From why to how – good governance in turbulent times
2 July 2024 – In this blog, Ben Kellard, Director of Business Strategy, explores how business leaders can make their way out of the transformation dilemma by following four key governance principles and enable their organisations to deliver their purpose and strategy aligned with a sustainable future. If you'd like to learn more about how boards can navigate the transformation dilemma, join CISL's sustainable governance course.
The transformation dilemma
For a long time, businesses were told that ‘the business of business is business’. However, they don’t operate in a vacuum. Today they are being scrutinised from all angles, from Executive pay to the role of banks in climate change. They are also being criticised for contributing to unsustainable outcomes by privatising profits and socializing costs at the expense of nature and society.
Many leaders feel caught in a dilemma. On the one hand the imperative to deliver quarterly financial results that often depends on a business model that externalises costs. On the other hand, a realisation that to be viable in the future, they need to transform their business to ensure it is meeting society’s real needs without undermining nature and society.
Good governance as the way out of the dilemma
CISL research revealed that pressure from a range of stakeholders is significantly shifting the social expectations of how boards and governance should serve society. Businesses need to decide how they navigate these expectations. Governance is ultimately about decision-making at all levels of the organisation. This includes aligning a business’ purpose and strategy with a sustainable future, to enable a business to chart a positive path through these expectations. As I explored earlier, our tools like the Business Transformation Framework can help companies shape their why (purpose) that delivers a sustainable future and how they can do that.
The following governance principles can enable organisations to deliver their purpose and strategy. These principles are underpinned by the Governance ISO standard and the British Standard for a purpose-led organisation.
Value generation
Rather than focusing on maximizing financial value alone, organisations need to define what value they will create (that reflects how their purpose serves society) and how it will be created. Truly purpose-led organizations will be able to articulate how they create value for society, by meeting its real needs.
This will include creating different types of value (social, financial, natural) across its value network. It will also demonstrate how it sustains this value creation by distributing these values across stakeholders to sustain the relationships, credibility and dependencies on nature and society over time. For example, food business Olam tracks its investment in soil health, recognizing that its crucial to their purpose and value proposition.
Risk
The organization will scan and understand the effects of long-term systemic uncertainty on its purpose and strategic activities rather than focusing on short-term operational risks. This includes the early identification of threats to its value creation model and dependencies on social and natural, as well as commercial, systems. This enables balanced decision-making for risk functions and committees to know when and how to respond to those threats. For example, Tesla invested early in Electric Vehicles and has captured a lot of market growth ahead of manufacturers that invested later.
Data and transparent decisions
Rather than primarily tracking short-term financial data, organizations track and analyse a range of data that covers both how the organization will know if it’s delivering its purpose plus the types of value it depends upon to deliver the purpose across its value chain. This data is available and integrated to provide holistic decision-making processes, such as capital expenditure and return on investment. As we explore in this business briefing, CFOs and their Finance Functions will play a critical role in enabling access to relevant, transparent and timely sustainability data. For example, Unilever tracks the sources of its palm oil to identify risks, target investment, and work with smallholder farmers.
Viability and performance over time
The organisation ensures that it remains viable and performs over time without compromising the ability of current and future generations to meet their needs, as opposed to a focus on hitting short-term financial targets. This remit is embedded in the board’s understanding of its fiduciary duty through shaping the organisation's purpose, strategy, and culture. This, in turn, ensures that the remit is integrated into corporate, functional strategies, and business processes.
For example, Umicore moved out of mining and into clean technology by activating a new purpose in 1996 that pivoted the business on its core capabilities of material science, chemistry, and metallurgy. As well as reducing its externalities like pollution and, therefore, its liabilities, it is also well positioned to capitalize on the growing renewable energy and clean technology growth industries.
Businesses are at huge risk of becoming unfit for the future if they focus purely on financial value and rely on the market to ensure their products and services are contributing to society and governments to ensure that natural and social systems are healthy.
Good governance can enable businesses to shift towards a prosperous future for themselves, nature, and society by being clear on how they serve society and create value for all those that it depends on and who depend on it. You can discover what this looks like for your organisation by joining CISL’s Governance for a Sustainable Future course.
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