Not only does ESG legislation (Environmental, Social and Governance) require more attention to governance. The quality of governance also has a major impact on the financial health and reputation of a company. Fraud, corruption, conflicts of interest and other forms of bad governance can have major consequences. Furthermore, the government can impose high fines if the ESG regulations are not followed.
But other parties can also hold a company liable for the consequences of improper governance. Managing governance risks is therefore essential. In this blog, I discuss governance pitfalls, associated risks and best practices for governance systems based on strong ethical standards and effective internal controls.
What are the managerial pitfalls?
- Lack of transparency. When companies are not open about their financial situation, decision-making processes and policies, it can lead to distrust among investors, customers and employees.
- Conflicts of interest. Directors or executives who pursue personal interests at the expense of the company create a climate of distrust and reduce efficiency.
- Insufficient diversity. A lack of diversity in governing bodies can lead to tunnel vision and missed opportunities, as well as raise ethical issues.
- Inadequate risk management. Companies that do not have effective risk management systems can face financial losses and reputational damage.
- Lack of accountability. When leaders are not held accountable for their decisions and actions, it can lead to abuse of power and wrong decisions.
What consequences can bad governance have?
- Reduced investor confidence, resulting in stock price declines and financing problems.
- Reputational damage, resulting in loss of customers and partners.
- Legal problems and fines for violations of laws and regulations.
- Loss of talent, because people do not want to work for companies with bad reputations in this field.
- Reduced creation of long-term value for all stakeholders.
How do you develop a robust governance system?
- Transparency. Provide transparency in business activities, financial reporting and decision-making processes. Publish annual reports and inform stakeholders, including at shareholder meetings.
- Independence. Ensure an independent board with board members who have no direct financial interests in the company. This helps avoid conflicts of interest.
- Diversity. Promote diversity on the board and senior management to foster different perspectives and ways of thinking.
- Risk Management. Implement effective risk management systems and internal controls to identify and address potential threats to the business.
- Accountability. Hold leaders and directors accountable for their decisions and actions. Implement a code of ethics and complaint handling mechanisms.
- Engage stakeholders: Communicate with all stakeholders, such as employees, customers, suppliers and communities, and include their interests in decision-making.
- Compliance. Ensure that the company complies with all applicable laws and regulations and stay abreast of changing regulations.
Part of ESG reporting
The term ESG refers to the environmental (Environment), people (Social) and governance (Governance) impacts on all stakeholders in an organization. The ESG legislation will apply to companies already covered by the non-financial reporting directive (NFRD) from Jan. 1, 2024, and to other large companies from 2025. Reporting will cover all aspects of ESG.
Governance must therefore also be reported on and an auditor must review this information. The benchmark recently conducted Schouten Zekerheid shows that ESG is not yet high on the agenda. Almost 40% of the companies provide no ESG reports and just under 20% believe that it does not apply to their organization. For the remaining companies, reporting is limited and thus mainly focused on compliance. Only 11% provide comprehensive ESG reporting with specific metrics and targets, including for governance.
Still participate in the benchmark and download the complete report
Not only governance and other ESG aspects need attention. All sorts of other developments also influence your risk profile. How can you manage those risks and how do other companies do that? You can find out by taking part in Schouten Zekerheid's benchmark. Immediately after completing the questionnaire, you will receive an overview that clearly shows where you stand compared to other companies. You can also download the complete report with the results of the benchmark here free of charge.
https://grootzakelijk.schoutenzekerheid.nl/het-schouten-zekerheid-bedrijfsrisco-onderzoek
