The now historical importance of financial assessments and the more recent – albeit growing – sustainable consciousness seem to travel on two parallel tracks, as if they were not interdependent and both a conditio sine qua non for access to financing and investments by companies.
What we commonly overlook is that governance is the essential link between financial and ESG evaluations, as it provides the foundation for implementing the best practices necessary for achieving environmental and social sustainability.
Corporate governance has long been considered within financial evaluations, where it plays a prominent role in providing crucial information on ethical behaviours and business management within the company.
Despite its fundamental importance, when we talk about ESG assessments, governance often seems to be overlooked, relegated to the background compared to environmental and social aspects (which we had already discussed in detail).
But what exactly do we mean when we talk about corporate governance in ESG assessments?
Governance represents an essential foundation in the administration and management of a company, outlining a set of principles, procedures, and rules that govern it.
This concept encompasses a wide range of aspects, including risk management, regulatory compliance, professional ethics, and diversity within the Board of Directors. Adequately managed governance should ensure that the company establishes robust and transparent decision-making processes, guaranteeing that actions are aligned with strategic objectives and organizational values. Additionally, business governance plays a crucial role in countering illicit practices and promoting corporate responsibility.
Key principles of corporate governance
Corporate governance revolves around fundamental principles that define its objectives and its effectiveness in ensuring the proper functioning of entrepreneurial activities. One of the primary aspects is transparency, which requires clear and timely disclosure of relevant information and policies, accessible to all levels of responsibility and stakeholders, as well as any shareholders. Equally crucial is ethical responsibility, ensuring sustainability (primarily financial) and excellent performance, protecting the interests of all parties involved. Security is another essential pillar, meaning the protection of personnel, from health to sensitive data, as well as the company’s commercial information. Finally, fairness and inclusivity underscore the importance of impartial treatment of investors’ interests and fair personnel selection, without discrimination of any kind.
As a result, these symbolic principles of good governance form the basis upon which the credibility and integrity of the company are founded, offering a range of tangible benefits that contribute to its success. Some of these include:
- Trust between the organization and its stakeholders, as a clear message of openness and integrity is conveyed
- Strengthening of accountability, making it more difficult for leaders to avoid being held accountable for their actions. This promotes a corporate culture based on responsibility and ethics
- Improvement of relationships with stakeholders
- Risk mitigation, enabling early identification and timely management of potential issues
- More effective decision-making process based on accurate and up-to-date information, leading to more informed choices.
Governance within modefinance evaluation models
It is essential to understand the significance of the “G” in ESG, as the risks and opportunities related to governance could grow as societal, political, and cultural attitudes evolve. Therefore, modefinance’s ESG evaluation models (For further details: ESG Automated, ESG Advanced, and ESG rating) carefully consider this aspect. Taking the example of modefinance’s automated Governance score integrated within the ESG Automated model, two main aspects are considered:
- Firstly, the administrative structure is examined, evaluating the number of administrators, the percentage of those who own shares or company stocks, and the presence of technical figures, external to the governing body, supporting the administrative body, such as non-executive independent directors or the supervisory board. All of this is crucial for evaluating the separation between management and control within the company, a key element for good corporate governance, as the presence of administrators who are also shareholders can compromise this separation. modefinance carefully considers these variables, taking into account the legal form of the company and its size for a fair and balanced assessment.
- Secondly, attention is focused on the structure of the control body, analyzing its type, as well as the possible entrustment of the legal auditing function to external entities such as the sole auditor or auditing companies.
Conclusion
Often not adequately considered with primary attention, the role of corporate governance emerges as crucial in the landscape of evaluating a company, where sustainability and social responsibility are relevant both from the perspective of sustainability and the future of the business itself. Through its key criteria, effective governance promotes stakeholder confidence, mitigates risks and improves decision-making processes, playing a fundamental role in ensuring ethical coherence within the company. Consequently, investing in corporate governance is not only a step towards sustainability but also an opportunity to consolidate the reputation and long-term success of businesses.
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