Understanding Governance (G) in ESG: Fostering Responsible Leadership

*The article in Macedonian language, published by Kapital can be found at the bottom of this page.

In today’s ever-changing business environment, activities related to the environment, social issues, and governance (ESG) are becoming increasingly important and critical factors for businesses in their efforts to create sustainable business models. While the “E” (Environmental) and “S” (Social) aspects focus on environmental and social issues, “G” (Governance) pertains to matters related to governance within a company.

When analyzing the issues related to the ESG concept, governance often receives less attention compared to the other elements, “E” and “S,” which is fundamentally a misguided practice. This is because behind every failure to meet environmental or social aspects lies inadequate and ineffective corporate governance. In fact, poor corporate governance practices in the past have been shown to be the cause of some of the biggest corporate scandals.

Therefore, the aspect of governance is considered a foundation for establishing a comprehensive corporate approach to responsible and sustainable business practices. Governance forms the pillar of ESG, influencing how companies operate, make decisions, and impact society and the environment.

Specifically, governance within the scope of ESG refers to the systems, processes, and structures that shape the decision-making process within an organization. Governance concerns the governance factors in decision-making, from crafting policies within the company to the allocation of rights and responsibilities among different stakeholders within the company, including the board of directors, executives, shareholders, and other affected parties.

Transparency, responsible governance, and ethical behavior are the essential critical components for ensuring effective governance. Transparency is the essence of governance in ESG. Companies dedicated to responsible governance proactively disclose relevant information to all stakeholders, including investors, employees, consumers, and the public. The principle of accountability involves establishing clear roles, responsibilities, and procedures to ensure that leadership acts in the best interest of all stakeholders, rather than solely focusing on short-term financial gains. Companies with strong governance frameworks have well-defined ethical codes and conduct that guide the behavior of employees and prevent unethical practices, including a zero-tolerance approach to corruption, bribery, and other illegal activities.

By prioritizing good governance practices, companies can build trust, maintain their reputation, attract responsible investors, establish strong, long-lasting relationships with customers and partners, and contribute to a sustainable and fair future. Indeed, good governance is of essential importance for long-term success. When an organization has adequate governance, there is a higher likelihood of making sound decisions, retaining the trust of its stakeholders, and creating added value for the company. On the other hand, companies with inadequate corporate governance are more likely to face financial losses, reputation damage, and regulatory violations.

Regulators, investors, clients, and employees are increasingly interested in organizations with strong ESG values and practices, including good corporate governance, transparency, and effective risk management. Research has shown that companies with strong ESG performance outperform their competitors. Companies stand to gain significant benefits by prioritizing good governance as part of their ESG strategy. By incorporating information related to company governance into corporate reports, information about governance practices is disclosed, similar to how insights are provided into environmental and social factors that are integral to the company’s business model.

Part of the information related to governance practices within the ESG concept involves information about the roles of administrative, management, and supervisory bodies of the company in relation to sustainability, their composition, as well as their expertise and skills in fulfilling that role or their approach with such expertise and skills. Presenting this information is already a part of regulatory pressures imposed in line with European Union regulations, but it’s also in line with the requirements set by the Macedonian Stock Exchange. Furthermore, it’s significant to include in companies’ annual reports the key characteristics of internal control systems and risk management. Additionally, companies should include information about their activities related to data protection, business ethics, and corporate culture, including information about the company’s anti-corruption policy, human rights policy, and information about inclusion and diversity within the company’s bodies. Responsible governance also extends to shareholder relations, encouraging their active engagement, as owners, to influence significant decisions and demand accountability from management.

However, while corporate governance is of great importance for every company, it’s important to emphasize that each industry faces specific demands and challenges. Each company must analyze the requirements of its industry to determine where to prioritize. Banks, airlines, and mining companies, for example, face different sets of corporate governance challenges.

Embracing governance principles within the ESG framework provides a strategic advantage in the rapidly changing business landscape. Responsible corporate governance is vital for the long-term success of a company. Companies with strong and effective corporate governance practices promote sustainable, compliant with relevant regulations and ethical business practices, and benefit from increased value and positive financial results.

*This article is written by Natasha Kostovska, Senior Manager at Grant Thornton DOO, Skopje, Member of AmCham ESG Committee

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