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Governance and sustainability must go together for long-term good

Companies that embrace the tenets of good governance and sustainability give everyone the best chance of success.

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NO MAN is an island, and if we were to achieve anything substantial in life, we would need to work with each other. By collaborating and taking collective action, we can achieve a common objective and enhance our lives.

And so it is with governance and sustainability, whether in relation to a society or to companies.

GOVERNANCE AS PROCESS, SUSTAINABILITY AS PURPOSE

Governance is the process of interaction and delineation of decision-making powers among key actors. In the context of a society, it is concerned with how power is exercised to manage the society's resources (economic, social and environmental) for development, and the traditions and institutions that support the exercise of that power.

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In the context of a company, we call this corporate governance.

Corporate governance is concerned with the board of directors and its composition, how they interact with the management of a company, how both the board and management relate to shareholders and stakeholders, and everyone's respective roles.

Next, sustainability.

It is the purpose of our work. In the context of a society, sustainability is concerned with meeting the needs of the present generation without compromising the ability of future generations to meet theirs.

This is the declaration of the Brundtland Commission established by the United Nations in 1987 that set the stage for sustainable development.

In the context of a company, we may call this corporate sustainability.

Corporate sustainability is concerned with a company's business strategy and performance in creating long-term stakeholder value.

The challenges in creating value are broadly categorised into the environmental, social and governance (ESG) aspects.

Companies do not exist in a vacuum; they create jobs for employees, provide goods and services to consumers, depend on suppliers and operate in communities.

Indeed, entire societies rely on businesses in order that each of us may pursue our life goals and to attain the fullest meaning in life.

But the relationship is a symbiotic one. A company with the best processes in place may ultimately fail, if it does not take into account stakeholder needs.

We may thus think of corporate governance as the foundational structure upon which the substance of corporate sustainability is built.

A JOURNEY FROM ACCEPTANCE TO ADOPTION TO ACCLAIM

Our understanding of the best practices in governance and sustainability evolves over time.

First, on corporate governance. It is useful to remember that corporate governance did not always enjoy the acclaim it receives today.

In the 1980s in the United States, the American Law Institute embarked on a new project to set out the principles of good corporate governance. It made several proposals, which today will be familiar to us.

Among others, it proposed that boards should play an oversight role in monitoring executive officers, and the majority of boards should be composed of outside directors free from economic or personal relationships with the company's senior executives.

Corporations should also establish audit committees, nomination committees and remuneration committees, and audit committees should supervise the relationship between the company and its independent auditors.

The project was roundly criticised by many, including the Business Roundtable, an initiative consisting of about 200 chief executives of major corporations in the United States, formed to discuss current problems and to issue recommendations. It criticised the proposals as inflexible and costly.

The final version of the principles of corporate governance was thus watered down to address these concerns.

Fast forward to today, these proposals have become standard practice among companies today, making their way into the 2018 revisions to the Singapore Code of Corporate Governance.

Similarly, views on sustainability have also evolved.

Adolph A. Berle, the co-author of the classic The Modern Corporation and Private Property had argued for shareholder primacy, or the view that corporations exist only to make money for their shareholders, without care for other stakeholders.

The text was viewed by many as foundational text for corporate governance and the separation of ownership and control.

However, strikingly, just last month, the Business Roundtable released a new "Statement on the Purpose of the Corporation".

The statement recognises that besides shareholders, businesses have a fundamental commitment to other stakeholders, including customers, employees, suppliers and the community in which they work.

This statement represents a fundamental shift away from the shareholder primacy model.

Increasingly, corporate sustainability has become accepted and adopted as a mainstream way of thinking. Well-governed companies are trusted by investors and tend to perform better in the long run.

To sustain itself in an interconnected world, a company needs to be mindful of the ESG risks and opportunities. Only by considering these issues in its business strategies can a company avoid obstacles and leverage on market gaps to achieve its business objectives.

In the final analysis, companies that embrace the tenets of good governance and sustainability give everyone the best chance of success.

  • The writer is Head of Listing Policy and Product Admission.

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