The changing nature of governance
Anyone looking at the different definitions of governance over the decades, and across sectors and countries, will acknowledge that it can be easier to identify what is not, rather than what is, part of governance. The Institute has also contributed to the discussion around the modern definition of governance, for governance professionals. As noted by my erstwhile colleague, Chris Hodge, governance (whether less or more of it) has been presented by government and commentators as the solution to many of society’s problems – from inequality to poor economic growth and climate change. It is only right that definitions change to reflect current realities and to adapt to the future.
As such, the concept and delivery of good governance is challenged to embrace continuous improvement to ensure it remains fit for purpose – in terms of the fundamentals of accepted governance definitions and those aspects added to it by government, regulators, and other interested and influential bodies. Continuous improvement is generally understood to mean the ongoing improvement of products, services or processes through incremental and breakthrough improvements – think UK Cycling’s ‘marginal gains’ approach at the height of its medal success. This approach can be supported by the ‘Plan>Do>Check>Act’ cycle. As such, good governance isn’t a destination or even a journey with a start and end point but something more akin to a loop and one that can get lumpy at times. So perhaps, governance professionals could adapt approaches akin to circular economies or virtual circles to define their approach to good governance and to identify the improvements and impacts delivered by changes to governance practice in response to the circumstances presented.
Like a circular economy, where organisations actively work to introduce and maintain operational practices that reduce and/or eliminate waste and pollution, keeping products and materials in use, and regenerating natural systems for their business model, a virtuous circle of governance can promote an approach which delivers not just for the organisation, but for people and planet. A virtuous circle of good governance replaces the prevailing narrative of only valuing good governance when ‘things go wrong’; exchanging it for one where good governance is seen as integral to an organisation’s success and achieving its aims effectively and efficiently. Combining a virtuous circle with a circular economy approach could potentially be beneficial for the organisation, its stakeholders, shareholders and the environment. It may also be one way of approaching the broader ESG agenda.
Virtuous circles
The term virtuous circle refers to a theory where new and existing factors are included and discarded in a continuous system of improvement and self-reinforcement. A virtuous circle of good governance will consistently use different components to generate ongoing and evolving practices that deliver internal benefits alongside positive outcomes for a wide range of stakeholders on a spectrum. Positive aspects should be mutually reinforcing until major changes to the external operating environment or internal activities are introduced to amend the efficiency of the model, In this case, the governance framework.
Good intentions and actions should lead to continuous improvements in good governance, which in turn should help promote better external relations, be it active support for an organisation or fewer examples of poor governance in the sector of operation and the wider economy. All organisations should be aware of the publi’'s perception of the sector in which it operates as that can have ramifications on each organisation, usually in increasing paperwork and decreasing investment, customers or other forms of income and support.
The governance professional, as the conscience of an organisation’ should be well placed to assist boards in articulating their organisation’s climate change-related risks and activities and harnessing those intentions to the governance architecture to ensure actions and ethical considerations support the ongoing success of the entity.
The Institute has developed a virtuous circle of good governance for charities.
The circular economy
The Ellen Macarthur Foundation describes a circular economy as:
…a systemic approach to economic development designed to benefit businesses, society, and the environment. In contrast to the ‘take-make-waste’ linear model, a circular economy is regenerative by design and aims to gradually decouple growth from the consumption of finite resources.
In developing a circular economy, an organisation will proactively ascertain where waste, pollution or other adverse behaviours impacting the environment are generated and take steps to remove those aspects from the operating model. By looking to better use recycled resources, reduce reliance on virgin materials and eliminate waste, there are positive impacts for the organisation and broader society, with innovation taking a starring role and new jobs created. These benefits include the creation of new profit opportunities, reduced costs due to lower virgin-material requirements, and stronger relationships with customers and other stakeholders. The aims of a circular economy are to:
- Promote and embed sustainable production values and operating models;
- Create new opportunities for growth and innovation;>/li>
- Reduce waste, promote wider adoption of renewables and limit the use of virgin resources;
- Improve the life and productivity of resources and products;
- Drive a more competitive economy;
- Facilitate companies and organisations to better meet the challenges of net zero and other climate-change-related issues; and
- Change the way we interact with the natural world with a view to reducing consumption and promoting environmentally-friendly approaches to modern economic activities and living.
Combining the two approaches could provide benefits for organisations trying to incorporate ESG measurements and reporting into their board decision-making and public disclosures.
