How is Corporate Governance Related to Sustainability?

There are a lot of different areas companies have to pay attention to these days if they want to succeed – such as pertaining to ESG values, engaging their suppliers, and implementing sustainability wherever they can in order to adhere to a world fighting against climate change.

There are a lot of factors that can impact the sustainability of a company – one of those being corporate governance. Why is corporate governance related to sustainability?

Sustainability is the practice of achieving goals without compromising on finite resources or impacting the lives of future generations. Sustainability is often referred to as the three pillars of sustainability: such as economic sustainability, social sustainability, and environmental sustainability. All three pillars of sustainability are important for any business looking to achieve long-term success. Therefore, it is important to note that while sustainability most often refers to the actions that can be taken to reduce environmental impact – sustainability is more multifaceted, and has even encouraged a movement towards sustainable development.

Corporate governance refers to the set of rules and practices that a company must adhere to throughout the business activities. In a nutshell, corporate governance aims to create balance between all parties involved in business operations: such as the customers, the local government, suppliers, stakeholders, business executives, and the surrounding community. Given that corporate governance supplies companies with a guideline in how to organize their business endeavors, corporate governance is a crucial part in any business – from management, to implementation plans, measuring progress towards goals, and disclosing data. 

A company’s corporate governance is contingent on the board of directors at the business – as these are the people who are often responsible for implementing many of the guidelines provided through corporate governance. If a board of directors is unwilling to pertain to the values expressed in the guidelines provided by corporate governance, both the financial and overall success of the business may be compromised.

Overall, the main goal of corporate governance is to provide guidance to companies through a set list of rules so that they can excel across the board in business success: such as achieving their environmental targets, encouraging fair human resource practices, developing improved corporate strategy, and mitigating business risks.

Corporate governance provides companies with a specific set of rules and policies in order to control all aspects of corporate behavior. While a board of directors serves as the primary referee for corporate governance, proxy advisors and stakeholders also serve a vital role in the overall effectiveness of corporate governance – as both data and finances have an impact on the implementation of the guidelines provided by corporate governance. These are the main parties within a business that help to establish the values depicted in corporate governance. 

Presenting a company’s corporate governance is a crucial part of cultivating a loyal investor and customer community for a business. If a company demonstrates their value towards establishing corporate governance, customers and investors will be more inclined to participate in the business. 

The five main principles of corporate governance are transparency, fairness, responsibility, accountability, and risk management. While there are several other components that could impact corporate governance, these are the primary components. 

Here are each of the main principles of corporate governance in detail.

Fairness

All members of the board should treat investors, employees, customers, and the surrounding community with fairness and equality. No one should be given special treatment or priority – this will help to establish other components of corporate governance. 

Transparency

The board of directors should strive to provide consistent information and data regarding business endeavors – such as financial status, potential internal conflicts, and business risks to potential investors. 

Risk Management

Corporate governance cannot function if the board is not determined to mitigate all risks possible, or at least control potential business hazards. In regards to those potential or ongoing risks, it is the responsibility of the board to report them to investors, stakeholders, or employees as an attempt to prevent further repercussions. 

Responsibility

The board of directors must also ensure that all business operations are running smoothly – and be ready to pivot directions if the current methods remain unsuccessful or inefficient. This level of responsibility also requires board members to remain highly observant and aware of their business surroundings and activities. Therefore, recruiting a responsible CEO is imperative if a company wants to ensure corporate responsibility and implement successful corporate governance tactics. 

Accountability

Accountability doesn’t just refer to owning up to when a mistake is made, but remaining aware of all the potential consequences that could potentially require accountability. Therefore, the board of directors should be able to elaborate on the main missions of their business activities at all times in order to demonstrate the plausibility in their actions and performances. Ensuring others of the viability of ongoing business activities can ultimately garner the interest of new employees, customers, and investors.

Corporate governance works by establishing these five main principles, and others if necessary, in order to improve the functionality of a business and all members of the company involved. Through the implementation of these values, businesses can begin to see the benefits of corporate governance – such as improved customer loyalty and increased financial performance. 

Why else is corporate governance good for businesses?

Good corporate governance can not only lead to enhanced sustainability across all three pillars of sustainable development – but it can also improve the overall efficiency and effectiveness of a business. 

