Don’t Neglect The ‘G’, It’s Cool Too

The ‘G’ in ESG has been attracting more attention of late, with the argument being that companies with strong governance principles can more easily attract capital as they seek to weather the pandemic.

This is certainly true, however, having strong corporate governance is also the right thing for businesses to do and provides stakeholders with much greater assurances that the company is being run on sound principles.

It’s easy to see how the ‘E’ and the ‘S’ directly impact people, society and the environment we live in. They are seen as exciting while the ‘G’ is often seen as boring, unexciting, and steeped in regulations with outdated names such as Sarbanes-Oxley.

I disagree. Governance is cool, too, and should receive broader understanding and appreciation. After all, where else are you going to come across Zombie Boards (more about them later), or events that can become Netflix hits such as "Bad Boy Billionaires: India"?

True, governance used to be all about regulation and lawyers, but that has changed. As a recent Deutsche Bank Wealth Management Report noted, there is a clear trend in governance to guide companies toward certain objectives rather than looking to control companies by legislating what they have to do.

This guidance can certainly be forceful. The Hong Kong Stock Exchange earlier this year introduced new rules requiring greater disclosure around ESG and making boards of directors responsible for disclosing ESG impact and the year-on-year improvements their companies are making.

At other times the guidance is in the form of advice coming from some of the world’s largest and best investors. Warren Buffet of Berkshire Hathaway in his 2020 ‘Annual Letter to Shareholders’, Larry Fink of Blackrock in his ‘Letter to CEO’s’, and the Norwegian Sovereign Wealth Fund in its ‘Expectations’ documents, have all weighed-in in recent years on aspects of governance that will make companies better run.

So why is governance important, and why should it be a focus for communication experts?

Governance relates to how a company organises itself for the interests of its shareholders (who are, after all, the actual owners of the company), the structure and effectiveness of its Board of Directors who oversee the long-term strategy of the company, its business conduct, business ethics, risk and crisis management structures, and social investment. Importantly, goals in these areas have to be measured and reported over time.

As ethical investing and sustainable financing gain focus thanks to a generational change setting new expectations on the impact we can all have on the world around us, it has become clearer that there is a premium companies can gain by doing the right thing and being able to demonstrate and be held accountable to ESG goals.

Governance overlaps with aspects of both the ‘E’ and the ‘S’ in ESG which is why ESG has to be looked at holistically and why a company that only focuses on ‘E’ and ‘S’ will not attract the same levels of investment that a company taking a more holistic approach that includes sound governance.

When there is ineffective corporate governance is where the opportunities for fraud or abuse of power occur. Wirecard and Luckin Coffee are just two of the latest examples of what can happen when corporate governance is weak.

From all of the above it’s easy to see how communications and corporate advisory is needed around all elements, in good times and bad, and to many different stakeholders. This is why governance is so fascinating.

The area of governance that particularly interests me is the role, structure and operation of Boards of Directors. Boards are appointed to act on behalf of shareholders, choose the CEO, oversee the performance of the company and focus on strategic decision-making.

While traditionally they do not get involved in the day-to-day running of the company, this has changed significantly during the pandemic where management has required every possible support to keep businesses going. New areas which previously were mainly in the management purview, including reputation, sustainability and purpose, are now seeing increased Board involvement.

Boards have intrigued me since studying for the FT Non-Executive Director Diploma where we had to examine the operations of good and bad boards in Hong Kong. There are some companies where the Boards are world-class, diverse, well-run and highly accountable. Yet there are many others that operate as an extension of the CEO and aim only to tick the minimum number of boxes when it comes to compliance or ESG.

Often people point to the large concentration of family-owned companies in Asia as the reason for this lack of strong governance. However, Credit Suisse, noting  that “this might come as somewhat of a surprise to some investors”, found in recent global research that when it comes to governance Asian family-owned companies tend to score better than both European and US family-owned companies.

What is clear is that for a variety of reasons ranging from the pandemic to demands for better governance, the function and constitution of boards of directors is changing and will continue to change in the coming years.

And what about those Zombie board members I mentioned earlier? They are a US phenomenon where poor corporate governance rules enable companies to defy votes from shareholders to remove directors from their boards. The board members stay on, despite having been voted off. Votes opposing board members are usually a good sign that there are other governance issue, and the presence of Zombie board members will result in lower ESG appeal ratings as Netflix, one of the companies with Zombie board members, has found.

So, the lesson here is don’t neglect the ‘G’ in ESG. It’s just as critical as the other parts of the acronym.