Raising Guardians to Defend the Future of Governance

Although governance has been part of human societies for millennia, corporate governance is evolving faster than ever, leaving companies and entire markets behind. It falls to board members to guarantee that organizations remain relevant through implementing sound environmental, social equity, and governance (ESG) practices.

The focus on sustainability, social responsibility, and ethical business conduct has become intense, making it vital for businesses and policymakers to consider them when making decisions. And with the continual introduction of new ESG regulations, such as those announced by the EU in adopting the Corporate Sustainability Reporting Directive (CSRD) in February 2024, compliance with minimum ratings is fast becoming an imperative, and not just a nice-to-have.  

These considerations formed the foundation of a thought-provoking discussion recently hosted by Signium Global at the Palais Kinsky in Vienna. A panel of industry-leading professionals examined where we are now and what’s coming next in the world of corporate governance – and attempted to predict how these principles have the power to create a future that is sustainable, responsible, and profitable. 

• Sustainability is a necessity and a competitive advantage 

When looking at sustainability at a larger scope, it’s becoming essential to invest as early as possible to retain a competitive advantage. Businesses that invested in sustainability 15 years ago are now harnessing and expanding their market positioning because of technologies and systems that they’ve adopted. Those who have failed to adopt environmentally sustainable practices will find it difficult to adapt to imminent regulatory changes quickly enough when implemented.  

• Regulatory changes are happening faster than anticipated 

Regulations being imposed by the CSRD could have a crippling effect on developing or emerging markets that aren’t equipped with the required infrastructure. As a result, over-regulation could impact the European Union’s competitive advantage against other markets. 

• Regulatory changes impact governance structure 

While executive teams are typically concerned with short-term KPIs, board members will need to re-emphasize sustainability efforts to meet the CSRD’s new directives and tight compliance deadlines. It will also require Boards to diversify, bringing more talent on board to broaden their collective understanding of sustainability, social issues, and compliance.  

• Stakeholder engagement remains a top priority 

Stakeholder engagement is critical in helping to determine how the organization affects other companies, communities and society in general. Given the global emphasis on environmental practices, it’s especially important to gather opinions and concerns on sustainability issues, and stakeholders provide a valuable resource of outside perspective and knowledge.  

Understanding origins: the evolution of governance 

If we pause and look back in history to the origins of the concept of governance, the earliest examples we can pinpoint were monolithic entities ruled by an emperor, pharaoh, or a monarch. The ruler’s power to govern was generally absolute, and his or her prescribed codes, rules, and behaviors were enforced by a body of officials.  

Fast-forward in time, and governance evolved from a largely compliance-based model, to one that balances compliance with stewardship, and this is the structure we still see in organizations today. What is stewardship? By definition, it is the careful and responsible management of something entrusted to one’s care. 

Andrew Kakabadse, Professor of Governance and Leadership and Chairman of Henley Director Forum in London, explains: “Over time, governance has matured beyond a set of rules. Cultures began to adopt and endorse certain behaviors focused on respect and care. They established oversight committees to examine institutions and leaders’ behaviors, and to determine who was going to be responsible for ensuring the proper conduct within society. In business, this method of governance remains relevant, but instead of having committees or officials, we now elect a board.”  

Kakabadse goes on to point out that compliance without stewardship is a dangerous position for any organization to be in. The Enron scandal is an apt example of failed governance. While money flows were being distorted over a prolonged period of time, the company ticked all the boxes, in terms of compliance. It even enjoyed a glowing reputation in the public eye. One must, if Enron fulfilled all its obligations and complied with regulations as an organization, how did such a scandal occur?  

According to investigations, many executives and board members were aware of the financial mismanagement for nearly three years before one brave board member finally blew the whistle. What this indicates is that although Enron had governance systems in place to track regulatory compliance, it severely lacked the elements of respect and care that fall under stewardship.  

In our role as trusted advisors in the executive space, we’ve witnessed some challenges within the global boardroom:   

• Disillusioned board members 

According to a recent study, over 34% of board members and C-Suite executives are in a state of permanent compromise, where they’re in disagreement over the structure, direction, or values of the organization, with no resolution in sight. Many of these Board members become disillusioned in their roles, or they leave.  

• Lack of action 

Another startling insight is that when a problem exists within an organization, up to 67% of board members are afraid to even talk about it, let alone find a solution. As in the case of Enron, this kind of paralysis hinders decision-making, and slow reactions to threats could have devastating consequences in the long run.  

• Detachment from reality 

A survey of the UK’s FTSE 100, FTSE 200, and FTSE 300 businesses revealed that over 80% of board members did not know their company’s competitive advantages. While they’re accustomed to procedures and regulations, few make a habit of venturing out of the boardroom to understand the reality of how the business adds value to society, or in what ways their competitive advantage may be limited – especially by matters relating to ESG.  

“So what is the future of governance?” questions Kakabadse. “We must find some really smart, principled executives to sit on our boards – people who aren’t afraid to explore the frontlines of business and to challenge the evidence of what’s being done, against the reports and policies being filed.  

“These are not just board members. They are guardians.”  

The guardians of governance uphold the “S” in ESG 

In the context of ESG, focusing on “social equity” involves looking beyond standard measures like gender and ethnicity, and evaluating a wider range of factors. Within the realm of social considerations, it’s important to assess aspects such as emotional culture, psychological safety, and the significance of intentionality. 

• Emotional culture pertains to the norms and values that shape how emotions are expressed and managed within an organization. It influences employee well-being, engagement, and overall performance.  
• Psychological safety refers to an environment where individuals feel safe to take risks, speak up, and express their thoughts without fear of negative consequences. 
• Intentionality emphasizes the importance of purposeful and deliberate actions in fostering a positive social environment. 

Boards play an important role in transforming company culture and improving Diversity, Equity, and Inclusion (DEI). Instead of merely looking at reports and policies once a year, boards should actively ask how positive behavior and inclusivity are being promoted at all levels of the organization, at all times of the year. 

By making DEI a top priority, and an essential part of the company’s strategy, boards can drive significant progress toward a more inclusive workplace culture that cares about social responsibility and respect. These are the substance of stewardship, the imperative partner to compliance and ultimately, governance as a whole.  

As organizations look ahead to the tasks of compliance with up-and-coming ESG regulations, leaders would do well to assess their board structure and ensure that they’ve appointed board members who show an ability to act as guardians. These are individuals who:  

• Have specific skills or knowledge pertaining to various company departments, including sustainability 
• Show a personal investment in building a company culture that fosters social equity and diversity across numerous metrics 
• Demonstrate willingness to navigate challenges with integrity and commitment 
• Understand the importance of knowing and driving the organization’s competitive advantage 

Kakabadse encourages companies to shift perspectives: “When leaders think of ESG, they often think paperwork, policies and quite honestly pain. It’s a lot more than that: ESG is about people, and having the right people for the role of governance.”