ESG (or Environmental, Social, and Corporate Governance) are three categories that prove critical for investors looking to make socially responsible investments. By measuring organisations against these standards, investors can better gauge the ethical stance of a business and their collective consciousness for doing better by people and the planet.
Amid an increasing demand for ethical, sustainable businesses – both from investors and consumers alike – demonstrating an ongoing commitment to doing better in these areas, looking past profits and financial gain, can pay dividends for an organisation looking to boost its resilience and profitability.
But these are three large, broad categories. And we think it’s worth breaking them down a little further.
So, today, we’re looking at corporate governance specifically, answering some frequently asked questions and providing examples of what governance might look like to your own organisation.
What is corporate governance?
“Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. […] Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced.”
In short, corporate governance is the rules and procedures that dictate how an organisation is run. It enables them to ensure it’s always meeting its objectives, aligning with wider social and environmental issues, balancing the interests of all its stakeholders, and maximising trust.
Good governance maximises accountability, creates a foundation for improved decision-making, and ensures a smoother trajectory for the organisation as a whole.
Why is good governance so important?
We’ve touched on them above, but some of the key benefits of prioritising your governance are:
- It maximises stakeholder confidence and trust – Any organisation is better when all its stakeholders know and follow the right direction. Any tension, disagreement, or scepticism only serve to distract from wider goals and objectives.
- It creates a foundation for strengthened performance – Good governance practices form the backbone of an organisation, creating a solid, resilient base from which to achieve wider objectives, visions, and missions.
- It helps an organisation respond to its external environment – Something we can count on in the world of business is change. But strong corporate governance allows an organisation to promptly and effectively respond to these changes, remaining profitable and sustainable no matter what.
- Not addressing key issues can be costly – One of the main benefits of prioritising your corporate governance is avoiding the fallout of not doing so. Ignoring key issues – or giving them your attention too late – can result in significant financial and reputational damage to an organisation.
What are some examples of governance practices?
We’re going to cover two examples of governance practices here, both of which we believe to be critical to a large majority of all organisations.
Both legislations are mandatory for the exact same categories of ‘large’ organisations. ‘Large’ in this case meaning businesses with:
- More than 250 employees
- An annual turnover of more than £36 million
- An annual balance sheet of over £18 million
Modern slavery is a term used to describe various exploitative activities an organisation might (knowingly or unknowingly) engage in. This includes forced labour, human trafficking, or any other instance of exploiting people for profit.
“Under the Modern Slavery Act 2015’s Transparency Clause, every organisation with a turnover of more than £36m operating in the UK is required to report on what actions have been taken to eradicate modern slavery and human trafficking from their supply chains for each financial year of the business.”
This might be something that presents itself in your supply chain. You may unwittingly be playing a part in promoting modern slavery culture. By performing due diligence into the risks across your chain, you can minimise the damage done to other humans.
But make sure this is something you actually do. According to recent statistics, 20,830 UK-registered companies are required to comply with modern slavery legislation. Of those, 5,627 have not submitted a statement.
SECR (Streamlined Energy and Carbon Reporting)
SECR is mandatory reporting for all large UK companies, replacing the Carbon Reduction Commitment (CRC) in 2019. The legislation requires annual reports on an organisation’s energy and carbon emissions, as well as an outline of any and all efficiency measures they are undertaking to improve their environmental impact.
“For SECR compliance, businesses need to include a detailed analysis of their energy consumption, greenhouse gas emissions, and energy management projects in their annual published accounts. […] The aim for SECR is to simplify carbon reporting while highlighting to companies where they could reduce energy costs, emissions, and fuel consumption. It is an opportunity to make energy policy and management decisions to benefit the company and the planet.”
The goal of the legislation is to help increase organisational awareness of energy use, as well as to create a reliable, equal reporting structure for energy and emissions reporting and empowering organisations to actively reduce their environmental impact.
Good governance practice extends beyond your organisation itself.
It’s up to an organisation’s board to put measures in place to regulate the behaviour of their wider supply chain, too. After all, it’s all well and good keeping your own organisation accountable to a high standard, but if these same standards aren’t being mirrored by your suppliers, you’re not doing all you can do.
As such, good corporate governance needs to be a partnership between stakeholders, their partners, customers, and wider supply chains. Upholding these high standards across the board also sets an example for smaller businesses and increases accountability in businesses of all sizes.
Even for SMEs who might fall outside the scope of certain legislations, they are largely encouraged to voluntarily report. Meeting the governance standards of the wider market can be critical to getting ahead and ensuring resilience for smaller organisations. As we said before, everything changes very quickly, and adopting these standards sooner rather than later can be imperative.
Corporate governance is how we can continue to strive towards a more ethical, sustainable world of business. But to achieve this, we need to continually educate ourselves on what good governance looks like to our industry and what legislation we’re already legally required to partake in. And, in the case of SMEs, how we can better prepare for the future by adopting certain legislation earlier on.
At Impact, we empower organisations to maximise their social value through the seamless measurement, evaluation, and reporting of initiatives. To find out more about what our platform could do for you, schedule a demo or get in touch with the team on 0161 532 4752.