Responsible governance: Why are we reluctant practitioners?

A $70 billion telecoms corruption scandal poses what the executive director of India’s largest company, Tata Group, calls “the greatest threat to the country’s civil society” since it won independence from Britain.
To draw any parallel between the state of commercial life in India and New Zealand is, on the face of it, absurd. It may be an extreme example of customer dissatisfaction but, local enterprise should watch what is happening in other countries very carefully. Public discontent is easier, thanks to telecoms technology, than ever to foment. And examples of seemingly opportunistic enterprise here and abroad are under scrutiny. Ask the directors of our now rotting finance companies.
Responsible governance is about the overlap between an organisation’s environmental, social and risk management practices and the interests of its shareholders and an increasingly wide circle of other stakeholders.
Last year few more of our larger companies took some steps toward being more responsibly governed, but it was driven “more by regulatory and market pressure” than by any significant shift in corporate attitudes, according to Duncan Paterson, the chief executive of Corporate Analysis Enhanced Responsibility (CAER), whose Canberra-based organisation measures the governance and senior management performance of NZX 50 companies for institutional investor AMP Capital.
The consensus in the business consulting and corporate analysis marketplace, is that New Zealand enterprise is dragging its feet on the adoption and implementation of corporate social responsibility (CSR) practices. Less than half of New Zealand’s listed companies can, for instance, supply reasonable evidence of accountability for any environmental, social and governance (ESG) risk rating. That is well behind Australia and increasingly behind other advanced economies, particularly the United States and Europe.

Some companies, like law firm Kensington Swan, which backs the Responsible Governance Award within the portfolio of the Deloitte/Management magazine Top 200 Awards, are encouraging business to adopt more socially responsible governance practices, but the firm’s chairman, Clayton Kimpton, concedes it is slow change process.
“When we first started sponsoring this Award, there was low level of recognition of the need to promote more responsible governance practices,” he says. “That has changed. More companies are beginning to realise the effect their governance practices have on the communities around them.”
But like Paterson, Kensington Swan believes most companies move in response to regulation or consumer pressure. Chris Parke, the firm’s corporate partner specialising in governance advice, says changed responsible governance attitudes and policies are led by consumer demand. “People expect businesses to respond to the sustainable and environmental policies now being raised.”
The reluctance to embrace or seek out the upsides of responsible governance simply invites change by regulation. Politicians, both central and local, see votes in promoting more “consumer and investor-protection” rules, even if they are more costly and cumbersome to implement and police.
Companies are, according to Paterson, responding to increasing community and regulatory pressure in climate change and environmental management but “it is more reactive than proactive”. “There is very little movement in some of the social aspects of the ESG spectrum, like human rights and supply chain issues.”

Competitive advantage
Few New Zealand companies have latched on to the competitive advantages that CSR advocates claim the initiatives deliver. They believe stakeholders, particularly investors, view the adoption of responsible governance practices as tangible expression of board’s commitment to best business practice, sustainable leadership and transaction transparency, all of which boost profitability.
Kimpton’s concern is that in the current economic climate, companies will be so focused on financial recovery that some responsible governance-type projects will become like-to-have but not-right-now, board agenda items. He also points out that protecting company’s financial state is, in itself, responsible governance.
More widespread adoption of responsible governance practices is, says Kimpton, moving feast. “It will take some time yet to find the balance between company’s need to make profits and pressures to simultaneously maintain community. For now we are happy that the Responsible Governance Award is gaining traction, particularly with New Zealand’s larger and higher profile companies.”
Paterson is concerned that New Zealand won’t attract international investment unless it shows greater willingness to enhance its responsible governance practices. There is, he says, considerable Australian interest in the United Nations Principles for Responsible Investment. “More than half of Australia’s large superannuation funds are signatories. This is driving interest in ESG research right through the investment supply chain. In New Zealand we are seeing interest from the community trusts and ongoing leadership from the NZ Super Fund and AMP.”
Institutional investors are pressuring our listed companies to lift their governance standards and their ESG disclosures. New Zealand might rate well on the world scale of un-corrupt countries, but commercially we are reluctant to disclose organisational detail. Boards fought universally accepted financial disclosures for many years. The lack of fulsome reporting was one of the reasons I worked with others to establish the National Business Review in New Zealand in the 1970s. And our regulatory watchdogs act more like toy poodles than Alsatians, thanks to the limitations of the legislation under which they were constituted and general lack of willingness to use the powers provided.
In the next few months NZ Management will report on the responsible governance practices of number of New Zealand’s more progressive corporates to show what can be done. We will also investigate whether CEOs or boards are pushing for more responsible governance.
Good governance comes from “two-way conversation between board and management”, says Paterson. “The board may be responsible for the broader strategic direction, but the day-to-day practicalities of implementing stronger environmental, social and governance practices are the responsibility of management. In my experience the strongest driver for change within an organisation is the attitude taken by senior management,” he says. M

Responsibly governed? Tell us

Companies can adopt initiatives that clearly illustrate their commitment to implementing responsible governance strategies.
NZ Management wants to feature examples of what can be done. These initiatives can include:

• Sustainable and environmental management
• Stakeholder education or commitment
• Empowering employees
• Ethical governance and management practices
• Organisational giving
• Community or other interest group support
• Product stewardship
• Health and safety
• Employment creation
• Waste management
• Wild life care
• Other responsible governance activities we haven’t thought of.

Companies that respond will be entered in the Kensington Swan Responsible Governance Award within the Deloitte/Management magazine Top 200 Awards.

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