The virtuous circle of board engagement with ESG initiatives
This resource proposes a virtuous circle of board engagement with ESG activities that can be used by governance professionals to increase understanding of the benefits of engaging with these challenges, embedding good governance and how that, in turn, can deliver public confidence and trust, enhanced sustainability and produces greater positive impact for communities and wider society.
A virtuous circle is a useful concept to promote the intrinsic values of good governance in delivering outcomes for the organisation’s shareholders and broader stakeholders – and in a manner that is more aligned to meeting the challenges grouped under the ESG umbrella.
For a virtuous circle to be effective, it needs to focus on output, outcomes and impact. For our purposes output, outcomes and impact involve both hard and soft governance drivers – see diagram 1.
The value-added of committing to meet the ESG challenge as a board
The impact of good governance and an organisation tackling the various issues under the ESG umbrella has to be seen as more than just complying with the legal, regulatory or moral obligations in place, but should incorporate a range of benefits which support the organisation in delivering for its investors, shareholders, staff, customers, clients, volunteers and stakeholders while contributing to the overall value with which the public regard the organisation, the sector it operates in and the wider economy. This paper calls this the 'virtuous circle of ESG. The impacts to be derived from good governance, which incorporates ESG factors either implicitly or explicitly, are detailed below:
- 'Delivering organisational aims and positive change' involves the organisation articulating how it achieves its organisational aims and demonstrates the positive impact it is making (whether planned or unintended) in its operations, sector, wider community and planet. This could incorporate simple CO2 reporting to broader impact statements on the activities that go beyond the original purpose of the organisation or how it adopts practices that address inequality or injustice.
- 'Demonstrating sound management' requires clarity of understanding of the organisation’s purpose and compliance with relevant legislation, regulation, codes and other standards. It includes good strategic direction, balanced and effective decision making (considering both short and long-term issues) and taking difficult decisions that benefit wider society as a whole while balancing other shareholder and stakeholder commitments. Ultimately, it is about evidence of purposeful, effective and ethical leadership and oversight whilst pursuing the aims of the organisation in an appropriate manner.
- 'Improving trust and confidence' will derive from good and improved decision making, business ethics and operations with the organisation’s activities being pursued in an ethical and open manner. This outcome will combine several hard and soft governance drivers as stakeholders and shareholders will be interested in a range of issues encapsulating both: such as executive pay on its own and compared against staff and wider society, organisational culture and being seen to do the right thing (not just doing things right). For an individual organisation, an enhanced reputation will be of direct interest, while the wider sector and economy should benefit from a more munificent shareholder and stakeholder community (willing to invest, purchase, give time, resources or other support).
- 'Welcoming accountability' requires that an organisation’s board and managers embrace questions and challenges from a range of investors, shareholders, customers and other stakeholders, while preserving/protecting commercial, confidential and sensitive information. Accounting for the spending of funds received from various sources, including: investors; shareholders; customers; the government (including contracts and/or tax breaks for research and development, for example); and the public. This will be combined with ensuring resources are expended in a manner designed to a) maximise use and reduce waste, including explanations as to how externalities are minimised and climate change impacts reduced, b) address or reduce injustices, and/or c) support broader ESG activities, such as the UN’s Sustainable Development Goals. Any action will be incorporated into organisational thinking and activities. Reporting will go beyond compliance to embrace a genuine conversation about how the organisation delivers on its ESG commitments and explains where and why it has fallen short.
- 'Generating sustainable organisations – profits, people and planet' places a key focus on organisations reviewing their impact and effectiveness in achieving their stated aims. It requires active and deliberate engagement with a wide range of shareholders and stakeholders, reviewing and reflecting on what they have learned and revising their operational model and activities consequently. It will also involve articulating what has gone well and what not so well. This will feed into setting out how the organisation aims to achieve positive change or sustainability through these new ways of working, thereby developing a virtuous circle and circular economy mode of operating.
A virtuous circle of ESG can be found in diagram 1 below. Each stage in the circle, and the cycle as a whole, can be subjected to the ‘Plan>Do>Check>Act’ approach to ensure it is delivering what the organisation envisages.
To help you find resources on ESG, we have put together a webpage with links to our content, including blogs, papers and relevant courses. Take a look at our ESG resource hub.
Diagram 1. A virtuous circle of ESG
