Corporate Governance and Transparency—The Chicken or the Egg of Sustainable Development?
Stathis Gould | November 30, 2015 |
We witnessed history recently—the agreement between all 193 UN member states on the 17 Sustainable Development Goals after three years of consultations and negotiations. The role of business in achieving many of the SDGs is critical. In most jurisdictions the private sector will be the main driver of employment, and have a broader reach and ability to create prosperity. However, the private sector is falling short and needs to step up.
I recently participated in a panel discussion at the UN about achieving the SDGs (the 32nd session of the UN Conference on Trade and Development’s intergovernmental working group on International Standards of Accounting Reporting). This panel followed an earlier presentation by IFAC Past President Warren Allen on the accountancy profession, the SDGs, and how important the profession is to reaching the goals.
One of the vexing questions on sustainable development is how to foster more responsible business and purpose-driven leadership. Although enhanced corporate reporting is a critical part of transparency, in itself it has limited impact on whether business is truly sustainable.
As UNCTAD highlights in Review of Good Practices on Enhancing the Role of Corporate Reporting in Attaining Sustainable Development Goals, reporting is a key part of attaining the SDGs. SDG 12 (target 12.6) specifically reflects this by encouraging companies, especially large and transnational companies, to adopt sustainable practices and integrate sustainability information into their reporting cycle.
This new goal will lead to a new demand on reporting—which should be channeled toward better quality and smarter reporting, particularly through the integrated reporting movement, and reporting that allows users to benchmark performance. Helpfully, the SDG Compass provides guidance on enhancing reporting on business activities that contribute to sustainable development. The Compass was developed jointly by the Global Reporting Initiative, the UN Global Compact, and the World Business Council for Sustainable Development.
But it is integrated thinking that underpins integrated reporting (or narrative reporting) and ultimately leads to resilient and sustainable organizations. While it can be fostered by improved reporting practices and processes, reporting alone cannot solve sustainable development challenges, and often does not lead to the purpose-based committed leadership that is needed for responsible business.
Embracing the SDGs fundamentally requires companies to be responsible for their actions—actions that are based on:
- the decisions that can have an impact on the long term direction of the company; and
- being aware of, and responding to, the organization's positive and negative impacts and ability to create value over time for providers of financial capital and other stakeholders.
The Private Sector is Falling Short
Responsible business requires business leaders who seek to direct organizations with a longer-term horizon in mind; it is not necessarily going to be achieved through more reporting. Over the last 15 to 20 years, the number of companies reporting on a wider range of non-financial matters has increased substantially. However, leadership on sustainability is at best stagnant.
In his article “Corporations, Sustainability, and Innovation: Early Results a Mixed Bag” Professor Robert Eccles reported on the sobering results of how companies are currently dealing with sustainability. For example, “Joining Forces: Collaboration and Leadership for Sustainability,” points out that many companies are not embracing the practices that will result in more sustainable corporations. The results of the survey also show that only 42% felt that their company’s board played a strong role in sustainability (it also showed a four-year downward trend in strong CEO commitment to sustainability).
Changing the Expectations on Company Directors
Turning this trend around requires winning hearts and minds. Transparency must be reinforced by a governance culture that leads to company directors being responsible for the way a company is directed and controlled, explicitly covering the long-term direction of the company.
The private sector’s contribution to the SDGs can, and should, be facilitated by the arrangements for corporate governance as implemented by governance codes and reinforced by companies’ law and stock market listing rules. Corporate governance, in substance over form, is the means to encouraging and enabling companies to embed sustainability issues into its strategy and the decisions it makes.
The Global Outlook for Changes to Governance Responsibilities
A few jurisdictions have already made changes to their corporate governance arrangements to extend the role of the board to focus on the sustainable success of the entity over the longer term. This is the direction that the International Corporate Governance Network has rightly taken with its Global Governance Principles, which state that:
The board of directors is accountable to investors and relevant stakeholders and responsible for protecting and generating sustainable value over the long term.
The UK Corporate Governance Code has been a leader in expanding the scope of director responsibility. The main principle under the role of the board is that:
Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
The UK is not alone in moving corporate governance to a new level of expectation. Singapore’s Code of Corporate Governance also begins with a first principle stating that a board is collectively responsible for the long-term success of the company.
The seminal King Code of Corporate Governance for South Africa goes a step further with its first principle, which clearly points to a responsibility to the organization and its sustainability, as well as taking into consideration wider impacts:
Ethical Leadership and Corporate Citizenship: the need to direct strategy and operations to build a sustainable business and consider short- and long-term impacts of the strategy on the economy, society, and the environment.
The Swedish Corporate Governance Board has followed suit with its revised corporate governance code that includes a sustainability perspective as one of the tasks of the board of directors with the aim of ensuring its long-term capacity for value creation given its responsibility for oversight and internal controls.
These governance codes are placing responsibility squarely with boards to proactively oversee, as well as report on, the opportunities and risk that affect longer-term viability.
Placing explicit expectations on corporate leaders to foster a responsible business with a long-term perspective needs to be the centerpiece of all governance requirements. This can lead to real change in business actions that enhance an overall positive impact of the organization. Too few companies have directed their purpose, strategy, and actions toward achieving sustainability outcomes related to the SDGs.
Now is a time for focus on the expectations of boards through governance requirements as well as on how more transparency can shine a light on company performance and actions.