ESG & Diversity
Kezia Farnham Image
Kezia Farnham
Senior Manager

What is the relationship between corporate governance and sustainability?

June 7, 2022
0 min read
Image of globe in nature demonstrating the relationship between corporate governance and sustainability.

Good governance is not only crucial for corporations, it's important for society. There’s a growing recognition that there is a close relationship between corporate governance and social responsibility.

Here we explore why this is: why are the two so closely interlinked? What is the relationship between corporate governance and social responsibility? And what role does sustainability play?

To begin with, good corporate governance improves the public's faith and confidence in its corporate leaders. Legislative processes were designed to protect societies from known threats and to keep problems from occurring or reoccurring. Recent corporate scandals shed light on the connection between corporations and social responsibility.

A growing focus on environmental, social and governance issues (ESG) and corporate social responsibility (CSR) increases corporations' responsibility and accountability to their stakeholders. As a result, we're seeing corporations place increasing pressure on themselves to improve best practices for corporate governance with the goal of enhancing their relationships with stakeholders. The largest motivation for corporations to direct increasing attention to sustainability is that it ultimately improves their ability to thrive and prosper.

Companies need to be on the front foot around ESG and CSR. Shareholder activism, a move towards public accountability on all things sustainability (an expectation that companies will publish ESG disclosures, for example), has moved the relationship between corporate governance and social responsibility, sustainability and broader societal issues to the top of the agenda.

Corporations Gain Interest in Sustainability

Corporations that recognize that their business impacts their environment create an innate sense of accountability to their societies. Sustainability takes into account a strong concern for the future. it is in a corporation's best interest to oversee social responsibility because this will ensure sustainability. The corporation and society will see evidence of that impact now and in the future.

>> Learn More With Our "Operationalizing ESG: A Roadmap for Boards & Their Organizations" Whitepaper

How to Incorporate Sustainability into Strategic Planning

Corporations are also taking a look at how they can incorporate sustainability into their strategic planning. In taking this approach, companies need to take four critical aspects into account, all of which should be tackled with equal importance.

  1. Societal influence: This refers to how society impacts the corporation, including the influence on stakeholders.
  2. Environmental impact: This refers to the impact of the corporation on the geophysical environment, such as water waste, paper waste and energy waste.
  3. Organizational culture: This refers to the relationship between the corporation, including its managers, and its internal stakeholders, particularly employees, and all that those relationships entail.
  4. Finance: This refers to the impact of the corporation's financial return in relation to the potential for risk and the level of risk.

These four dimensions consider that everyone and everything is essentially a stakeholder in the company's business.

Sustainability Provides Benefits for Corporations

In recent years, people worldwide have been increasingly concerned about saving our earth's natural resources to make them last as long as possible. Businesses are significant users of natural resources, so it makes sense that they'd also be interested in operating as 'green' as possible without compromising the vitality of their operations. Many businesses are finding that a good way to do this is by incorporating conservation principles into their mission, culture and strategic planning. Companies are trying to develop a culture that encourages all employees and other stakeholders to reserve energy, cut costs, reduce waste and enhance other environmental factors.

The benefits of this are manifold: the collective impact of corporates and individuals that work toward preserving energy and resources benefits the public. It positively impacts businesses that contribute materially to conservation efforts.

Stakeholders appreciate the effort that businesses take to place recycling bins throughout corporate facilities. They enjoy reading about how businesses have lowered their emissions, gone paperless and engaged in other conservation efforts. Consumers increasingly prioritize provenance and sustainable supply chains, putting pressure on corporates to adopt socially responsible attitudes to sourcing.

Each year, more businesses find ways to implement conservation efforts as part of their strategic, tactical and operational procedures. They gain the benefit of positive impact for their efforts.

Reducing energy, waste and costs has obvious benefits for companies. Taking a conservationist perspective allows companies new opportunities to promote innovative and creative ways of saving energy for their stakeholders. Corporations may also find that the cost savings they realize from their conservation efforts may afford them opportunities to expand to new markets, boost them above the competition, and perhaps, even get ahead of future regulatory issues.

The progression of conservationist efforts also benefits companies because it attracts like-minded people to them, such as employees, shareholders and customers. Most companies also find that their efforts improve the public's view of their companies, which directly impacts their bottom line.

Making some changes requires companies to revisit their corporate governance policies and practices and what they need to be. Ultimately, these efforts will be worthwhile, as they increase the corporation's credibility and provide them with a competitive edge.

Factoring Corporate Governance Combined with Sustainability Efforts

Corporate governance is a structure that boards and senior managers rely on to help them manage the company responsibly and according to sound ethics and accountability. The principles of corporate governance are based on transparency, accountability, responsibility and fairness.

Those four principles are also inherently related to the company's corporate social responsibility. The relationship between good corporate governance and social responsibility helps corporations keep things in good balance. It also supports the company's efforts to develop control mechanisms, increasing shareholder value and improving satisfaction among shareholders and stakeholders.

Pulling Together Final Thoughts on Corporate Governance and Sustainability

Governance experts agree on many things, but they have historically struggled to develop a distinct way to measure good corporate governance, so the topic continues to be a lively subject for debate.

Although ESG disclosures are becoming increasingly commonplace, and there are now frameworks for corporate governance monitoring and measurement, many companies still have work to structure their reporting on governance, CSR and ESG.

Good corporate governance is essentially built on three precedents — economic progress, social development and environmental improvements. Good governance ultimately fosters sustainability, creates sustainable values and helps companies achieve these values. Companies also realize long-term benefits, including reducing risks, attracting new investors and shareholders, and increasing the company's equity.

As the quest for corporate sustainability continues to improve and enhance the principles of good corporate governance, companies will feel pressured to support their efforts with transparency and public disclosure. Transparency efforts will provide information to the general public on the relationship between corporate governance and improved sustainability. The better informed stakeholders are about the connection between corporate governance and sustainability, the stronger that relationship will become over time.

The marketplace has seen a flurry of change during recent financial crises. The relationship between corporate governance and corporate social responsibility (CSR) is just one part of the evolution of corporate businesses.

Sustainability, corporate governance and social responsibility are all high on the agenda for companies and their directors — but what are their priorities, and how far are aspirations translating into action on CSR and ESG-related issues like DEI, board composition and executive compensation? How is the relationship between corporate governance and social responsibility playing out in practice?

Many organizations are turning to external resources as they begin to consider these questions and start their journey of taking a more integrated approach to corporate governance and sustainability. With the tone for how this is done set at the top, corporate directors are being asked to consider these new questions being posed in the modern boardroom, but doing so requires additional expertise, experience, and perspectives. One way to bridge this gap and bring sustainability, corporate governance and social responsibility into an organization's approach to corporate governance is through the training of board members and directors through Diligent Institute's ESG and Climate Certificate Programs.

In this ‘Inside America’s Boardrooms’ episode, we discuss findings from PWC's 2021 Annual Corporate Directors Survey — from how ESG is linked to corporate strategy to the lack of understanding still surrounding ESG risks. Watch the episode to learn more.



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