Corporate Governance: The LDL in Your ESG Test

Integrity and ethics are often hailed as the bedrock of corporate governance. Yet, in the real world, they seem to matter only as much as the following quarterly report. When businesses face allegations of ethical lapses or governance failures—tax evasion, bribery, or money laundering—one might expect the market to unleash its wrath. And it does—briefly. The stock plummets, triggering panic and headlines, but within days or weeks, the trusty bull charges back, sweeping those concerns under the rug.

Why Governance Scandals Are Shrugged Off

Especially in markets like India, these scandals follow a predictable cycle: public outrage, stock market jitters, and eventual normalisation. But why this relaxed attitude? The answer lies in how stakeholders perceive and rationalise governance failures. For many, corruption is less a mortal sin and more a frustrating inevitability, like potholes during monsoon—annoying but hardly surprising.

Here’s where the much-lauded ESG (Environmental, Social, and Governance) framework comes into play. Or, as we like to call it, the cholesterol profile of corporate health.

ESG: The Cholesterol Profile of Corporates

Think of ESG like your cholesterol test. The "G" (Governance) is the LDL—the bad cholesterol. If it's high, it’s a red flag. But hey, if your "E" (Environmental) and "S" (Social) are doing great—like your HDL, the good cholesterol—they can counterbalance the risks. A little governance irregularity? No problem. As long as the company is socially responsible and eco-friendly, stakeholders are happy to turn a blind eye, much like ignoring that extra piece of fried chicken.

Let’s break it down with some common justifications:

• "Sure, there are some governance issues, but he’s such a compassionate leader.

Translation: Yes, he’s been accused of money laundering, but he’s also the guy who attends village cleanup drives. That counts for something, right?

• "But look at their environmental initiatives—simply amazing!"

Translation: They might have bribed someone, but at least they’re planting trees while doing it.

• "These are just allegations. The fundamentals are solid."

Translation: As long as the quarterly earnings show growth, governance is a minor inconvenience.

Four Engines That Drive Corporate Perception

If a company were an aircraft, it wouldn’t just run on E, S, and G. It needs a fourth, often overlooked engine: F—Financial Performance.

This fourth engine has a way of smoothing over turbulence caused by governance failures. If profits are strong, dividends are generous, and there’s a visible commitment to social initiatives and environmental conservation, stakeholders are often willing to overlook governance issues. After all, a company that runs on three strong engines—E, S, and F—can often afford to have a sputtering G.

The G Trade-Off: A Practical Reality

While ignoring governance issues might not please purists, the market operates on pragmatism. A company delivering consistent financial performance, visibly supporting social development, and launching flashy green initiatives often gets a pass. As long as the "cholesterol profile" balances out, stakeholders are willing to endure a governance blip.

The Final Word: Governance, But Not Too Much

Corporate governance might be a cornerstone of good business, but let’s not pretend the world is perfect. As long as the other engines—E, S, and F—run smoothly, stakeholders seem happy to let G takes a backseat. After all, what’s a little governance hiccup between friends in the grand scheme of things?