For instance, well established corporate governance can improve the transparency within a company by encouraging all those involved in the business, from stakeholders to employees, to be more direct with what is necessary for the business to continue working towards success and greater sustainability. Corporate governance therefore also can help with creating trust amongst those involved in the business on the outside: such as investors, government officials, and the surrounding community.

Investors are notably becoming more interested in taking part in business projects that adhere to sustainability – as customers are also becoming more likely to purchase products or services from a business that puts their best environmental foot forward. Corporate governance can help investors and stakeholders determine if it is the right investment for them – as corporate governance encourages transparency, and therefore accountability as to where the business stands in their journey towards sustainability. 

Additional benefits of corporate governance include long-term financial prosperity, lucrative financial returns on business investments, and reduced risk of financial loss. However, the overarching benefit of corporate governance is that it helps businesses to become more resilient and succeed in the long run.

How do these benefits of corporate governance relate to sustainability? 

Implementing sustainability can be done in several different ways, but if a company wants to achieve true sustainability – it requires pertaining to all three pillars of sustainable development: economic, environmental, and social sustainability. Creating a company dedicated to all three pillars is no easy task – as it requires equal dedication from staff, employees, and the surrounding community to be sustainable in all areas. 

For instance, a company looking to achieve social sustainability must be dedicated to improving their Human Resource department as well as improving upon the environmental health and safety of the company in order to ensure a viable working environment for their employees. It is difficult to ensure both safe, fair working conditions while also remaining as a financially lucrative business. Corporate governance can help provide companies with the guidelines necessary to successfully and simultaneously implement all three pillars of sustainability.

Another example is with economic sustainability. In order to achieve economic sustainability, companies must shift their priorities and strive to use renewable resources to ensure their product or service is still relative and viable for the future. For instance, let’s say a reusable water bottle company makes use of non-recyclable plastics to manufacture their reusable water bottles. While their product is beneficial in preventing people from purchasing and throwing away single use plastic water bottles – their individual use of plastic is still bad for the environment as it contributes to excessive greenhouse gasses. It is imperative that companies find ways to make use of eco-friendly resources for the sake of finances and future mass production for their company – demonstrating how one pillar of sustainability is hard to uphold without the help of another pillar.

This is precisely why corporate governance is linked with sustainability. Corporate governance provides guidelines for not just one pillar of sustainability, but all three – and all three pillars of sustainability are more successful when each pillar of sustainability is functioning at their utmost potential. If economic sustainability is thriving, odds are environmental sustainability and social sustainability are as well.

Think of corporate governance like a comprehensive study guide for a final exam. Instead of going through each individual old quiz, test, or homework assignment – the study guide comprehensively allows a company to receive all of the guidance necessary to excel in achieving all three pillars of sustainability. 

Therefore, corporate governance is important for companies that want to achieve sustainability.

If a company is demonstrating good corporate governance, they probability that they can be deemed as a sustainable company is high – making the enterprise more attractive to potential investors. How can potential financial contributors tell if a company is practicing good corporate governance? 

It isn’t too difficult to determine if a company is a good representative of corporate governance, and it’s possible for investors to do the research necessary before even meeting with the company. For instance, people curious on the corporate governance practices of a company can take a look at their: disclosure practices, how they determine their employees compensation, how risk management is handled, how conflict is handled, who is seated at the board of directors and their motives behind being a part of the business, the company’s commitment to global predicaments such as climate change, how they treat their vendors and suppliers, and how previous stakeholders comment on the company’s credibility. 

Signs of a company with poor corporate governance practices are when a company doesn’t comply with auditors, poor quality of executive packages that don’t create intrinsic motivation for their employees, and policies that make it difficult to eschew incompetent employees or components of a business model. In short, a company that is not willing to be flexible for the sake of corporate governance and improved sustainability – is not a company demonstrating good corporate governance. 

Sustainability and corporate governance can be obtained separately from one another, but when they coexist – each area excels to a new extent. Corporate governance can help propel a company to greater sustainability and comply with many of the new environmental regulations, and with more new climate change legislation to come in 2023 – the time to get started with corporate governance might be now.

If reading this article about how corporate governance is related to sustainability has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.