Making the transition to governance for good 

GLOBALLY, stakeholder capitalism, which is the idea that businesses have a responsibility that extends beyond their shareholders, has gathered significant momentum in the last few years. Consequently, boards and management have been prompted to rethink the role of their organisations in terms of who they are serving, what contributions they can make to society, and what constitutes long-term value.

More traditional strategies that narrowly focus on financial output have become increasingly risky. Long-term value is not just about immediate financial returns. It’s asking what will drive – or destroy – value for the business in the next era. Organisations will need to look at value from three pillars, namely customer value, including customer satisfaction, trust and loyalty; people value, comprising engagement, employee loyalty, diversity and inclusiveness, health and wellness; and thirdly, societal value, encompassing sustainability, total economic impact, carbon footprint and ethics.

With the increasing emphasis on long-term value, at the heart of corporate governance must be a strong focus on ethical, responsible and sustainable decision-making. In other words, governance for good.

Imperatives for board leadership

How can boards better lead their organisations on a path towards creating long-term value?

It first starts with defining and embedding the organisation’s purpose. Purpose is the organisation’s north star – the reason for which it exists. Once this purpose is defined, it should underpin all decision-making. The board will need to define what stakeholder capitalism means to the organisation and formalise it through the corporate purpose and strategy.

Second, organisations should adopt a discipline in integrating environmental, social and governance (ESG) considerations in the board agenda. To that end, some companies have a dedicated sustainability committee; others assign the responsibility to an existing committee, such as the risk or audit committees. Depending on the complexities of the business, no one size fits all, but an agile board operating model is essential.

It’s not just about having the right board structure. Effective governance also means devoting sufficient time to sustainability matters. In the EY Europe Long-Term Value and Corporate Governance Survey released in March 2023, 200 European corporate directors and senior leaders surveyed were split into two groups: “Experts” and “Beginners”, depending on how they scored on sustainability governance. It was found that a vast majority of the “Experts” were effective at “managing the board agenda to ensure long-term ESG risks and opportunities are always discussed, and not just near-term business issues”. In contrast, only half of the so-called “Beginners” did the same.

Boards also need the right competence and awareness of the key trends in ESG issues. This means it is important to include sustainability skills as criteria when assessing new board candidates, or consider setting up external advisory boards that include scientific and academic expertise.

Third, diversity on boards and in senior management is important. Effective governance requires being intentional about bringing new perspectives to the table. The more diverse your board is, the better you can identify, anticipate and manage the universe of risks, including those of ESG.

Fourth, organisations should be authentic with material and credible disclosures. Leading companies not only embed ESG into their strategy; they put ESG-linked KPIs in place to manage the business. These companies know what ESG factors are material to their business – and therefore what needs to be measured. With this clarity, they also better navigate evolving ESG regulations.

What’s crucial in the reporting is authenticity. Authenticity is not just about sharing targets and successes, but also about the challenges and difficulties encountered along the way. Greenwashing or greenwishing will only create more reputational and confidence issues.

Finally, governance will not be complete without accountability. Making real impact requires a shift in mindset and actions. To incentivise management to work toward long-term value creation, boards should consider how to link sustainability to executive remuneration. Making such a move is a bold step. The key is for boards and remuneration committees to be pragmatic and agile when setting such sustainability-based KPIs, which will continue to evolve as the business evolves.

Good for planet, society and business

The emphasis on governance in ESG is not just a feel-good philosophy; it also makes good business sense.

Take action against climate change for instance. EY research has found that companies that are taking the boldest steps in climate action – or the pacesetters as we would like to call them – are 2.4 times more likely than their peers to report significantly higher-than-expected financial value as a result of their climate initiatives. Not to mention they also achieved higher emissions reductions to date.

This dispels the myth that there is an unsurmountable trade-off between financial and non-financial impact. While priorities may need to shift, what’s good for the planet and society can be good for business too.

No doubt, governance for good can be an ambitious goal. There will be tough calls to be made, cynics to be convinced, and obstacles and risks to overcome. Yet, the results will be immensely rewarding: resilient organisations that can better weather challenges; build stronger relationships with employees, customers and communities; and importantly, create sustainable value for the long term.

After all, will there be a “next” if governance is focused only on the “now”?

The writer is managing partner for Singapore and Brunei, Ernst & Young LLP and EY Asean managing partner. The views here are the writer’s and do not necessarily reflect the views of the global EY organisation or its member firms.