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The Next Frontier for Corporate Governance

Alexander Barkawi, SAM Indexes

Governance and transparency have always been integral elements of sustainability principles. The growing attention that mainstream investors are paying to these issues is a further case in point for the merits of sustainability investing.

Corporate scandals and the subsequent deterioration of investor trust have moved corporate governance to the top of politicians’, regulators’ and – most importantly – shareholders' agendas. Investors and other stakeholders increasingly realize that good governance is an essential component of companies’ long-term success as well as of functioning financial markets in general. As a result, various organizations, including the New York Stock Exchange and the International Corporate Governance Network, have recently published proposals to improve the institutional architecture for corporate decision-making.

This development coincides with a growing demand for greater transparency. Requests for more information do not only apply to remuneration packages or stock option plans of top management, but increasingly to other business activities as well. In May, a group of over 30 large institutional investors wrote to the 500 biggest companies worldwide asking for specific information on their greenhouse gas emissions.

A few days later, investor and philanthropist George Soros joined forces with several NGOs in an appeal for greater financial transparency of natural resource companies. Their campaign, “Publish what you pay”, calls on stock exchange regulators to oblige listed oil, gas and mining firms to disclose their payments to national governments.

The initiatives described above reflect more than simply a growing concern about corporate governance in the traditional sense. They also illustrate that this field’s agenda is moving beyond the relationship of capital owners and management. As sustainability becomes an integral part of long-term success, companies’ institutional structures and processes need to account for the growing influence and importance of different stakeholders.

As a result, future corporate governance structures will be based on more inclusive platforms for decision-making. External and internal interest groups will offer a vast pool of knowledge and a source for early signals of change. They will also provide necessary checks and balances to safeguard the company’s legitimacy and license to operate. Project teams that include NGOs, suppliers, employees and local communities are a first step in this direction. The growing number of sustainability reports is providing the necessary initial transparency for this development.

With the increasing importance of sustainability, companies will face significant opportunities and risks. Sustainability leaders will embrace stakeholder engagement and communication as an essential component of their response to these challenges.

(Reprinted with permission of Sustainable Business Investor - Worldwide is published by CCL Commerce a division of Euromoney Institutional Investor PLC -- )


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