Governance: Putting the 'G' in ESG

A study found that over the 12 months, governance consistently ranked second, behind only a company's products, as a driver of corporate reputation

Not too long ago, the success of a company was determined purely by its financial performance.

Its profit and loss account, balance sheet statements, share price, ROI, ROE — these were the metrics that set a successful business apart from a failing one.

That no longer holds entirely true.

A business still has to be profitable, it still has to have the right level of leverage, a healthy return on invested capital.

These are outcomes that any company aspires to. But the influences that determine them have undergone a sea change in today’s digitally-enabled modern day world.

Once the quality of a company’s products or service was enough to set it apart from the competition. Today, there is a complex, multi-layered matrix of intangible influences that determine whether a company succeeds or fails.

Influences like perception and reputation, stemming from a company’s actions outside of its area of business, move the needle to a far greater degree today than they did in the past.

Environmental sustainability, engagement with local communities, employability, a social conscience — these are the metrics that define a good business in the 21st century.

The definition of “good business” varies for varying stakeholder groups, according to a survey carried out by the Mahindra Group.

Urban and rural consumers will have a different interpretation of the concept, as will people of different ages or genders. Potential employees, current employees, shareholders, auditors, suppliers and service providers will all have their unique perspective on what makes a “good business”.

It is a fluid concept, shape shifting to fit the different perspectives of different stakeholders.

But survey respondents broadly identified the following pillars as central to the concept of “good business”: environmental sustainability, contribution to society, inclusivity and ethics.

These are all indispensable elements of “good business”. But a key aspect that survey respondents tended to largely overlook was governance.

In my view, corporate governance is the bedrock of “good business”.

The business world has coined an acronym — ESG — to measure a company’s societal impact. It stands for Environmental, Social and Corporate Governance.

Governance doesn’t create the same excitement as environmental sustainability and a commitment to social causes. But I believe it is to “good business” what salt is to cooking.

A “good business” cannot exist without strong corporate governance. It has more of an influence on the “matrix of intangibles” like perception and reputation than, for example, environmental sustainability.

It is more directly linked to a company’s profitability and creditworthiness, for instance. It is intrinsic to value creation — for me, the cardinal principle of doing business.

Reputation insights company RepTrak, which has worked with several blue-chip companies, carried out a study measuring reputation drivers between August 2019 and July 2020.

The study found that over the 12 months, governance consistently ranked second, behind only a company’s products, as a driver of corporate reputation.

Another study by RepTrak found that a company’s ESG score is a key differentiator in a consumer’s purchase decision. About 60 per cent of the general public expressed a willingness to buy products from a company with a high ESG score compared to just 20 per cent willing to buy from a company with a low score.

The latter study focused on the overall ESG score of a company, which includes its environmental and social commitments. But, as highlighted above, with governance such a key component of the three, the study further emphasised its importance to reputation and overall business.

Doing things the right way is just as important as doing the right things. At the Mahindra Group we’ve come up with a philosophy that works for us. We place compliance at the bottom of the pyramid of our operations. Governance flows from the top.

Together with our commitment to our stakeholders, shareholders, communities, employees, our regard for the environment and our push for profitability, this emphasis on governance has led to a way of doing business for us that we dub conscious capitalism.

A business exists to turn a profit. That has always been the case since the earliest days of capitalism. What has changed in the 21st century is that the how now matters just as much as the how much.

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The writer is Managing Director & CEO, Mahindra Group