it needs to be present in the boardroom, discussed as strategy and transformed into concrete actions to be implemented and followed up by management. Furthermore, to create competitive advantage through sustainability it is essential that the company stimulates an environment of innovation. This requires thoughtful leadership, rather than instinctive management. It will not be fostered in an environment where “business-as-usual” is the norm and sustainability is a mere marketing tool.

Transparency and engagement

Scrutiny on how companies handle sustainability governance has become one of the most important business concerns of our time. An example is the well-known sustainability frameworks and standards created to ensure greater accountability for managing, measuring and reporting environment and social issues. Some of these are: the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council, the Dow Jones Sustainability Index (DJSI), or the B3 Sustainability Index in Brazil. The Inter-American Development Bank and the IDB Invest have also supported the development of IndexAmericas, in partnership with S-Network Global Indexes and Florida International University, powered by Thomson Reuters. IndexAmericas recognizes the 100 most sustainable publicly traded companies operating in Latin America and the Caribbean.

A board of directors that is truly engaged with sustainability can achieve a lot. Corporate directors can think strategically, create an environment where innovation is fostered, ensure that sustainability is dynamically integrated into corporate objectives, maintain a constant dialogue with stakeholders and be vigilant and proactive in relation to ESG risks.

Many would consider that embracing the values and principles of sustainability is becoming the “new normal”. In such a dynamic world, understanding the company’s responsibility towards a large range of stakeholders is crucial. Corporate reputation and the capacity to create long-lasting, trust-based relations with multiple stakeholders can be the basis for success and survival. Corporate leaders have a fiduciary responsibility to think strategically about these matters.