Jan 24: Good Governance

"Good Governance Wins

Make choices that impact all

Hard but essential"

#dghaiku #esg #sustainability #stewardship #esgstewardship #governance

1. Good Governance creates value

An underlying principle is that good Governance does indeed add value. If it is only a hygiene factor, in the sense that you are punished or excluded for failing, then there is no upside from engagement unless there is already an issue which has negatively impacted the company (share price, reputation etc.). Simply, poor Governance may lead to companies being screened out of portfolios. If companies and investors do believe that good Governance adds value, then there is a strong incentive for enhancing Governance and pro-active engagement.

2. Good Governance enables optimal Execution

Governance is a leading driver for all aspects of the company – including its Environmental, Societal and Operational actions and results. Governance is not company or sector specific in the way that the other elements are; it is the overarching driver of all activities. Good Governance will deliver the best results for all stakeholders in the long term, whilst reducing risks and increasing confidence in delivery. It should be embedded in the culture and purpose of the company.

3. Good Governance is the responsibility of the Board

The Board is fundamentally responsible for, and instrumental in, setting and implementing the Governance of the company. They are appointed by the shareholders to run the company on their behalf and they are answerable to them. Checklists can only measure so much. They can examine the form of the processes and procedures that are in place, but are limited in their ability to assess the substance of how they actually work, which is again dependent on the culture and purpose of the company.

4. Good Governance relies on effective implementation by the Board

The key, therefore, is the effectiveness of the Governance structures that are put in place which is in turn dependent on the skills and competencies of the Directors. They must have the skills, knowledge and experience to be able to challenge management and hold them to account. So having the right mix of individuals, suitably remunerated and held accountable is essential – as is the succession planning for their replacements to ensure continuity.

5. Good Governance benefits from holistic engagement with investors

It therefore follows that for investors to fully understand their investee companies, to evaluate their performance and prospects, and to have confidence in or influence future delivery, they must engage with the individual directors in addition to the ongoing monitoring of the financial and operational results. Particularly the Non-Executive Directors: Chair, Senior Independent Director and Committee Chairs. This will enable them to look beyond the checklist facts and to assess the quality and effectiveness of the Governance and how it is being implemented. It also enables the investor to deliver key messages directly to their appointed agents and actively exercise good stewardship. Face to face meetings are the best format to achieve this.

Source: https://www.investorforum.org.uk/wp-content/uploads/securepdfs/2019/07/Governance-engagement-Guidelines.pdf