Without rules and structure, most situations open themselves up to problems – it’s human nature. We have laws, regulations, policies, and procedures in all walks of life to keep things in line and ensure everything keeps running smoothly for all involved.
ESG or Environmental, Social, and Governance frameworks work similarly to help businesses operate above a particular line of responsibility and accountability. While there is no formal policy or law in place that a business must operate against an ESG framework, it is becoming increasingly popular for companies and their leadership to use an ESG framework to benchmark their progress and ensure they are running their business responsibly.
Equally, many organisations are still to adopt or see the benefit of an ESG framework, and some fall victim to the dilemmas faced when ESG issues are presented in their businesses. One of these is the lack of governance and the negative impact that it can have.
In this article, we will look at why a lack of governance can make for bad business.
What does a lack of governance in business look like?
A lack of governance in your business may look like poor decision-making, high employee turnover, management members, corruption, lack of diversity, theft, fraud, and even scandals. It’s essentially down to a lack of management control that directly impacts employees, customers, clients, investors, and the wider world, dependent on your company’s size and involvement in its community.
Investopedia defines corporate governance as “a system of relationships, defined by structures and processes,” therefore, bad governance is when these system relationships break down due to poor implementation or when structures and processes go by the wayside or are entirely ignored.
Why do so many businesses show bad governance?
It would be fair to suggest that most business leaders want to avoid the fallout of poor governance within their organisations, so why do so many businesses find themselves in sticky situations related to bad governance?
There are many reasons for this, and they can often be industry specific. However, here are a few of the trends that seem to affect all business types and which you ought to be aware of.
- Not knowing what needs to be done
While many business leaders know they are responsible for ensuring a positive impact on the world, their concept of this impact can be completely different from what it needs to be. While gaining popularity, the awareness of ESG frameworks still isn’t the norm within all businesses. Therefore, many leaders never consider implementing a set structure to hold their actions accountable.
They may, however, have a few policies in place that keep things ticking over, but in the long term, issues surrounding environmental, social and governance catch up with them and they have no way of handling them or evidencing what they have done to minimise their impact.
- Effort
For good governance to take place in a business, a lot of effort is required. Many companies see this as an extra cost without any immediate return and therefore can often let governance implementation fall down their list of priorities. They don’t account the value from governance against the problems that may arise because they are not following a framework that allows them to assess business operations strategically over time.
- Thinking good governance is a board problem to solve
Whilst good business governance starts from above, and it is the responsibility of the board and management to put a governance structure in place, it is also the rest of the people in the business that need to implement policies and procedures to continually achieve these governance goals. Often, miscommunication or poor leadership surrounding this means minimal understanding of responsibilities towards governance within the business, meaning it either gets forgotten about or people simply aren’t aware they need to act.
The Results of Bad Governance
Everything you do in business has an impact, whether good or bad. Poor governance, however, can result in many business issues which include but are not limited to:
- Loss of shareholder confidence.
- High employee, management and board member turnover.
- Loss in earnings and reduced revenue.
- Higher insurance costs and investment risk.
- Difficulty with raising capital
The Sustain ESG Knowledge Hub contains information regarding ESG and its importance in business so be sure to sign up for Knowledge Hub update direct to your inbox.
