For better or for worse, the fates of business and society are intertwined. So how can corporate governance help achieve a positive alignment between the two?
This article was first published in the July 2018 International edition of Accounting and Business magazine.
Can good corporate governance be the link between achieving long-term prosperity for society and for business? It is a question that is being increasingly asked, whether in the boardroom, in government or across the wider community.
To find the answer, stakeholders of all descriptions – policymakers, business leaders, professional accountants, investors, regulators – need to understand the relationship between business and society, and how it can affect long-term prosperity. Where they are aligned, both will prosper; where they diverge, both will suffer.
Recent corporate collapses, and subsequent calls for a wholesale reform of how companies are regulated, audited and governed, serve to underline the importance of good governance. But will this reform provide the necessary focus on the long-term needs not only of business but societal stakeholders as well?
With this in mind, ACCA has produced a set of corporate governance tenets, which aims to lift the debate out of a box-ticking exercise into one where all parties can prosper in the long term. ‘While the corporate governance debate has come some way over the last decades, many still see it as a compliance exercise,’ says Jo Iwasaki, ACCA’s head of corporate governance. ‘However, some companies are exceeding best practice, which, combined with a change in public perception, should raise standards of practice over time.’
In its report Tenets of good corporate governance, ACCA sets out five areas that organisations should focus on to achieve a positive alignment:
- The relationship between companies and society
- Diversity and balance
- Enabling an effective board
- Executive remuneration
- Gatekeepers of corporate governance.
The first of these tenets, the relationship between companies and society, is based on the ample evidence suggesting that the long-term success of business and society is often interconnected. Take the global financial crisis of 2007-8: the collapse of financial institutions led to a deep recession, which in turn drove unemployment; conversely, the recent explosion in technology-backed businesses has helped create a dynamic society, encouraging greater information flows, global mobility and connectivity between businesses and society.
The ACCA report says that if a business makes a deliberate effort to be a part of the society in which it operates, it will increase its chance of surviving and, better still, thriving. It will also be more likely to attract investment, which, for the most part, looks for businesses that will create value on a sustainable basis and attract the best employees.
‘Companies need to achieve their long-term business purpose, but this must also involve envisaging where the society is going, and how they fit with the vision,’ says Iwasaki. ‘Businesses also need to realise the importance of a motivated workforce and positive relationship with their environment in achieving that objective effectively.’
The report suggests that businesses must refresh their value propositions, and measure progress towards these. Simply applying the letter of the law or sticking to the bare minimum of regulatory requirements will not work in the long run.
On the issue of diversity and balance, the report emphasises how tackling the problem can help leadership to communicate to its stakeholders the company’s culture. By actively taking steps to address the lack of diversity and balance, leadership can demonstrate that the company respects its people and talent. While it may take time for society to change, it is important that changes are instigated from within a company as the first step.
The third tenet, enabling an effective board, does not just rely on getting the composition of the board right. The report recommends that every board should be accountable for enabling effective boardroom discussion, though board chairs will play a critical role as they will be the ones who facilitate discussion and debate and have a substantial impact on the social and psychological dynamics around the boardroom table.
The headline grabber
The topic more likely than any other to grab the headlines is executive pay, where the report identifies two issues. The first is an apparent mismatch between pay and performance, which has been addressed in some quarters through investor challenge. The second subtler, but arguably more powerful, issue concerns the increasing sense of inequality. Increased disclosure in company reports has helped bring these concerns to light, and stakeholders, including the workforce, are interested in the information. It is therefore not enough for remuneration committees to regularly review whether executive pay is structured to align with the long-term purpose of the business; companies need to consider how employees are rewarded and given opportunities, and if this is aligned in a consistent, understandable way.
The final tenet addresses who should ultimately have responsibility for corporate governance. Investors have the ability to hold boards to account, but it is not their task alone. Wider stakeholders grant the business a ‘social licence’, but for these to be effective these same stakeholders need to engage and hold business to account.
As corporate governance expert Mervyn E King says: ‘All businesses exist in the triple context of the economy, society and the environment. Good corporate governance is about considering the outcomes that a business model has on its surroundings, and the positive role that it can play in creating the long-term health of the company.’
Philip Smith, journalist
"If a business makes a deliberate effort to be a part of the society in which it operates, it will increase its chance of surviving and, better still, thriving"