The largest companies in the world are now larger than they have been at any time in recent history. In 1980, the world’s largest 1,000 companies made $2.6 trillion in revenues or $7.0 trillion in 2012 dollars (adjusted using the consumer price index), whereas by 2012 they made $34 trillion in revenue. Think about this: out of 206 countries recognized by the United Nations, only 26 had nominal Gross Domestic Product (GDP) higher than the sales numbers reported by Royal Dutch Shell and Wal-Mart.
Not surprisingly as companies grew to be so large the ‘bar was raised’ and new expectations, about what they should be held accountable for, emerged and forged in the minds of people. As societal problems worsened many saw companies as not just the source of some of those problems but potentially also the solution to them.
This is why environmental, social, and governance issues are coming at the forefront of business agendas around the world. An increasing number of companies are now realizing that resource scarcity, climate change, social inequality, corruption, and other fundamental challenges our societies are facing are also impediments to economic growth.
While more companies now understand this and as a result trying to form sustainable strategies, board of directors, the ultimate governing mechanism of a firm, is largely agnostic, unaware, and absent. This is what a new report by KKS Advisors and theUnited Nations Environment Program Finance Initiative finds, led by Sakis Kotsantonis. I quote directly from the report:
“Yet more often than not, governance structures and operations still tend to either ignore sustainability or pigeonhole it. This should perhaps not come as a surprise. Even the traditional parameters of good governance are not always common in today’s publicly traded companies. For example, while there is a lively debate about remuneration, succession planning, especially for sustainability, is rare.”
The report describes a new governance model, “Integrated Governance.” Integrated governance is “the system by which companies are directed and controlled, in which sustainability issues are integrated in a way that ensures value creation for the company and beneficial results for all stakeholders in the long term.” According to the report, “Integrated governance combines bringing sustainability oversight in the boardroom together with addressing some of the identified current governance weaknesses that prevent boards from operating in the most effective manner.”
The report features a wealth of cases of how corporate governance is failing in certain firms, while in other companies is evolving to become an asset for the company. I firmly believe that if we are to make progress with sustainability issues we need to engage board of directors. This report is a good first step towards that.