Management's focus on sustainability
The reality in which we found ourselves living is not easy. At the time we are struggling with many difficult problems, such as the ongoing climate change and pandemic. These issues affect everyone in the world, so in order to confront them we need to work together, involving governments, businesses, individuals and institutions. In particular, attention should be given to supporting sustainable businesses. Companies that use sustainable corporate governance in their operations have a very positive impact in many aspects. Among other things, they contribute to maintaining high transparency and accelerating the development of innovation. Determining the extent to which a company applies sustainable corporate governance is reflected heavily in what due diligence duties are performed by the directors of the companies in question. A board that effectively manages sustainability risks and strives to create long-term value effectively contributes to business growth. Transforming a company's operations to be focused on creating sustainable value is not easy and we may encounter some complications during implementation. Knowing how to effectively deal with potential obstacles will save the company a lot of time and resources.
Ensuring a favorable environment
The countries that have the most favorable regulatory environment and financial structures, focused on sustainable development and supporting small businesses to grow dynamically are the United States and China. In the United States, an increasing number of special purpose acquisition companies (SPACs) can be observed. These entities are publicly listed and non-operational. They are created precisely in order to be able to acquire a private company and then be able to list it on the stock exchange bypassing the entire initial offering process. Unfortunately, Europe is lagging behind in this regard because there are currently no forms of support through which thriving companies can count on the support of additional funding, at least not on the scale as is the case in China and the United States. Sustainability is extremely important in terms of competitiveness and innovation. The regulatory environment should make every effort to ensure that in the future, the sustainability framework that is introduced will primarily benefit businesses. After all, the goal is long-term value creation and the promotion of good practices. However, if the process of implementing sustainability strategies involves a lot of bureaucracy then this could cause a lot of problems for companies. If overly strict regulations are introduced in Europe this could result in a very serious weakening of the competitiveness of European companies in relation to Chinese and American companies.
Setting international standards for sustainable development
Greenwashing is now, unfortunately, a very popular phenomenon. Companies are spreading untruthful information to the masses about the strategy they are carrying out, which are only seemingly for the general good. Consumers put sustainability on their list of priorities and are more likely to purchase products from companies for which this value is also important. Businesses are well aware of this fact so they are doing everything in their power to prove to consumers that they are "on the same page."
With the introduction of corporate reporting, distinguishing which companies are actually operating within the framework of sustainability and which are merely greenwashing would be much easier.
The main problem is reporting, or more precisely, differing reporting standards and initiatives. This effectively makes it impossible to accurately identify the activities of a particular company. The solution would be to introduce international sustainability standards to which all companies would have to adhere. Then it would be possible to objectively assess a company's credibility and compare it with others. It is essential to make sure that such standards actually cover all operating businesses - regardless of whether we are dealing with large corporations, private companies or listed companies. Any difference in requirements for one or more forms of business may result in the practice of unsustainable activities which will consequently be difficult to detect.
Conducting an analysis of their supply chains by companies is a very complicated process. Especially challenging are the supply chains that are particularly large. Top leaders have very elaborate supply chains consisting of up to millions of suppliers in just the first and second tier, disregarding the rest. Suppliers are also often larger than the companies they work for. In addition to this, companies may also work with suppliers who are under the permanent control of countries with fairly weak governance. As you can see, supply chain analysis can be extremely complex. To make it a little easier, companies could mainly focus on those suppliers who are most risky when it comes to the local environment and human rights. It is also necessary to be fair to companies from different countries and thus apply the same regulations to each supplier regardless of the country of origin.
Enhancing the role of committees
Often the company's management is under very strong pressure from many different sources and, as a consequence, has a challenging task to bring together priorities that are sometimes contradictory. This consumes most of their attention and time, leaving them with little room to think about the company's role in the global value chain, long-term value creation or possible opportunities for innovation. The solution to this problem could be greater involvement of committees. Sustainability committees are unlikely to be something that occurs frequently among company boards. Creating this committee is not a necessity, because if a company has an audit committee it can effectively use its powers. The audit committee can successively deal with all sustainability issues and control the company's activities in this regard. Introducing sustainable corporate governance into a company will be much easier if the audit committee takes on the responsibility of ensuring the reliability of the information used by the board of directors in setting the company's long-term strategy.
Audit committees can effectively monitor a company's operations as long as they are not afraid to ask the management direct questions.
They need to establish regular internal audits that check the company's operations against customer expectations and required standards, ensure that ESG information is taken into account in all decision-making, put in place an efficient sustainability reporting system and skillfully monitor any risks that could threaten the company. European companies operating in the market are usually characterized by one- or two-tier supervisory boards. In the future, it is worth investigating whether either of these systems is more successful in terms of the board's introduction of a sustainability strategy.
Developing employee remuneration plans
Global capital markets mainly support short-term action, so that companies and their executives often forget to draw up long-term strategies and focus only on the here and now. The right behavior for a board to exhibit should be to counter this pressure. Long-term valuation should never be pushed to the background at the expense of short-term activities. The task of creating executive compensation plans is by no means a simple one and requires careful attention. When constructing this type of plan, long-term corporate governance, environmental and social goals should also be taken into account. There may be times when certain goals are almost impossible to measure. There is also no way to predict the exact dates by which the goals should be achieved in the future because no one can foresee if and what complications will arise along the way and how the company will deal with them. Also, there is the probability that some of the previously set targets will become significantly less important as the compensation plan develops. To create the most precise staff compensation plan, it is a good idea to use the services of experienced compensation consultants.