Governance As Social Responsibility

A Green Paper released by the European Commission defines Corporate Social Responsibility, more commonly referred to as CSR, as those actions which allow companies to not only meet their legal obligations but also to go beyond and invest in human capital, in the environment, and in strengthening relations with their stakeholders.

But real commitment to address today’s pressing issues, even those lurking deep within our very own organisations, has long become absent and CSR activity has been conveniently reduced to a futile PR exercise that reaps very little long-term dividends.

Perhaps this is the reason why CSR is on its way out. 

Not because companies no longer need to be socially responsible but because they have to do so more effectively and more responsibly; where their actions and the respective outcomes can be truly monitored and measured.

Today, Environmental, Social and Governance have claimed their place as the new qualities defining social responsibility. They have become the best criteria with which responsible businesses operate and define themselves.

As companies seek to operate whilst being guided by a more meaningful purpose, business leaders have started to embrace ESG in favour of CSR. This has been also confirmed by a recent study conducted by Oxford University which found that more than 80% of mainstream investors are now considering ESG when making investment decisions.

The difference is minimal but crucial: whereas CSR seeks to leave positive impact on employees, consumers, the environment and the wider community through actions that many times tend to verge on the ambiguous, ESG demands metrics and expects activities to be measured to arrive at a more precise assessment of a company’s actions.

Perhaps the most meaningul aspect in this important shift is the inclusion of governance and its heightened role in defining companies, how they operate and whether they truly seek to be good corporate citizens. It is an important development especially in the light of huge financial and environmental scandals around the world. Within this context, the idea of corporate governance as an active and tangible commitment to the values of social responsibility is an idea which is being increasingly studied, discussed, proposed and implemented.

But what is Corporate Governance? It is defined as that system which manages and controls relations between the management, the board of directors, shareholders and other stakeholders. This system is built on three main pillars namely transparency, accountability, and security – all critical in successfully running a company whilst forming solid professional relationships among all stakeholders which include board directors, managers, employees, and most importantly, shareholders.

Simply put, corporate governance means making sure that the different ownership structures and governance practices reflect the values upheld and promoted by the company or the organisation.

The fact that the link between a company’s corporate governance and its social role is being studied, further supports the claim that the true social responsibility promoted by the values of ESG comes from good corporate citizens who are internally well governed and externally responsible. In this scenario, the implication is clear: unless corporates practice good governance they are unlikely to have a social conscience.

One of the key shifts we’ve seen in recent years is a move toward “values.” A company’s approach to the way it wants to impact its community, is a reflection of that company’s values, the values of its customers, employees and increasingly of its investors. It’s a shift that has been accelerated by the current political climate, in which companies have had to publicly stand up, both individually and collaboratively, for values like inclusion, empathy and environmental preservation in the face of questionable policy decisions in the recent past.

Whilst it is true that the role of the board of directors and the management is critical for a company’s responsibility and approach to corporate governance, the responsibility is not solely theirs. Since effective corporate governance means that internal democracy and external responsibility go hand in hand. This means that employees and stakeholders including the shareholders too have an important function to perform to ensure good corporate governance. Their duty is to persuade the company’s management to follow ethical and social norms of doing business. 

Shareholder activism and stakeholder involvement means that all stakeholders and shareholders can exercise power over the actions of the board and the management to steer them towards the practice of good corporate governance. 

The bottom line is that before engaging in ESG initiatives, companies would do well to make sure that their internal structures can support a proper and strong governance model. More than ever, society at large is watching and is ready to call out those organisations that fail in being ethical, socially responsible and conscious. Companies need to start owning up to their responsibilities without reverting to community initiatives purely as a cosmetic exercise in looking good.

Mark Aquilina, Managing Partner, NOUV.