Dr Glenn Frommer and Theodora Thunder, Principals, The Sustainability Partnership, offer advice on how governance can play a central role in shaping organisational sustainability.
Using current corporate governance practices, we build supervisory systems that ensure compliance with regulatory issues and internal policies. However, with growing investor and stakeholder pressure to commit to sustainability, how would one need to evolve governance practices to be future proof? That is, how can governance manage such issues as stakeholder engagement and the co-generation
of value, which are the hallmark practices for sustainability development? Compliance becomes a moot point at this level of management.
In shaping this future-proof scenario, governance has the opportunity to take a strategic role. It is through the ability to establish strong policies and practices that governance can embed sustainability aspirations and create the structured follow-through to create the business case for sustainability development.
Optimising the governance role in sustainability development
From the governance perspective, sustainability development broadly follows two pathways – internal compliance and external socio-economic pressures on management. Internal compliance focuses principally on regulatory issues and the strategies that oversee the rigours of operating efficiency, transparency, ethics and defined roles and responsibilities. Socio-economic pressures commonly encompass management issues that are beyond compliance – such as stakeholder expectations; the social, economic and environmental (SEE) context of operations; growth opportunities; and, the voluntary alignment with industry norms. For sustainability to develop, these pathways must be recognised and managed as two sides of the same coin.
With internal compliance, governance serves as the codifier-in-chief, translating the corporate vision and goals into policy and practice. It keeps the vision and goals alive through the establishment, supervision and monitoring of the tools and processes that control risks, brings order and efficiencies to operations and stabilises growth. It oversees the framework for corporate behaviour at all levels, including regulatory compliance, ethics, product responsibility, reporting and communications. This traditional role relies on the competencies and skill sets used for compliance-based/business systems governance.
When managing business risks posed by socio-economic (non-financial) issues, the dynamics of an organisation’s social systems come into play, often with the need to develop internal competencies (think qualitative) further for effective management. This starts with retooling the purpose and procedures for stakeholder engagement. Engagement practices, for example, should be planned and proactive. Constructive engagement can be used to map stakeholders and their interests into a formal hierarchy of influence on the business. This mapping serves as an essential tool to the enterprise risk management strategy and is critical to identifying and prioritising risks.
As a simple means to illustrate the two pathways’ influence on sustainability development, we identify their driving presence in commonly recognised core practices of leading sustainable organisations.
Long-term thinking and goals orientated (internal compliance)
Long-term thinking is reflected in the corporate sustainability vision that assumes the aspirations of business continuity and goals over time. The board entrusts this to management, which is tasked with developing the appropriate business strategy to execute aspirations. This positions the strategy along a multi-year trajectory and ensures that policies and system markers (or targets) that measure progress are in place and that they maintain purpose and relevance.
Active and organic risk management (internal compliance)
Active risk management stewards sustainability development in similar ways to the development of the business strategy. The internal directive from senior management establishes the risk appetite with governance acting as supervisor of the risk management process. Further, governance has the obligation to keep senior management apprised of efficacy and any potential impact to ensure timely mitigating actions.
However, with the proliferation of non-financial risks, the ground rules are shifting, leading to a volatility that affects the entire ecosystem of risk and the bandwidth of mitigation management. With non-financial risk issues (often resulting from socio-economic pressures) in the mix, tools such as scenario planning and proactive stakeholder engagement add to the understanding and prioritisation of risk and its potential consequences. Thus, risk management, while an internal issue, necessarily takes into account the added dynamics and pressures of the external environment and society.
Resilience to the SEE context (socio-economic)
SEE context is time and event sensitive and generally reflects external socio-economic pressures. Similar to risk management analysis, context is unique to the company’s purpose, its stakeholders and its operating footprint. Notably, context includes externalities such as geopolitical events, climate change impact, social disruptions, technology innovation and activities that depend on external supply chains and resources. Resiliency to context is the timely and continuous ability to observe, analyse and leverage such events to manage the potential consequences/opportunities generated as well as any potentially unforeseen events that may arise.
The concept of context is also pivotal to the understanding of materiality in risk exposure and the development of mitigating actions. Customers, for example, are increasingly aware and vocal about the quality and safety of products and services. As well, global supply chains are under increasing public scrutiny for their use of natural resources and human rights violations (for example, conflict materials). And, climate change should, if not already, assume a major position on the risk radar for its increasing impact on supply chains and the potential of damaged, redundant or stranded assets.
Engaged and inclusive (socio-economic)
Stakeholder engagement relies heavily on a company’s social systems for management and execution. Stakeholders are a valuable source of information and insight into corporate performance and expectations. They influence risk and reputation management strategies, shape product/services development and delivery, and, ultimately, can lead to competitive advantage opportunities.
Stakeholder engagement requires resilience and agility in social system competencies to be effective in the operating environment. Engagement today is propelled into hyper-drive by the power of social media, societal expectations to share value and the increased regulatory and investor scrutiny across national boundaries. With the appropriate tools, governance can foster the development of needed internal competencies to manage such demands and work with a more challenging and inclusive universe of stakeholders and their influence.
Ethical and accountable (socio-economic)
Visible ethical behaviours that link organisational purpose to action promote trust and engender a strong corporate reputation. Accountability assigns these behaviours to management and commits to transparency of actions. Best practice companies manage such behaviours through specific and strong internal ethical codes underpinned by a defined accountability structure, populated by tactical committees and groups and supervised at the very top levels of management. The culture of ethics and accountability starts and ends at the board level with governance being the conduit for policy and procedure.
When strategising the future proof, one must realise that evolving the governance framework is a ‘marathon, not a sprint’ and requires patience and diligence. The following points provide some guidance as to where and how to take step changes in governance to assume its central role in future proofing organisational sustainability.
- Secure the active commitment and direction from the board and senior management to establish clear goals and parameters for sustainability development. Follow this with a relevant company policy.
- Make sustainability fundamental to the business case. Develop efforts that integrate and add value to the business strategy. Ensure that policy implementation is included in committee terms of reference, job description and employee training.
- Establish a material risk assessment protocol that encompasses the SEE context and ranks risk as a collective reflection of this as well as the material company and stakeholder interests. Allocate capital to risk treatment and its management and implement and make visible the risk appetite.
- Establish a stakeholder engagement policy and platform that is resilient, respectful and productive in purpose. Similar to managing accountability, engagement operates under a strong structure of defined responsibilities and reporting. Notably, the most effective engagement programmes are developed to include the SEE context and with the view to achieve the sustainability goals established by the board.
- Enhance governance to identify and guide internal competencies development so that sustainability practices at the operating level are productive and relevant. Clearly articulated goals, lines of responsibility and metrics are essential to this process.
- And lastly, take steps to embed sustainability as the corporate culture through active engagement, training and collaboration. A hierarchy of management accountability measured through science-based targets presents a structured model to embed such a culture. Existing programmes such as safety, energy and supplier management can be modified to this end with lines of reporting under the governance purview. Achievement of targets should be tied to individual/committee performance reviews and compensation.
Overall, it is clear that combining the internal compliance and socio-economic pathways into a formalised framework and system for management provides optimal governance capabilities. In the current climate of sustainability expectations and reporting, the visibility of such a governance structure enhances trust, reputation and, importantly, investor interest.
Dr Glenn Frommer and Theodora Thunder, Principals
The Sustainability Partnership
The Sustainability Partnership advises companies on the end-to-end management of ESG issues and their reporting. Materiality assessments, reporting strategy and fulfilment and the comparative analysis of industry and peer ESG performance are amongst the services provided. For further information contact: Thunder@streeter.com.hk.