Environmental, social and governance (ESG) issues have become increasingly important drivers of behaviour within the global business landscape. While this framework has attracted some criticism, various research studies and regulatory changes indicate that ESG issues have become operational priorities for businesses of all sizes. In this article we examine the growing links between ESG and reputation management; specifically analysing the regularly overlooked issue of corporate governance and its growing importance within this debate.
Focusing on the ‘G’ within ‘ESG’
Corporate governance can be defined as the system of structures, practices and processes by which a company is directed and controlled.
The ongoing climate crisis and a plethora of shifting cultural and societal changes have meant that governance is often neglected within the ESG debate. Precedent has generally been given to environmental and social issues which have commanded the lion’s share of ESG-related coverage.
There have been several examples in recent years of corporate reputational issues surrounding the environment. This includes accusations of Greenwashing being levelled at the likes of Volkswagen, Coca-Cola and H&M. Equally, ill-advised statements, campaigns and behaviours from companies across the globe have led to a multitude of reputational challenges centred around social issues including ED&I and geopolitical tensions.
However, this landscape is beginning to evolve. While environmental and social issues remain critically important for businesses, there has been a heightened awareness in recent months of the importance of good governance and its impact on corporate reputation.
Corporate governance and its links to reputation
Good governance can come in many forms but is usually characterised by accountability, leadership, integrity and transparency. Ensuring your business’ executive team are recognised for these qualities is a critical component of building a robust corporate reputation. Following a series of high-profile governance failures in recent years, executive teams are facing heightened scrutiny so it is crucial that corporate communications teams manage this carefully and strategically.
Microsoft is a great example of strong governance with a diverse Board of Directors, performance evaluation, effective shareholder engagement and clear succession planning.
Good governance is key to building a positive corporate reputation but it has an equally important role to play when it comes to protecting this in times of crisis. Crises occur in every organisation but good governance can mitigate the impact of any potential fallout. Strong leadership can insulate organisations against reputational challenges and can facilitate swift and decisive issues management when challenges occur.
There have been many examples in recent years of poor governance negatively impacting corporate reputation and in turn, business performance. These range from the collapse of Lehman Brothers and consequent financial crisis through to several scandals that have rocked trust in the charity sector.
While poor governance can impact organisations large and small, it is particularly important that rapidly scaling organisations or those with inexperienced leadership teams ensure effective governance is not neglected in pursuit of growth.
Why companies must prioritise good governance
Corporate governance issues are being discussed with increased frequency by both mainstream and business media outlets and are starting to share the same level of scrutiny as environmental and social issues. One recent example of this was the shock departure of former BP CEO Bernard Looney. This issue was covered extensively by the press and led to over £2bn being wiped from the company’s share price.
While as a listed entity the challenges facing BP will not be applicable across the board, in the current climate where investment is increasingly hard to come by, founding teams at earlier stage businesses must work proactively to build trust in the leadership of their organisations.
Another challenge facing larger-scale organisations is the rising tide of shareholder activism. According to Freshfields, shareholder activism increased in 2023 during the proxy season with a 150% surge compared to 2022. External perceptions of poor governance significantly increase the likelihood that businesses will become targets of an activist attack. While shareholder activism can improve business performance in the long-term, the instability this generates can present numerous challenges for organisations.
With ESG issues only growing in importance, governance has a more important role to play than ever. Organisations must proactively address this trend in both their communications and operational decision making to ensure long-term business success. Frameworks must be put in place to prevent reputational issues from happening or if they do occur, to address them as quickly and appropriately as possible.