Corporate Governance and Sustainability in the context of contemporary organizations

 

In the fast-moving business environment, companies do encounter challenges and opportunities from the domestic and international markets. Therefore, the survival of the best becomes essential by providing qualitative goods at low cost and improving financial position, namely profits, earnings per share, while meeting the stakeholder expectations and public scrutiny of corporate values and culture.

 

Organizations’ corporate governance, financial transparency, ethical behaviour, corporate social responsibility and financial transparency was intensively taken into consideration by society after the collapses of mega corporates during the early 2000s, Specifically the collapse of Enron, WorldCom, and Parmalat. (Rashid, 2018) Companies developed a practice of disclosing relevant information to capital providers and other stakeholders due to these corporate mass destructions. Corporate analysts revealed to the world that the primary reason for these collapses were the non-availability of good governance, social responsibility, and ethics rather than auditing failures. (Dibra, 2016).

 

What is Corporate Governance?

 

As described by (Cadbury 1993), Corporate Governance is "the system by which companies are directed and controlled."

 

Traditionally, corporate governance focuses on the financial capital provided by the corporation's owners, as well as the regulation of the duties and responsibilities of the people whom the owners have chosen to deploy their financial capital and generate a reasonable return on their investment, such as accounting procedures and internal controls. (Rodriguez-Fernandez, 2016)

 

Corporate governance is a framework that boards of directors and senior executives use to operate responsibly and ethically. The principles of corporate governance are based on transparency, responsibility, accountability, and fairness. (Lumentut, Rifai, Aburaera and Sumardi, 2017).

 

The organization's board of directors is directly responsible for establishing a culture of accountability and transparency. Transparency must be ensured and rewarded by the board of directors. They accurately monitor implementation, ensure facts are not obfuscated and guarantee that conflicts of interest are avoided. On the other hand, management is responsible for developing the procedures and processes to ensure that these policies are implemented appropriately. Top executives in best-practice firms are steadfastly committed to a transparent culture.

 

Many businesses tend to focus on profit-making rather than anything in the business world, which leads to engaging in activities that may not meet the required ethical standards. Business ethics is an upcoming issue mainly due to the sheer number of persons involved when a group of people planning and implementing decisions, the ethics of these people are translated into the firm’s ethics. It involves morally upright actions.  The actions of a few persons may seem safe on a small scale, but on a large scale, such actions could be devastating; thus, having substantial firms are. As a result, to have high business ethics, solid personal ethics is needed parallel to an effective CG system, which ensures rules enforcement, increases transparency, and minimizes the chances of fraud.

 

Financial transparency has become one of the foundations of a robust CG system considering numerous scandals and fraud actions. Because accounting is the language of business, investors want a transparent and fair depiction of the firm's financial position to make informed decisions. Unfortunately, management may purposefully withhold certain information from a wide range of financial statement users, thereby misleading them about its operations. It is impossible to properly comprehend a company's financial situation without the necessary information.

 

Like romance, a firm and its corporate governance structure can be a marriage made in heaven.

Working together, they can boost competitiveness, transparency, and access to international financial markets.

 

As a result, while the "ideal marriage" does not exist, if mishandled, it can throw the partnership on the rocks, making it troublesome, uncomfortable, and putting the company at risk of failing. Recently, efforts to invigorate a more long-term perspective among corporations and their investors have laid the groundwork. It aims to shift these process-oriented debates to fundamental questions about corporations' primary purpose and how their success should be measured and defined as sustainability.

What is sustainability?

 

Expressed in a simpler way, sustainability is a business strategy for generating long-term value by considering how a company works in its environmental, economic and social environment (ESG) (Alsayegh, Abdul Rahman and Homayoun, 2020)

 

Sustainability has become one of the most critical governance topics covering various issues such as climate change, environmental concerns, systemic financial stability, labour norms, and consumer and product safety.

 

What’s the relationship between corporate social responsibility and sustainability?

 

If a company's best interest is to manage corporate social responsibility, realizing that their operations impact the environment, an innate feeling of commitment to their societies will assure long-term viability. That impact will be visible today and in the future in the organization and society.

 

Though some businesses and economists first opposed the concept of CSR because it implies a responsibility to society and future generations beyond what is required by law, most companies today embrace it.

 

Approaches to CSR vary. Some companies invest in CSR to manage their brand or sustain profitability, while others do so out of a sense of social responsibility. These tools emphasize sustainability and CSR in terms of moral obligation, and they provide insight into ethical ideas related to economic, environmental, and social equality.

