A company's success is dependent on the values it built on. Transparency and accountability are the two values that are imperative for companies in this economic environment. Consumers and investors are extremely aware and have begun to informed decisions while choosing which company or brand to trust. 

The G in Environment, Social, and Governance  is a crucial part in the entire sustainability spectrum. Governance entails ensuring:

• Transparency and accountability
• Board diversity
• Fair remuneration
• Compliance with policies
• Mitigation of malpractices

Governance thus includes the equitable distribution of responsibility and accountability for the decision making processes in the company. Governance is measured by a number of factors (both quantitative and qualitative) such employee turnover, CEO to employee wage ratio, number of women board members, type of policies, compliance to those policies, grievances of stakeholders addressed, etc. 

There is evidence that those companies that perform below the average for these factors are prone to mismanagement and risks. 

Corporate Governance Models

Corporate Governance Model can give companies a skeleton as to how to shape their policies and decision making frameworks to ensure good governance. There three models that we can look into

• Anglo-US Model:

This model is designed for individualistic businesses where the executives and shareholders have the controlling powers in the organisation. Here, although shareholders do have influence over the day-to-day operations, there is legislative control over this authority. Shareholders get support from regulatory bodies. 

• German Model:

This model focuses on two groups: the supervisory council and the executive board. The supervisory board controls the latter and is chosen by employees and shareholders to ensure minimum amount of bias. There is a great amount of focus on how the company can support the government for social betterment. Banks also play a crucial role in the financing of the company. 

• Japanese Model:

In this model there 2 major groups of stakeholder. The first group consists of shareholders, customers, and employee unions and the second group has the managers, executives, and board members. The key takeaways from the Japanese model are that this is a model that ensures balance of responsibility and ensures loyalty between the supplier and the customer. The government has high influence on the corporations. 

Each corporate governance model has its flaws and thus each model must be thoroughly analysed based on factors like location, economic policies, customers, etc to choose the best model suitable for the company. The best of all models can be taken to make a new model.

Board Inclusivity and Ethical Leadership

Representation of women in higher authority positions in companies is very less. Lack of diversity in terms of gender and race have caused problems for companies. Inclusivity in the boardroom allows the company to get various perspectives on decisions and situations, making an environment for collaborative and deliberative decision making and problem solving. This ultimately leads to better firm performance and shareholder relations. 

However a transition to integrate more diversity in the boardroom take time and people are averse to change. Thus there can be policy changes implemented. Reserving seats for women in executive positions can help this cause. This can be seen in many European countries where it is mandated at least 40% of the board members must be women and in the US where similar policies have been applied for gender and race inclusivity.

As we talk about the directors and executives, the top rung of the companies, the responsibility of policy formulation and execution is on them. Along with implementation of the policies, the leaders of the firms must lead by example. Ensuring that there is fairness from their end, such as fair renumeration for employees, adherence to policies by them, etc, can help in setting the tone for the environment in the company.

Compliance

ESG compliance regulations should be incorporated in the policies of the firm. There are several regulatory measures coming up. It is important to keep a tab on the new developments and adhere to them to avoid any risks and penalties due to non-compliance. Thus companies must have their own regulatory framework that can help in ensuring compliance and collecting ESG data for disclosures. There are several frameworks already existing which can be implemented in the company, like Global Reporting Initiative, Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures. 

In India, the landscape of ESG has been evolving, with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) taking steps to promote ESG by putting regulations on reporting and disclosures. For example, the RBI mandated that Scheduled Commercial Banks (SCBs), Urban Cooperative Banks (UCBs), and Non-Banking Financial Companies (NBFCs) having assets worth more than Rs. 5,000 crores must incorporate the TCFD framework for climate-related and sustainability-related disclosures.

Governance specifically, and Compliance as a whole set the tone for the company and ensure that the business is aligned with its values. It is likely that ESG regulations will become more stringent. Thus the trend of ESG compliance has now shifted into a norm and it is in the best interest of all the stakeholders in the firm to comply with the changes and regulations.