Many New Zealand enterprises are already world-class at meeting their wider environmental, social and cultural interests while simultaneously delivering high level economic performance, says professor Neil Richardson, chairman of the Foundation for Research, Science and Technology.
He told Sustainable Business Conference in Hamilton late last year that in reality, local enterprise had no choice but to adopt sustainable business strategies because New Zealand’s traditional wealth-creating sectors are “populated by cooperatives, community and government-owned organisations” and all three categories are required to deliver range of outcomes to many stakeholders simultaneously. “They have done so without easy access to either debt or equity capital,” he said. “In addition, the governance arrangements for these organisations are complex and subtle to level far beyond what you would expect for [enterprises of] their size.”
According to Richardson this situation has given New Zealand both unique understanding of sustainable corporate governance means and an “opportunity to share this leadership experience on global level”.
Conventional definitions of corporate governance are, he says, too “narrowly focused on control of business power and authority. They don’t reflect expanding expectations about the roles that business should play in modern society.
“Increasingly, governance is about partnership and mutual responsibility. Narrow views about what is good for the company and shareholders are now being balanced with acceptance that the health of the local community and economy in which company operates is of direct interest to both the company and the shareholders they serve,” he said.
“Corporate governance,” said Richardson, “is rapidly evolving concept”, and he offered his own “more useful definition”.
“Corporate governance, is the system or process by which an organisation is led, planned, directed and controlled in order to protect, create and ultimately maximise the sustainable achievement of direct shareholder interests, in synergy with wider stakeholder interests.”
“Boards have responsibilities that extend beyond looking after single bottom line,” he added.
According to Richardson, “effective boards enthusiastically embrace the new reality. They recognise that their business activities have an impact on the environment, local communities and other affected groups and to be sustainable enterprises they must deliver substantial net benefit to all stakeholders.”
Boards, he said, were still focused on ensuring conformance with legal requirements and maximising profit, but they are also taking responsibility for providing strategic leadership “in the wider context”.
Organisations of any type fail if they do not deliver four outcomes simultaneously; conformance, performance, strategy and leadership.
“But too many boards are still operating under the old single dimension definition of corporate governance,” Richardson said. “They believe their responsibilities begin and end with acting in the best interests of the corporation and its shareholders, which is usually interpreted to mean maximising the share price. As long as today’s share price remains high, directors feel confident. Yet it was the singular focus on share price that contributed to one of the biggest corporate catastrophes of recent years – Enron.
“It may seem unconscionable negligence on the part of Enron’s directors for them to admit they didn’t see the collapse coming, but it is more fundamentally result of failed model of corporate governance. narrow fixation on the short-term share price meant deeper problems and wider issues were never resolved.”
Other companies have managed to avoid these problems by revolutionising their approach to corporate governance. Westpac in Australia is, said Richardson, successfully making the transition from the old paradigm of the single bottom line to the new paradigm of the triple bottom line.
Westpac had, he said, responded to the public’s criticism of its high fee and branch closure policies by developing new policies and practices that helped it meet the expectations of not just its shareholders, but also its customers and the wider community.
Last year the bank produced its first Social Impact Report with more than 70 social, environmental and economic performance indicators, many of which were developed after extensive stakeholder consultation. As result of this focus on the triple bottom line, Westpac has significantly improved both its business and its reputation. Westpac now ranks number one globally on the Dow Jones Sustainability Index for overall sustainability in the finance and banking sector. In 2002 it was top of Australia’s 100 largest companies in the Good Reputation Index.
“We don’t have to look across the Tasman to see good examples of sustainable corporate governance in practice,” Richardson added. “New Zealand enterprises have gained unique understanding of sustainable corporate governance because of the complex environment in which they operate.”
The cooperatives, community organisations and government-owned organisations at the centre of our economy have been created and evolved in complex environments, according to Richardson. They have had to deal with, and deliver to, multiple stakeholders longer than enterprises in other countries.
“The existence of several strong co-operatives in New Zealand is structural result of the agricultural sector dominating our economy,” he said. “Over 70 percent of our exports are agriculture based, including dairy, lamb, beef, wool and venison being sold in highly regulated international markets with strict import controls and government-to-government negotiations.
“In any agriculture-based cooperative company it is essential that the directors understand the motivations of its farming members. Farmers are more likely to be interested in what’s best for their farms and families instead of what might be best financially for the company; and any director who doesn’t understand this will quickly be rejected by the co-op shareholders,” he added.
Richardson then detailed what Fonterra, New Zealand’s largest company, has done to adopt and implement wide-ranging sustainable business strategies. “Fonterra’s corporate governance shows its growing understanding of the importance of working with multiple stakeholders to achieve mutually beneficial outcomes,” he said.
He also outlined the sustainable corporate governance policies and strategies adopted by government-owned Meridian Energy and by public company The Warehouse.
The examples of the world’s enduring companies and New Zealand companies such as Fonterra, Meridian Energy and The Warehouse illustrate that traditional corporate governance focus on the single bottom line is insufficient and inapplicable to the bulk of New Zealand’s wealth-creating activities, he said.
“Because of their evolution, experience and operating environment, New Zealand enterprises have unique track record in delivering multiple outcomes for multiple stakeholders simultaneously,” said Richardson. “Our understanding of sustainable corporate governance makes us internationally competitive in this area, and we have an opportunity to share our expertise on global level. New Zealand enterprises can be models for traditional corporates that are looking to transform themselves into successful sustainable organisations in the future.”
There are, however, many areas where “our businesses and organisations need to do better,” he added. “Sustainable enterprise has to deliver fast-paced sustainable growth in four key areas in particular:
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