Governance is king

By Andrew Adie

Governance can often feel like the unloved element within the ESG mix. It’s doesn’t have the same consumer-pull of saving the planet, creating fair jobs and delivering positive social impact.

Yet, speak to many investors and they will tell you that the ‘G’ In ESG is the thing they look to first. If the governance is right then experience tells them that the company will likely have addressed other ESG hot buttons as well.

It’s not just investors who take governance seriously, the general public also care more about it than might generally be thought. Research and focus groups that we ran as part of the SEC Newgate ESG Monitor have shown that public expectations that companies should act on ESG are high with 78% of the 12,000 people we surveyed in 12 countries agreeing that companies have a responsibility to be a good citizen. 

Globally, 72% want companies to communicate their ESG efforts more clearly, and 71% think there should be a consistent approach to ESG reporting. In turn, the average rating of how informed people feel about companies’ ESG activities and performance sits at a mere 4.7 out of 10. Trust and transparency are big issues, with the community highly sceptical of how honest companies and governments are about ESG.

Why do we raise this? Because over the year to date we have seen increasing debate and scrutiny of the governance structures that surround us. While the UK economy is, according to the OECD, set to show the most anaemic growth in the G7, we are seeing renewed focus on what the country needs to do to stimulate growth.

Some of that focus is directed at whether we need to reform the City institutions that regulate and set frameworks for governance for business.

Rishi Sunak’s decision this week to split the Department of Business Energy and Industrial Strategy into separate departments, including a new Department of Business and Trade, is the latest twist in an ongoing tyre-kicking exercise that seems to surround the institutions that provide structure in the UK economy. That announcement includes pledges to ‘deliver a pro-enterprise regulatory system’ and ‘make the most of Brexit freedoms and remove unnecessary regulatory burdens’. 

Liz Truss’s recent analysis of her 44-day premiership includes criticism of the OBR and the Bank for England for failing to warn of the risk of the LDI crisis.

Yet traditionally the UK’s regulatory and institutional structure, including our legal system, have been a strength that has drawn investment and business to this country. In a world where governance, unsexy as it may sound, is a key investor metric and public expectation, it would be good if we can rediscover ways to celebrate the stability and oversight that our institutions can deliver.

Yet the need for good governance doesn’t just fall on government and regulators, its also an imperative for corporates themselves.

Lazard’s released data earlier this year suggesting that 2023 could see a wave of shareholder activism. 

When looking for levers to pull in order to affect change in management teams and board strategies, governance failure or a perception of poor management practice is often a route in for those seeking to drive change.

It is also a critical reputational issue as numerous scandals will attest

Harry Wallop, writing in today’s Times, flags that ethics in business is becoming an increasing focus, pointing out that there is a significant ongoing growth in the number of businesses creating chief ethics officer and ethics director roles.

In a world still in economic turmoil, rekindling the UK’s reputation for institutional governance and stability would go a long way in helping us navigate a future framed by ESG and an expectation that business acts with purpose to deliver profit. Part of that challenge lies with business itself. Good governance may not set hearts racing but it puts minds at rest and in an  era of activism that’s a valuable outcome.