From Where We Sit

Into the future: Real sustainability as the next corporate governance challenge

Boyet Murcia III
By:
Boyet Murcia III
Contents

There is a world of difference pre-pandemic and the so-called “post-pandemic”, and for companies, these differences go all the way to the top. Proactivity is now required of board directors as they strive to simultaneously address business-model disruptions against a slowing global economy, and digitalization against effective management of cyber risks, among numerous other issues.

Corporate governance – or the ways companies are run to achieve their goals – has come to the forefront of the conversation. The strategy for corporate governance is primarily decided upon by a board of directors, and the term encompasses every decision related to the management of a company, from ways to improve the year’s financial outlook to the values and performance metrics the company prioritizes.  

Throughout the pandemic, boards made big changes to their organization and processes to innovate and survive. Directors even spent more time devoted to their responsibilities as members of the board. There has been so much evolution and at such a remarkable speed that, in 2020, Microsoft reported 56% of Philippine organizations found it easy to innovate, which is a great improvement from the 77% of respondents that found innovation difficult before the pandemic.

But now that the immediate crisis has been averted to varying degrees of success and the day saved, and with remarkably more leaders sharing the sentiment that their business model will lose competitiveness in five years’ time, where do corporations go from here?

Future trends in corporate governance

If trends are any indication, sustainability and a stronger commitment to environmental, social, and governance (ESG) goals should be the next focus for many boards. Harvard Law School predicts that climate change risk and better human capital management are among the global corporate governance trends for 2021.  

In the first place, the board of directors do not make their corporate governance decisions independently. They must consider the many stakeholders of the company, from the consumers and their own management team to the community at large, and how each decision might affect their reputation within these groups. While shareholder activism does not always equate to social activism, the expected return of shareholder activism puts boards under more pressure to reassure stakeholders that their interests are acknowledged and aligned with the company’s next steps.

Even on a regulatory level, the increasing importance of sustainability can be seen in the Securities and Exchange Commission (SEC) requiring not just annual corporate governance reports but also sustainability reports from publicly listed companies. The latter will be mandatory starting 2023.

This, mixed with the public call for greater corporate social responsibility overall, means that more stakeholders expect transparency and accountability on sustainability issues from corporations. Considering that research has shown that signatories of ESG statements and principles have done little to improve the conditions of the companies they’re involved with, it might soon be time for stakeholders themselves to demand public purpose-led reports and tangible environmental and social impact from companies even without the SEC requirement.

Second, having real processes in place for sustainability has been shown to improve financial performance. After comparing high sustainability and low sustainability companies over an 18-year period, a Harvard study found that high sustainability companies outclassed their counterparts and resulted in better stock market performance (+46.8%), return on assets (+61.4%), and return on equity (+23.3%).

On the other hand, another study found that energy initiatives have a global average internal rate on return of 23%. Yet another study found that implementing sustainability initiatives comes hand in hand with improved risk management and innovation, and that ESG investing provides downside protection in a crisis, among other findings.

This gives further credence to the “triple bottom line” approach and gives companies more incentive to consider profit, people, and the planet in their future corporate governance strategies as these three aspects are inextricably connected in the current environment.

Current sustainability trends

There have already been steps made towards this sustainability initiative, too. In the US, larger companies like Patagonia, Ben & Jerry’s, and P&G-owned New Chapter are classifying as benefit corporations (or B Corp), which in effect puts their efforts under greater assessment by certifying bodies while they balance profit and purpose in their corporate strategy. Singapore-based infrastructure firm, Keppel Corporation, is studying the possibility of “floating data centre parks” which aims to utilize sea water for cooling, thereby lowering their carbon footprint through this innovation and other renewable energy investments.

In the Philippines, Globe Telecom was recently included in Vigeo’s Top 100 ESG companies, achieving this feat through its Science-Based Target initiative, Carbon Disclosure Project, and by providing sustainability training for its employees.

The accounting world is not far off either. Accounting and consulting firms are in talks to create one unified and comprehensive standard for ESG reporting. The International Financial Reporting Standards (IFRS) Foundation, already providing the basis for accounting practices globally, is set to introduce an International Sustainability Standards Board which recently opened a call for nominations for its first Chair and Vice-Chair. Even here at home, the skills of CPAs will be called to task as they begin offering assurance services on sustainability reports. Transformation in corporate governance, including ethical considerations of innovation, was one of the highlights of the Association of Certified Public Accountants in Public Practice’s (ACPAPP) recently concluded 21st Annual National Convention, and I was proud to act as the overall Chairman of such an increasingly relevant event.

As some writers would put it, it seems there is an “ESG reckoning” waiting to happen and it might do companies well to implement real sustainability initiatives in their governance strategy before it arrives.

 

As published in The Manila Times, dated 27 October 2021

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