Towards an ideal Corporate Governance System for Sustainability

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By Rbhava Nahata, Corporate Governance Intern

Strong environmental performance by a company requires effective leadership on sustainability from the board level. Sustainable corporate governance structures will soon become a norm as legislators, investors, and consumers start to consider non-financial, ESG performance in the same light as a company’s traditional financials.

There is no perfect model for a sustainable corporate governance structure, as this can depend on the industry or size of the organization. Corporations need to adapt their governance structure depending on their specific business model, but there are three key considerations every company can take:  

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  1. Integrated Reporting: This is the concept of merging compulsory financial reporting with voluntary sustainability reporting. There has been a growing number of corporations publishing sustainability or CSR reports, however it is the companies publishing integrated reports that signal advanced thinking on sustainability. The key feature of integrated reports is presenting  the non-financial drivers of value creation, alongside a company’s financials. This signals a company’s commitment to sustainability and that their governance team is thinking about sustainability matters strategically.

    Hitachi have published an excellent example of an Integrated Report and perform well as a sustainable corporation.    

  2. Integrated Board Oversight: There are three main aspects to this:

    • Board and/or board committees overseeing sustainability and CSR issues as part of their official responsibilities. This ensures that relevant issues are being discussed at the highest level of the corporation.

    • Industry-specific committee dealing with material sustainability issues specific to that industry. If you were to compare the IT sector with the mining sector you would notice that companies in their respected sectors are required to addresses contrasting issues to do with sustainability. There may be greater need for an IT company to deal with issues to do with data privacy and information security, whereas a mining company needs to deal with more specific environmental issues.

    • Interaction between executive level sustainability groups and the board. Interaction between different corporate levels on sustainability is an advanced signal of sustainability being integrated into the company.

    Nokia and Cielo are two companies with effective board oversight into sustainability, even though they have taken different approaches.  

  3. Remuneration linked to Sustainability Performance: Remuneration policies are set by directors on the compensation committees of a board. Traditionally, remuneration plans are set with performance metrics linked to specific financial goals such as revenue or profit. Presence of remuneration being linked to sustainability performance indicates an advanced sustainable governance structure as the Board has not only considered sustainability but also made an active step to integrate it. Once integrated, this further incentivizes executives to improve on sustainability practices.

    Omron uses a sustainability score as a component when determining stock-based compensation for its internal directors and executive offices. This score is derived from an evaluation based on the Dow Jones Sustainability Indices (DJSI).   

Implementation of a sustainable corporate governance system through the methods stated is an excellent approach for companies wishing to improve their environmental performance. An effective governance system will promote a culture of sustainability led from the top, and it sets the expectation for management to view ESG issues with higher regard.