G as in Governance

Corporate sustainability: few topics in management have generated debate that’s as unexpected as it is heated. This goes along with ESG criteria in general, which it seems every company must strive to comply with to be considered “modern.” The ESG acronym stands for three sets of criteria, relating respectively to Environment, Social issues and Governance. Till just a few years ago, ESG was seen as a topic for sector specialists, setting guidelines for investment decisions of institutional players (pension funds, sovereign funds and other categories of investors). Specifically the idea is to channel investments to companies paying particular attention to factors such as environmental and social policies as well as their corporate governance structures and the ethical practices they follow. The stated objective is orient investment toward the long term, to attempt to capture the economic impact of factors that are not exclusively business-related, and to reward promising, innovative business models.

But recent events tell us of a somewhat different story, with ESG becoming synonymous with sustainability in the strategy, values and even the very vision of a company. This has led to undeniable advantages. First of all, credit where credit is due for helping evolve the concept of “corporate social responsibility” into “corporate sustainability.” In this process, luckily companies are abandoning the idea that their social responsibility is one of many giveback options; or the worst case hypothesis, greenwashing. Correlated to this credit is raising the debate from the marketing and communication level to the managerial level, with clear, progressive, and growing repercussions on a set of company choices and processes that would have otherwise taken decades to change. At the same time, as with all quite abrupt evolutions, fueled too much at a social and media level, today we risk confusing the criterion with the final purpose, the means with the end, not to mention forgetting some parts of the ESG equation altogether.

I’d like take a moment to delve deeper into two aspects of this issue. The first is that the concept corporate sustainability is far broader than the criteria that measure it. In fact, corporate sustainability can be summed up in the idea of sustainable development, which has moved to the fore with the 2030 agenda of the United Nations (the now-famous 17 SDGs - Sustainable Development Goals). From this standpoint, what’s surprising is the uproar sparked by the position of the Committee on Corporate Governance of the Borsa Italiana. The 2020 edition of their Code explicitly cites “sustainable success” as a benchmark objective for the Board of Directors, in lieu of the traditional value creation for shareholders. From a certain perspective, this could and should be entirely long-term oriented.

The second aspect I’d like to point out relates instead to the focus of the ongoing debate surrounding ESG criteria. Assuming that we want to consider the three areas - environmental, social and governance - as priorities when we tackle sustainability issues, then as I see it, we need to put the G at the center of the equation again, and at the center of the public debate on the issue. There are three reasons why.

The first is that corporate governance can and must be the driver for the environmental and social engagement of the company. Likewise, governance can and must be the driver for a deeper integration of sustainability in corporate strategy. Sustainability must be placed at the center of discussion for the Board of Directors. This was the case to some extent with compliance with Non-Financial Reporting Directive (NFRD), and the is the only way that there is any hope of seeing permanent impacts in the corporate strategy and organizational structures of businesses. Indeed, this may even be an opportunity to bring the strategic role of the Board center stage once again. Currently, this role is being increasingly blurred by the growing weight of compliance, which itself is fueled by the need to shore up governance, and make it autonomous – a movement that may be going to an extreme.

The second reason is that governance itself must be sustainable. If we think about all the listed companies that lack a clear succession plan for their CEO or key managers, not to mention the thousands of unlisted firms that have a hard time even talking about succession. In light of all this, what becomes crystal clear is the inability of governance to create the conditions for future sustainability, since governance is built on an seemingly stable – but in reality highly precarious - equilibrium. And we could list countless similar examples.

Finally, and a corollary to the previous point, governance may be the key variable to allow the dissemination of a sustainable approach for SMEs, or more generally among unlisted firms that are not subject to regulations (even though in some cases these organizations are quite large). Admittedly, in many circumstances, it is the supply chain itself that acts like a mechanism for propagating good practices for environmental and social sustainability, as demanded by supplier relations, in particular when dealing with multinational customers. But it’s also true that this mechanism once again neglects the powerful role that governance can play to bring about a real change of pace and change of mindset where owners are still very hands-on and involved in the company’s strategic decisions.

This is why today, the G as in Governance can be the key to sustainability. Vice versa, sustainability may prompt us to pay more attention to the limits of governance in many companies, which for far too long have seen governance as a concept with more form than substance.