What is hidden under the letter G?
ESG is a conglomeration of letters that still doesn't say much to most of us. But while E (environment) and S (society) are fairly easy to grasp, it is no longer so clear with G (governance), as even those who deal with sustainability on a daily basis have quite a problem with the latter letter. So what is hidden under the mysterious term "corporate governance"?
The concept of corporate governance has been known to business for more than 30 years, which means that its history is much longer than that of ESG. In the simplest terms, under this seemingly difficult concept are all the rules and norms that regulate the relations between the bodies of the company (employees, supervisory board, management board), as well as within these bodies. These principles relate to the company's management in the broadest sense. It is a set of rules, both written (contracts, bylaws) and unwritten (norms, customs), which regulate the conduct of all bodies operating in a given enterprise. In companies where corporate governance principles are observed, no body, nor any individual member, can be either privileged or disadvantaged. The idea behind adherence to corporate governance is that everyone should be treated equally.
Corporate governance in sustainable development
The ESG concept has greatly expanded the interpretation of corporate governance, according to which it is understood as a system of controls and procedures to ensure proper corporate management. The correctness of corporate governance is determined by such factors as a professional and politically independent management, a balanced and transparent management and supervisory board structure, and a well-organized governance system. Proper corporate governance significantly minimizes a company's riskiness and is designed to ensure that key decisions are made in line with the interests of the company and its shareholders. It is easy to see that the understanding of corporate governance from this perspective is much broader than before. In the new understanding, it is no longer just the mutual and internal relations between the company's bodies, but the broadly understood principles of management of the entire company, subject to evaluation. The main thing being evaluated is the system of control and procedures used. A very important aspect to which special attention is paid is the company's ethics system, i.e. a set of norms and internal standards that will allow the company to act ethically.
Corporate governance in practice
As we already know, corporate governance involves managing the relationship between the management of companies, their bodies, shareholders, and other stakeholders, including employees and regulators. Corporate governance is the framework through which the company's goals (strategy) are set, the means of achieving those goals and the tools for monitoring them. The purpose of corporate governance is to stimulate the company's bodies and management to legally and safely for the company to achieve business objectives that are in the interest of the company and its shareholders. The Best Practices Committee operating within the WSE has developed a catalog of good practices for the operation of corporate governance. It shows how the company's information policy and communication with investors and shareholders should be implemented, defines the framework for the functioning and composition of the company's bodies such as the Management Board and Supervisory Board, describes what the company's internal functions and operating system should look like, and defines the value chain. In this regard, it defines what relations with suppliers should look like, pointing out desirable actions in this regard, such as having and applying an anti-trust policy, an anti-corruption policy, etc. In addition, the document indicates what the remuneration policy inside the company should look like and strongly emphasizes its transparency. It is worth noting that in the latest iteration of the document entitled "Good Practices 2021" we will find issues regulating climate protection, sustainable development, diversity in the composition of corporate bodies and equal pay. Good corporate governance is heavily influenced by the way shareholders are treated, hence the new rules relating to the way profit is distributed, the issuance of shares with exclusion of pre-emptive rights, or the repurchase of own shares. Great attention has been paid to the best possible preparation of the general meeting, indicating a deadline for shareholders to send draft resolutions, as well as the process of nominating and appointing board members, in accordance with the requirements set by law for audit committee members, as well as the diversity policy adopted as a result of the relevant principle of the Good Practices.
Challenges of evaluating corporate governance principles
Proper evaluation of corporate governance principles is thus undoubtedly challenging for companies. Its implementation in practice needs to be assessed in detail, more specifically:
at the outset, assess whether the company has relevant policies, information and documents at all
then substantively assess the content of these information and documents, both in terms of their impact on the improvement of the management system, compliance with regulations, but also their actual usefulness,
and, as a result, try to assess whether the company's declared policies are actually followed and applied by the company.
All this shows how difficult it is to make a meticulous, comprehensive and transparent assessment of corporate governance. It is not enough to describe that a company has some specific policy indicated by a catalog of good practices, but above all it is necessary to assess whether and to what extent it is effectively implemented. The point is that corporate governance actually works in practice, and is not just a figment of the imagination and exists only "on paper" or in the pages of the annual report.