When we talk about corporate social responsibility, we often focus on social and environmental issues. Issues relating to good corporate governance often take a back seat. Yet they correspond to one of the three dimensions of sustainable corporate development, covered by the acronym ESG, for environment, social and governance. "In fact, governance should be considered the keystone of a company's proper operation and long-term development", says , deputy director of the National Institute for Sustainable Development and Corporate Social Responsibility (INDR). "The concept encompasses good management practices, regulatory compliance, risk management and, among other things, ethical considerations specific to each company".
Every company applies various good governance practices, whether or not it has formalised them. These practices may be based on common sense, on 'prudent management' or, in the case of more mature companies, on strong commitments in terms of development and management. "Many companies apply good governance principles without necessarily being aware of it," says Graff. "In very general terms, it can be considered as all the elements that contribute to informed decision-making, taking into account the environment in which the company operates. From one company to another, the level of formalisation of these measures can vary considerably, as can the tools put in place to support this good governance."
Supporting sustainable management
In a context of ecological transition and solidarity, in support of the sustainable development objectives defined by the United Nations, and in the context of the Paris agreements, the issues linked to good governance are taking on an increasingly important dimension. "If a company is pursuing environmental and social objectives, it is at the level of its governance that the foundation of its commitment lies", stated Christian Dohmen, general counsel of the Luxembourg Stock Exchange, a Luxembourg institution that is particularly committed to sustainable development.
Until now, outside particularly regulated environments such as finance, governance has not necessarily been a prominent theme. "Yet it is through governance that a company defines a set of rules and control procedures that guarantee the application of good management practices and risk management," Dohmen said in an interview. "Today, with the development of a regulatory framework inherent in environmental and social issues, governance aspects are taking on a more important dimension.”
EU regulations such as the , the (for asset managers) and the are forcing a number of players to adopt good management practices and integrate sustainability issues into the heart of their operations. "When we talk about good governance, we can refer to various aspects, such as the composition of decision-making bodies, the processes for appointing executives and the control mechanisms put in place," commented Dohmen. "It also covers the elements supporting commitments in terms of diversity, inclusion or equality, or the risk management mechanisms within the company. It can also include training and education issues."
Setting the framework, guaranteeing transparency
Governance is not directly concerned with assessing a company's environmental or social performance. It establishes a framework, in other words a set of measures guaranteeing that commitments made at company level are monitored and respected. "It is at this level that the responsibilities of the company, and by the same token of each individual within it, can be defined. Governance also aims to reinforce transparency with regard to the various stakeholders, by establishing clear and documented decision-making processes that are clearly understood by all", Graff said. It is up to the company to develop the framework and rules it imposes on itself.
Sustainable regulations establish a set of standards with which more and more structures must comply. They oblige economic players to demonstrate greater transparency, by making public a set of indicators relating to their main social and environmental impacts, or by identifying the risks emanating from the ecosystem in which they operate (following a materiality analysis). This reporting, imposed by the CSRD, must be carried out according to very precise standards, and the players involved will be audited on the basis of the information they provide. Transparency with regard to these issues is therefore now a regulatory requirement. "However, these issues must not be approached from a 'tick the box' perspective, from the sole angle of regulatory compliance. Governance must support the company's culture, its values, but also its relations with all its stakeholders, all according to an ethical approach specific to each structure", said Dohmen.
In terms of sustainable development objectives, beyond the constraints imposed on certain players, each company acts in a more or less proactive manner. Although not directly covered by the CSRD, a structure like the Luxembourg Stock Exchange intends to set an example in terms of social and environmental issues, promoting a responsible approach to finance. "At our level, this means that our institution has signed up to charters or memoranda of understanding. Beyond any voluntary commitment, however, it is essential to formally define how we respond and report on it. We are all facing major social and environmental challenges. Beyond the rhetoric, we need to be able to ensure that we actually do what we say. It is at the level of governance that we will ensure this follow-up. The challenge is to effectively support this transition towards sustainable development. Our credibility is at stake".
We are all facing major social and environmental challenges . Beyond the rhetoric, we need to be able to ensure that we actually do what we say we're going to do.
Lever for performance
While this approach may seem restrictive, in terms of the procedures, rules and limits it sets, it is also a key lever for improving company management and performance. "By improving its governance, a company will be able to plan its development over the long term, through a better understanding of the risks to which it is exposed and those that emerge", explained Graff. "The challenge is to ensure the company's long-term future by guaranteeing income for its managers, employees and shareholders. To this end, the primary aim is to ensure the economic performance of the business. It is the foundation of the company. Having said that, if we can guarantee it by taking externalities into account, by seeking to reduce both its impact and its exposure to various risks, social or environmental for example, that's beneficial for everyone".
Strengthening corporate governance, monitoring commitments and being more transparent with stakeholders all help to improve the company's brand image. At a time when one of the greatest challenges facing organisations is attracting and retaining talent, robust governance can make things easier. "If the rules and objectives pursued are understood by everyone, and the rules are clear, employees feel involved and more concerned by the development of the business", she said.
Improved governance supports business performance in many other ways. "It has now been shown that increasing the diversity of the members of a management committee creates value. It allows projects to be approached from different perspectives. This is beneficial for the future of the company," observed Dohmen. "We could also mention the role of governance in terms of relations with counterparties, whether suppliers or customers. The company, for example, may decide to establish contractual relations only with players who share the same high standards as it does in terms of social and environmental issues or transparency. In this way, we ensure that we only establish relationships with serious players, so that together we can move towards a better world".
10 principles of governance
- The company implements an appropriate sustainable development policy. It sets out the measures taken to implement this policy and reports on them transparently and in sufficient detail.
- The board of directors is responsible for managing the company. As a collective body, it acts in the interests of the company and serves all shareholders by ensuring the company's long-term success.
- The board of directors is made up of competent, honourable and qualified individuals. The choice of these people takes into account the specific characteristics of the company.
- The company establishes a formal procedure for appointing members of the board of directors.
- Directors must demonstrate integrity and commitment.
- The board of directors should establish a body responsible for the effective executive management of its activities. It clearly defines the tasks and duties of the executive management and delegates to it the powers necessary for their proper execution.
- The company establishes a fair remuneration policy for its directors and members of its executive management, which is consistent with the objectives of the company's business strategy and risk management, including objectives relating to sustainable development...
- The board of directors establishes strict rules to protect the interests of the company in the areas of financial and sustainability reporting, internal control and risk management.
- The company implements an appropriate sustainable development policy. It sets out the measures taken to implement this policy and reports transparently and in sufficient detail.
This article was written for the supplement to the edition of , published on 19 June. Read the original French version . Click to subscribe to the magazine.
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