(Part 2 of an ongoing series)
“The Environmental Social and Governance (ESG) factors are a subset of non-financial performance indicators which include ethical, sustainable and corporate government issues such as making sure there are systems in place to ensure accountability and managing the corporation’s carbon footprint.” – Market Business News, 2022
In my business ethics motivational speaking practice and also as a business ethics consultant and book author, I am surprised by the number of executives who are unfamiliar with the acronym “ESG.” The term directly affects the question of “What is the role of ethics in corporate governance?”
The definition of ESG is pretty much encapsulated in the above definition. For this business ethics post, I want to focus on the governance aspect. Governance includes the following areas particularly of publicly-traded corporations: tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, board diversity and structure.
Ethics affect every aspect of governance and for a corporate entity to claim it is ethical, it must satisfy, and be able to defend its record on the issues I have listed.
A generation ago
While as a business ethics speaker, business ethics consultant and author, I understand that from generation to generation, ethics has always been important, in these 2022, post-pandemic days, ESG has taken on a hugely important role.
Issues such as “governance,” one the domain of accountants and a handful of HR professionals, is now studied in detail even by those who have never seen the inside of a business school. Clearly, access to information (and its simplification) is widely available online. What was once a “nice-to-know” in terms of corporate social responsibility, is now a need-to-know in terms of investing, social justice, and human rights issues.
Undoubtedly, we are all seeing a major uptick in activist investors and those forcing the expanded dialog of equity and inclusion, fair play and ethical behavior in better determining how executive leaders should be compensated, who is hired for board positions (and their record), how the company goes about its sales and marketing mission, how their financial people are reporting results, who is the recipient of donations and other here-to-fore hidden factors.
It is not only CEO’s and other C-suite players who are being held to task for unethical governance practices, but Human Resources, Finance and Accounting, Sales and Marketing and any other public-facing department.
Violations of governance will be quickly discovered by a new breed of activism and activist investors. As a business ethics speaker, I celebrate this new-found awareness. Some CEOs and other executive leaders may take exception to governance; the claim their remuneration is “no one’s business,” or that being caught handing out bribes was “misunderstood in light of normal business,” or that they have long had trouble finding “qualified diverse board members,” however with renewed ESG awareness, activist investors are not hearing it.
It comes down to ethics
The way corporations must be governed eventually leads to good business ethics. So, what is the role of ethics in corporate governance? It is everywhere, and concerns itself with everything. The company that has been slow to adopt more inclusive policies; the company that resorts to bribes or intentional corner cutting; the organization that overly compensates executives during a period of poor performance; the organization that donates to questionable or unprincipled charities is inherently unethical.
A company that is governed by ethical principles will succeed in these time, a company content to a strategy of business as usual, will suffer.
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