Strengthening business success through corporate governance

Trust, accountability, and leadership — these principles are essential foundations that can make or break a company. A well-governed company is not only profitable but also responsible and transparent to all its stakeholders.

Corporate governance is essential for aligning the interests of a company’s management with those of its shareholders and other stakeholders. It ensures that decisions are made to promote transparency, fairness, and accountability, thereby fostering trust and confidence among investors, employees, customers, and the public.

According to the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance, corporate governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the “structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

According to McKinsey & Company, 84% of global institutional investors are willing to pay a premium for companies with robust corporate governance practices. Similarly, the Harvard Law School Forum on Corporate Governance found that 64% of investors consider corporate governance a critical factor in their investment decisions. These figures indicate that well-governed companies are more likely to attract investment, reduce the cost of capital, and enhance overall corporate performance, which is crucial for long-term sustainability and strategic growth.

Adopting ESG and boosting CSR in businesses

Environmental, social, and governance (ESG) criteria have become integral to corporate governance practices. Companies are increasingly evaluated on their ESG performance, influencing investment decisions and corporate strategies. This additional factor mirrors a broader understanding that a company’s success is not solely determined by financial performance but also by its impact on society and the environment.

According to a report by ESG Reporting Hub, businesses are now actively incorporating ESG goals into the company’s purpose, ensuring that these considerations are not treated as separate initiatives but are integrated into the core business model.

A study published in the peer-reviewed journal Environment, Development, and Sustainability stated that businesses that integrate ESG factors into their operations often experience improved value creation and sustainability, which can lead to better financial outcomes over time. In fact, firms with robust governance structures also tend to perform better, with good governance practices correlating with increased shareholder value and reduced risks.

On the other hand, consumers are increasingly choosing to spend their money on products and services with ESG-related claims. According to a report by McKinsey, products with ESG-related claims had a 1.7 percentage-point advantage over those without.

Meanwhile, corporate social responsibility (CSR) and sustainability have become increasingly intertwined with effective corporate governance as these strategies require considering the interests of all stakeholders, including shareholders, employees, customers, suppliers, and the community, in decision-making processes. For instance, a report by the Corporate Finance Institute found that CSR can add value to firms by establishing and maintaining a good corporate reputation, reducing operational costs through efficiency improvements, and attracting and retaining committed employees.

Going beyond profit

According to Institute of Business Ethics, many businesses today are not viewed as highly trustworthy, which emphasizes the need for ethical governance practices that are rooted in integrity, honesty, and openness.

Central to the corporate governance framework is the concept of ethics, which refers to the moral principles guiding the decision-making processes within an organization. Ethical corporate governance ensures that companies not only comply with the law but also adhere to a higher standard of integrity and responsibility toward all stakeholders.

Meanwhile, businesses are now creating a more productive, engaged, and innovative workforce by promoting equality, diversity, and inclusion in the workplace. Fair employment practices secure that all employees are treated equitably, regardless of gender, race, age, disability, or other characteristics. This strategy not only fosters a positive work environment but also mitigates the risks associated with discriminatory practices.

In addition, a study on the diversity and effectiveness in FTSE 350 companies, commissioned by the United Kingdom’s Financial Reporting Council (FRC) and conducted by research firm SQW in collaboration with the London Business School Leadership Institute in 2021, revealed that boards with well-managed gender diversity tend to have higher stock returns and are less prone to experiencing shareholder dissent.

However, Gartner’s 2021 ReimagineHR Employee Survey revealed only 18% of survey respondents indicated that they work in a highly fair environment. These findings have significant implications for employers, as perceptions of a fair employee experience can improve employee performance by up to 26% and increase employee retention by up to 27%.

In the Philippines, women face notable challenges in the labor market as labor force participation rate (LFPR) for women is significantly lower than that of men.

The Education Development Center, Inc. reported that women are often engaged in lower-paying, informal jobs, which limits their economic empowerment. They are often overrepresented in sectors like education and health, while underrepresented in higher-paying fields such as technology and engineering.

Global variability in corporate governance

Corporate governance practices vary widely across different regions, influenced by cultural, legal, and economic factors. While some convergence towards a more globalized approach has occurred, alternative models are still observable, especially in Europe and Asia.

According to Investopedia, the Anglo-US model, prevalent in the United States and United Kingdom, is oriented towards the stock market and is characterized by a dispersed ownership structure.

The German model, also known as the continental or European model, features a two-tier board structure with a supervisory council and an executive board.

On the other hand, corporate governance in Asia and the Pacific region is influenced by factors such as family ownership, business groups, and state ownership. Many Asian countries have a high prevalence of state-owned enterprises (SOEs), which account for a significant portion of their economies. Challenges in the region include improving board structure and diversity, enhancing transparency, and dealing with corporate scandals.

In the Philippines, the Securities and Exchange Commission (SEC) required all publicly listed companies (PLCs) to issue an annual corporate governance report consolidating their governance policies and practices since 2013. This report is mandatory and due by June of every fiscal year.

The country also introduced the Philippine Corporate Governance Blueprint, spearheaded by the SEC in 2015. The blueprint encouraged PLCs to adopt best practices in governance, which included the timely disclosure of significant information, the right of shareholders to nominate board candidates, and the requirement for a formal board nomination process. These practices were aligned with the ASEAN Corporate Governance Scorecard (ACGS) to facilitate performance assessment across the region.

Currently, the Philippines has kept the 11th ranking among 12 Asia-Pacific countries in terms of their performance in corporate governance (CG) and environmental, social, and corporate governance (ESG). However, the country came out with a score of 49.3 in the 2023 CLSA CG ranking, lower than the 50.5 score in 2020.

This year, PricewaterhouseCoopers (PwC) predicted that Filipino companies will become more exposed to global capital markets, and shareholder activism will likely increase. Investors, particularly foreign institutional investors, are expected to place greater emphasis on corporate governance and are more willing to challenge management decisions that they perceive as detrimental to shareholder value. — Mhicole A. Moral