Corporate governance is no longer a term reserved for large multinational corporations. Small and Medium-sized Enterprises (SMEs) and Owner-Managed Businesses (OMBs) are increasingly recognising the significance of good governance, especially from an Environmental, Social, and Governance (ESG) standpoint. Here’s why.
- Building Trust and Credibility
Good corporate governance ensures transparency, accountability, and fairness, all of which are essential for building a trustworthy reputation. When a company integrates ESG principles into its governance framework, like sustainable buying practices, paying a living wage to staff or enhanced due diligence when onboarding new customers, it sends a clear message to its stakeholders that it is committed to responsible business practices.
- Attracting Investment
ESG factors are now a significant consideration for many investors. SMEs and OMBs that demonstrate strong ESG governance are more likely to attract investment from these socially conscious investors, whether its banks, private equity, investment angels or other businesses looking to expand via acquisition. By showcasing a commitment to sustainable practices, these businesses can tap into a broader pool of capital and/or be more appealing for sale.
- Risk Management
ESG-focused corporate governance helps SMEs and OMBs identify and manage potential risks. Whether it’s environmental risks like climate change impacts or social risks like staff disputes, a robust governance framework can provide the tools and processes needed to address these challenges proactively.
- Long-term Sustainability
For any business, sustainability is the key to long-term success. By adopting ESG principles in their governance practices, SMEs and OMBs can ensure they are making decisions that benefit not just their bottom line, but also everything that surrounds that. We often to refer to this as they four Ps – people, planet, profit and purpose. This holistic approach ensures that businesses remain truly sustainable. In a recent study 51% of millennials surveyed believe that capitalism does not work in its current form. What this means is that new decision makers are going to have different values which could make historic customers or suppliers no longer attractive to partner if they do not align culturally.
- Enhanced Stakeholder Relations
Stakeholders, including employees, customers, and suppliers, are increasingly valuing businesses that prioritise ESG. By integrating ESG principles into their governance they can foster better relationships, leading to increased loyalty, improved employee morale, and stronger partnerships. The important thing to note is that this must be done authentically, if not this is when businesses can be accused of “greenwashing” or paying lip service to employee wellbeing.
- Regulatory Compliance
As the global emphasis on ESG continues to grow, regulatory bodies are implementing stricter guidelines and standards related to environmental and social responsibilities. Larger businesses in the UK already have reporting requirements under new rules from the FRC (Financial Reporting Council), which forced them to make key ESG disclosures in their annual report. The Better Business Act is currently being lobbied in parliament, which will essentially end the idea of “shareholder primacy” and give directors freedom to focus of improving other stakeholders in their business, Should this go through as law, it will have huge ramifications for the SME & OMB sphere. Therefore, SMEs and OMBs with strong ESG governance practices will be better positioned to meet these expected future regulatory requirements, avoiding potential penalties and reputational damage.
Corporate governance, especially from an ESG perspective, is not just a trend but a necessity in today’s business world. As the business landscape continues to evolve, those that prioritize responsible and sustainable practices will undoubtedly lead the way. We have also produced a podcast on this topic which you cab view on our You Tube Channel here: Corporate Governance Podcast.
To get started on your ESG journey, or for more information on how you can embed ESG principles within your corporate governance check out our ESG services, email us: email@example.com or check out our ESG diagnostic to see where you are at now and where you can make improvements.