Can Corporate Governance Drive Corporate Sustainability?

The evidence that business has recognized the imperative of sustainability is overwhelming and unambiguous. Businesses around the world are more interested and involved in sustainability than they were ever before.  They are no longer oblivious to the fact that there are complex, serious and urgent sustainability challenges on the horizon such as climate change, biodiversity loss and resource depletion, which are material to their survival and profitability.

A number of global cross-industry surveys such as those by The Boston Consulting Group and KPMG International have demonstrated that most large corporations have already adopted sustainability practices. Most large corporations now appoint sustainability managers, have sustainability strategies in place and publish sustainability reports (UNGC, 2013; KPMG, 2011; Deloitte, 2010; Sustain Ability, 2000). With sustainability reporting standards, stock market sustainability indices and corporate sustainability ratings fast becoming the norm, corporate sustainability is clearly emerging as a new paradigm.

 

However, there may not always be a business case for sustainability. In fact, ‘sustainable business practices can sometimes entail profit sacrifices, particularly in the short term’. (Sneirson, 2009, p.3). This lack of a business case pits sustainability against the currently predominant ‘shareholder value’ model of corporate governance.

The OECD Principles of Corporate Governance (1999) define Corporate Governance as follows:

‘It involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.’

Corporate Governance is essentially the stakeholder relationships that determine the decision-making and in turn the performance and direction of a company. (Shailer, 2004, Tricker, 2009 and Monks and Minnow, 2011). During the last two decades of the 20th century, the ‘shareholder value’ model of corporate governance and the profit-maximization goal it promotes dominated the corporate landscape because of the apparent role it played in the stock market boom in the US and Europe. It became entrenched as a corporate governance principle, at least among companies in the west, with even The OECD Principles of Corporate Governance of 1999 emphasizing that ‘corporations should be run, first and foremost in the interest of shareholders’ (Lazonick and O’Sullivan, 2000, p.14).

However, the recent corporate scandals and financial crises have called into question the soundness of the ‘shareholder value’ paradigm and its relationship with long-term economic prosperity (Vitols and Kluge, 2011; Lazonick and O’Sullivan, 2000). As a result, the past few years have witnessed ‘a virtual explosion of interest in corporate governance’ (Ricart, Rodrıguez and Sanchez, 2005). The corporate scandals have also redirected attention to issues of ethics, accountability, transparency and disclosure (Gill, 2008; Jamali, Safieddine and Rabbath, 2008). According to Elkington(2006), issues such as ethics, human rights and climate change ‘increasingly cross-cut the rarefied worlds of corporate boardrooms’.

The perceptible steering away of corporate governance from the ‘shareholder value’ model is concurrent and in sync with the evolution of the new paradigm of corporate sustainability. 

In fact, Corporate Governance is already being seen as a primary driver of corporate sustainability. A recent report by IFC’s Global Corporate Governance Forum, titled Corporate Governance: The Foundation for Corporate Citizenship and Sustainable Businesses, postulates that corporate governance can ‘provide well-informed strategic direction and engaged oversight’ to company management for integrating sustainability targets in the action plans, targets and day-to-day operations of the company (UNGC and IFC, 2009).

Integrating Corporate Sustainability into Corporate Governance

Corporate Governance and Corporate Sustainability

 Source: UNGC and IFC, 2009

Of late, a spate of international codes and guidelines of best practice for corporate governance have been developed by organizations including the IFC, the International Federation of Accountants (IFAC), the International Corporate Governance Network (IGCN) and the UNCTAD. With a view of improving corporate governance standards, in 2004 the OECD also reviewed and revised its Principles of Corporate Governance in response to the numerous ‘high-profile cases of corporate governance failure’ (Kirpatrick, 2004). Another review of the principles has started in 2014. The sustainability principles outlined by the aforesaid international initiatives call on corporate boards to be accountable to their broad set of stakeholders including not just employees and customers but also the communities in which the business operates, adhering to a high standard of corporate ethics. Thus, it is clear that the new paradigm of corporate governance perfectly aligns with corporate sustainability and plays a pivotal role in mainstreaming it.

 

References

Deloitte, 2010, Sustainability in business today: A cross-industry view, Deloitte Development LLC.

Elkington, J., 2006, Governance for Sustainability, Corporate Governance: An International Review Volume 14, Issue 6, pages 522–529, November 2006

Gill, A., 2008, Corporate Governance as Social Responsibility: A Research Agenda, 26 Berkeley J. Int’l Law. 452 (2008).

Jamali D., Safieddine A.M. and Rabbath M., 2008, Corporate Governance and Corporate Social Responsibility Synergies and Interrelationships, Corporate Governance, Volume 16 Number 5 September 2008.

KPMG, 2011, Corporate Sustainability: A progress report, KPMG International.

Lazonick W. and O’Sullivan M., 2000, Maximizing shareholder value: a new ideology for corporate governance, Economy and Society Volume 29 Number 1 February 2000: 13–35

Ricart J.E., Rodrı´guez M. A. and Sa´nchez P., 2005, Sustainability in the boardroom: An empirical examination of Dow Jones Sustainability World Index leaders, Corporate Governance Vol. 5 No. 3 2005, pp. 24-41

Shailer, G., 2004, An Introduction to Corporate Governance in Australia, Pearson Education Australia, Sydney

Sneirson, 2009, Green Is Good:Sustainability, Profitability, and a New Paradigm for Corporate Governance. Iowa Law Review, pp 987-1022.

SustainAbility, 2000,The Global Reporters. SustainAbility: London.

UNGC, 2013, Global Corporate Sustainability Report 2013, United Nations Global Compact.

UNGC and IFC, 2009, Corporate Governance: The Foundation for Corporate Citizenship and Sustainable Businesses

Vitols, S. and Kluge, N., 2011, The Sustainable Company: a new approach to corporate governance.European Trade Union Institute (ETUI)