Corporate Governance: The Need to Go Beyond Compliance

Corporate Governance

Despite the universally shifting focus towards sustainability, many businesses still have not “bought-in” to ideas such as corporate responsibility and ESG, and merely participate at the bare minimum level to attain compliance. While stakeholders push the agenda for ethical business practices, most corporate organizations only abide by the laws that govern them, regardless of that legislation’s potency. This pattern of business can have many negative consequences.

When businesses are situated in locations with notoriously corrupt or weak governance, companies may easily choose poor ethics instead of safeguarding human rights and providing better working and living conditions for the surrounding populace. Additionally, businesses are less likely to operate in countries where corporate governance frameworks and regulatory agencies are more robust. As a result, corporations that would be apt to make questionable business decisions in the first place end up facing no legal resistance for unethical behavior (e.g., corruption, bribery, fraud, etc.). In such cases, the only consequence is a negative reputation. The increasing social demand for business transparency serves to reinforce the idea that meeting legal compliance is not enough to future-proof businesses.

Resilient Businesses

Businesses that rise beyond compliance are proven more resilient to changing environments and (local or global) economic uncertainties. For example, studies done by E&Y Australia revealed that small and medium-sized enterprises which held corporate governance policies that went above and beyond local compliance requirements not only survived the pandemic and its devastation to businesses but performed well. Already having strong corporate governance that exceeded the standard requirements through structured guidelines and processes supported these companies in tumultuous times, allowing them to sustain when many organizations were forced to close or seek assistance to continue operations. Much of this can be attributed to corporate governance frameworks providing businesses with an additional means of assessing risk. As one of corporate governance’s basic principles, this aspect of risk management helps future-proof company assets and investments by analyzing scenarios through the lens of staying ahead of changing social, economic, and physical environments.

Environmental Responsibility

Besides the benefit of increased resiliency, going beyond compliance provides businesses with the opportunity to give back to the environment by consuming fewer raw materials. (Investing in programs that increase the efficiency of resource use in operations also improves organizations’ bottom lines by cutting production costs.) The UN’s environment program (UNEP) was created to help businesses focus their efforts on environmentally conscience business decision-making. It is committed to making companies better understand environmental responsibilities by moving from the widely prevalent “compliance culture” to a culture of championing environmental rights. An additional opportunity presented to companies willing to go beyond compliance is the ability to take advantage of markets and government regulations that favor environmentally friendly (or “green”) initiatives. Studies show that firms that are recognized for their efforts to go beyond compliance with the law reduce both their risk of being constricted in operations by tighter regulation and their cost of capital coming from green investors. By conscientiously controlling the negative impact business operations have on the environment, corporations can set an example for other organizations, attract new consumers, and be in good standing with regulatory agencies.

Social License to Operate

Most savvy businesses now recognize the concept of having a social license to operate. Social licenses emerged as society and communities began to play a more active role in approving how organizations (or entire industries) conduct business. Due to growing public concern over climate change and related issues, a social license to operate has become increasingly linked to the positive impact a company can make on both the environment and society. Environmental impact can alter a business’s social license because of the dependency people have on the surrounding physical environment. For example, coastal communities depend greatly on the resources inherent to the coast for their livelihoods and well-being. Businesses that operate near coastal environments and negatively impact marine life and other factors of the coastline due to poor corporate governance most often fail to achieve their social license to operate and are seen as poor investments. The pandemic served to expose many vulnerabilities and economic disparities within medical and financial systems, resulting in a more prevalent awareness of the impact that businesses have on their surrounding environments (for good or ill) and a greater demand for corporate responsibility beyond what is currently required for compliance.

It is not always a simple push to get business decision-making to include considerations that go beyond quick profits. However, evidence suggests that businesses that invest in strong corporate governance, regardless of their location or industry, lead the market and have greater resilience to economically disruptive events. Having systems in place to effectively manage compliance in other, more established areas of business, means more time and energy can be dedicated to focusing on meeting the challenge of going beyond regulatory demands in the more novel areas of operating. Companies that commit to these opportunities and hold themselves to a higher ethical standard of operating can prove to be role models for future generations of business, helping to construct a brighter society and environment.

Author Bio

Fatima-Fasih

Fatima Fasih

Experienced in corporate sustainability in both developed and emerging markets, Fatima Fasih has over 5 years of experience in advising businesses on their sustainability strategies and reporting. She also assists businesses in identifying their progress on the UN Sustainable Development Goals.

Currently, working as an independent Sustainability Consultant, Fatima holds a Masters degree in Sustainability Management and Bachelors in Health Sciences and Environmental Science from the University of Toronto.

She is also certified a Greenhouse Gas Inventory Quantifier (GHG-IQ) and aims to work towards pushing businesses to play a larger role in solving the world’s biggest sustainable development problems: hunger, poverty, and inequality.

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