Corporate governance in the face of environmental and social activism

Corporate governance in the face of environmental and social activism

Corporate governance in the face of environmental and social activism – Is shareholders’ interest reconcilable with a company’s ability to address its environmental and social impact?

Corporate governance is usually seen from a shareholder viewpoint, where the main goal of a company is to create value for shareholders, and the board's duty is to achieve this objective. Board operations, fiduciary duties, strategy development, and risk management are all evaluated with shareholder value in mind. The effectiveness of governance is measured by its impact on shareholder value and company profitability.

Is it a reasonable position that if a company includes other goals besides making money, it means taking resources away from the primary goal, i.e., it can result in lower profits for shareholders.

Stakeholder (non-shareholder) Interests –

There is now more pressure on companies to consider the interests of other groups in their long-term plans. These groups include employees, customers, suppliers, creditors, trade unions, local communities, and society in general. They want things like a clean environment, less waste and pollution, higher wages, equality in the workplace, diversity, and affordable products for everyone. Different industries have different stakeholders and interests. For example, energy companies and climate change.

In some cases, there are common social goals for all companies, such as promoting diversity.

Corporate and investor efforts to address stakeholder needs have many labels, with environmental, social, and governance (ESG) currently being most topical.

Investors, activist minority shareholders, lending institutions and rating agencies, to name a few, will soon apply pressure, if not already, on companies to safeguard stakeholder interests. Company executives might be forced to consider stakeholder objectives in their planning. Going forward, the legal and economic implications of a governance model that focus on stakeholder interests and its impact on strategy, risk, and value creation will have to be considered. It will be interesting to see how executives and directors view their obligations to stakeholders in the evolving climate of companies taking a stand on social issues.

Managing a company from a stakeholder perspective is not easy. Directors will have to learn how to balance different interests to ensure long-term success.

Potential legal and economic implications –

It is not clear how a company director's commitment to stakeholders affects their advice and oversight of management. Sri Lankan law essentially requires directors to prioritize the company and its shareholders. As per the provisions of the Companies Act No.07 of 2007, a director must act in good faith and in what he believes to be in the interests of the company which typically includes considering the interests of the shareholders.

Some companies promote initiatives to show their dedication to environmental and social issues. However, these initiatives often align with their existing business model.

The impact of focusing on stakeholders instead of just shareholders is uncertain, in the sphere of corporate governance. It would need to be required by changing laws. Focusing on stakeholders may make it harder to measure success. Shareholder value focuses on evaluating performance which is easily measurable. Stakeholder interest can potentially increase costs. Forcing companies to focus on stakeholders might be challenging.

Directors and executives –

How readily will directors and executives embrace the principle of advancing stakeholder interests. In the absence of a specific legal regime or the requirements of lenders and investors, will directors and executives address stakeholder needs? ESG programs can be costly too. So will they prioritise stakeholder interests and include it in developing company strategy going forward? Is it sustainable?