The governance segment of ESG encompasses corporate boards and management structures, along with company policies, information disclosures, auditing, and compliance issues. It leads to many thought-provoking questions – If the company encourage shareholders’ engagement? Are accounting practices accurate and transparent? Stakeholder wants to know if people throughout the company conduct business ethically and responsibly. Understanding governance risks and all opportunities in decision-making is very critical, as poor corporate governance practices have stood at the cores of some of the biggest corporate scandals. Volkswagen’s emissions test scandals, Facebook’s misuse of data, and other recent incidents have caused significant financial damages to these companies. S&P Global researches on governance factors have shown that companies that rank well below average on good governance characteristics are particularly prone to mismanagement and risk their ability to capitalize on business opportunities.
S&P Global assesses companies’ governance performance by assessing four kinds of factors:
- Structure and oversight
- Codes and values
- Transparency and reporting
- Cyber risks and systems
Well, governance and good business go hand in hand. A company that ignores weak spots in governance limits its potential, in some cases, invites scandals hence leading to catastrophic damage to the potential markets, investors, and workforce.
Maintaining the balance between the responsible governance and healthy profitability requires vigilance about the key concerns and issues summarized below:
- Corporate Governance
- Board diversity
- Executive pay
- Ownership and control
- Accounting
- Corporate Structure
- Business ethics
- Anti-competitive practices
- Tax transparency
- Corruption and instability
- Financial system instability
Impacts on Business
All the more, the behaviour of corporate managers is in the spotlight. Customers, employees, and other stakeholders want to know if the leadership is operating within an ethical and good responsible framework. At leisure, the effects of sustainable governance are especially evident in these areas.
Management Effectiveness
All the companies that rank low on governance characteristics are more exposed to mismanagements, scandals, and tarnished reputations. They are less likely to mitigate risks and capitalize on business opportunities over time.
Workforce Productivity
Companies that create an inclusive workplace are discovering higher employee commitments, increasing productivity, and improving financial performance.
Investor Confidence
From transparent accounting to leadership accountability, high governance scores are a requirement to attract an increasing number of institutional investors. Understanding the “G” in ESG is quite critical, as governance, all kinds of risks and opportunities will likely increase as social, political, and cultural attitudes continue to evolve. S&P Global evaluates governance factors in all of its ‘ESG’ Solutions offerings. The connections between responsible governance, value creation, and risk reduction are clear and increasingly important as cultural and political pressures magnify public scrutiny.
