In a series of roundtable discussions with board members, it has become apparent that the ‘G’ (for governance) in ESG is the most important aspect of this very popular acronym.
As companies adopt an expanded view of the constituents they serve, environmental and social issues have gained more prominence in management and board agendas. Stakeholder capitalism has become one of the key concepts guiding how companies and boards view their purpose and responsibilities. Investors, employees, customers and regulators are pressuring companies about their commitments to issues like climate change, pollution, energy efficiency, diversity, equity, inclusion and employee well-being.
All of this puts pressure on board members to “do something” about ESG. Good governance, then, is of paramount importance. Boards, working with management, have to sort through all of the noise — opinions, ideas and information — and make rational, informed decisions about how to set priorities, allocate resources and make investments.
The following diagram, putting the G above the S and the E in ESG, captures the critical role of governance:
We have learned a great deal from our series of roundtable discussions with board members about ESG. Some of the lessons are as follows:
Finally, as we have discussed in a previous article, including ESG measures in incentive plans may be an effective way to focus management attention on a mission critical measure that requires concerted effort and resources. However, there is likely a much wider array of ESG issues that require management and governance attention on a regular basis. And what gets managed and discussed in the board room often has as much or greater impact on what gets done than adding a new measure to an incentive plan.
In other words, effective governance — the G in ESG — comes first.
A version of this article appeared in Workspan Daily on September 16, 2021. All rights reserved, reprinted with permission.