 

It's past time for business leaders to stop conflating responsibility with sustainability, which prevents companies from thinking deeply enough about their actions' disparities generated over time. To put it in another way, some behaviours are either responsible or sustainable, but not both.

The sole moral obligation that underpins sustainability is the need to balance resource availability and demand in the short and long term. Short-term success should never come at the expense of long-term survival.

 

Why is corporate governance is so important for long-term sustainability and development?

 

Without a doubt, corporate governance is a key lever for firms to create long-term value. Corporate governance must align across critical areas of governance, from risk management to remuneration plans to provide transparent, honest reporting on their company's progress toward long-term value goals to unleash sustainable performance fully.

 

Companies are under pressure to support their efforts with transparency, and public disclosure as the hunt for corporate sustainability continues to strengthen and enhance the principles of good corporate governance. Transparency initiatives will inform the general public about the link between corporate governance and better sustainability. Transparency initiatives will inform the general public about the connection between corporate governance and better sustainability. The greater the awareness of the link between corporate governance and sustainability among stakeholders, the more apparent the link will become over time.

 

If organizations effectively handle climate change, demographic upheavals, globalization, pandemics, and technology disruption, they will need a new way of thinking about risk. At the same time, a company's long-term success will determine by its leadership's capacity to accept the upside risks posed by quickly changing markets. Boards play an essential function in this situation.

 

Sustainable and ethical practices can be identified as two sides of the same coin. Only when ethical behaviours and sustainability are combined can hope for a brighter future be ignited. In truth, sustainability is a moral way of life. TATA, for example, has earned a lot of goodwill by combining ethical standards with long-term environmental aims.

 

Brands like Unilever and Natura have benefited from strong corporate governance and sustainability initiatives. Unilever's sustainable living brands continue to grow at a quicker rate than other product lines. (Unilever, 2019)

 

The COVID-19 epidemic and social justice movements have had far-reaching repercussions on

businesses worldwide, and the years 2020 and 2021 have pushed the world to a tipping point, underlining that corporations can no longer disregard the concept of sustainability.

 

 

Boards are now facing a challenging new reality as a result of Covid-19. The new environment is characterised by pressures and demands from various stakeholder groups, increased expectations for social participation and corporate citizenship, and fundamental uncertainty about the future.

 

These variables make board decision-making more complex and put the shareholder-centric governance paradigm to the test, which has led boards and CEOs for decades. A board's ability to discuss in a thorough and rigorous, yet quick, manner and reach a meaningful conclusion on critical issues in the post-Covid age will be an essential component of its efficacy.

 

In the end, corporate governance and sustainability is no longer simply a means of theoretical frameworks for companies or boards to distinguish themselves. Instead, it is imperative for survival. Companies must produce long-term value for their stakeholders to be trusted and, in some cases, to keep their firm operating in the future. This ambition will become a reality thanks to sound company governance.

Reference

 

Alsayegh, M., Abdul Rahman, R. and Homayoun, S., 2020. Corporate Economic, Environmental, and Social Sustainability Performance Transformation through ESG Disclosure. Sustainability, 12(9), p.3910.

 

Cadbury, A., 1993. The Report of the Cadbury Committee on The Financial Aspects of Corporate Governance: The Code of Best Practice. Corporate Governance: An International Review, 1(3), pp.124-124.

 

Dibra, R., 2016. Corporate Governance Failure: The Case Of Enron And Parmalat. European Scientific Journal, ESJ, 12(16), p.283.

 

Lumentut, L., Rifai, B., Aburaera, S. and Sumardi, J., 2017. The Transparency Principle in Realize Good Corporate Governance: Limited Company. IOSR Journal of Humanities and Social Science, 22(04), pp.50-57.

 

Rashid, A., 2018. The influence of corporate governance practices on corporate social responsibility reporting. Social Responsibility Journal, 14(1), pp.20-39.

 

Rodriguez-Fernandez, M., 2016. Social responsibility and financial performance: The role of good corporate governance. BRQ Business Research Quarterly, 19(2), pp.137-151.

 

Unilever, 2019. Unilever Annual Report and Accounts 2019. [online] Unilever.com. Available at: <https://www.unilever.com/Images/unilever-annual-report-and-accounts-2019_tcm244-547893_en.pdf> [Accessed 5 September 2021].