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Corporate Governance: Empowering Business Through Transparency

Corporate Governance: Empowering Business Through Transparency


Corporate Governance: Empowering Business Through Transparency

Corporate Governance: Empowering Business Through Transparency

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Transparency has become an imperative in today’s business landscape rather than a mere option. In the era of sustainability, businesses that prioritize transparency are thriving. As a result, an increasing number of companies are embracing transparency as a core value, moving beyond using it as a marketing tactic to set themselves apart as industry leaders.

Trust is a critical factor in the success of any business, and transparency plays a vital role in building that trust. While trust is commonly associated with relationships between shareholders, management, and employees as a foundation for a business, it also extends to the relationship between the company and its customers, as well as between the company and its investors. In this way, transparency can help establish and reinforce trust across all aspects of a business.

But what does “Business Transparency” really entail? Forbes defines it as “the process of being open, honest, and straightforward about various company operations,” including sharing information on performance, revenue, internal processes, sourcing, pricing, and values. However, transparency goes beyond just sharing information. It is a critical tool for the sustained growth of any business in any industry, allowing them to stand out from its competitors.

As the competition among companies continues to evolve, transparency has become a hotly contested area. In the United States, companies are ranked annually based on the quality and completeness of the information they provide to investors. The prestigious “Transparency Awards” recognize the top U.S. companies and the evolving criteria address more issues as the needs of the investor community grow. The 2022 rankings were based on a review of annual proxy statements, annual reports on Form 10-K, investor relations websites, and codes of conduct. This ranking incentivizes companies to improve their regulated disclosure while providing stakeholders with benchmark information across several investment options.

Impact of Transparency Within the Company

Transparency within a company used to be a rare practice, but it can serve as an effective tool in establishing a robust security policy that minimizes risks and addresses various Environment, Social, and Governance (ESG) metrics.

Encouraging corporate transparency also empowers employees, irrespective of their position, by giving them access to crucial information and company objectives that help them generate innovative ideas and make better decisions, ultimately contributing to the company’s success. Openness and relationship-building are critical factors that foster success in any company. One way to promote transparency is through a “Townhall meeting,” an opportunity to update everyone on company progress, goals, new policies, and recent decisions. These meetings enable decision-makers to present a clear and concise company-wide strategy and provide employees with a better understanding of the company’s objectives, fostering a sense of connection and commitment among them.

Impact of Transparency Outside the Company

Corporate transparency outside the company involves more than just presenting financial information. It also includes disclosures to inform investors and other stakeholders of qualitative data such as company mission, vision, goals, risks, policies, and strategies. For example, a company may disclose how the board oversees ESG issues and that oversight is supported by appropriate documentation and processes. Other companies even widen the spectrum from disclosing internal processes, growth, and performance, diversity and inclusion data, hiring practices, pricing breakdowns, and employee salaries.

However, companies must exercise caution in their transparency practices as over or under-disclosure can adversely affect their relationship with investors. Improper transparency practices may lead to different risks, which companies must avoid.

Disclosure considerations

As most investors and outside stakeholders demand more information over time, they look for an easy and understandable report providing a clear presentation of corporate governance processes in place, board composition, and strategies tied to the company’s ESG and business as a whole.

Investors want to ensure that a company’s corporate governance is effective in managing significant ESG risks (i.e., Transition risks from shifting away from fossil fuels, litigation risks on companies generating more carbon emissions, geopolitical events, labor issues, risks from regulatory requirements, and corruption and fraud risks) and whether they can capitalize on any relevant ESG opportunities (i.e., Increasing demand for climate/ carbon capture technologies, including renewables, opportunities in the broader supply chain of climate solutions such as solar and wind component manufacturers, innovations, and other ESG investing opportunities) 

Investors may also look for the board’s expertise, training, and competencies and their role and responsibilities towards various significant ESG issues. SEC regulations now require additional disclosure on the role of a company’s board in terms of oversights of ESG-related risks.

Disclosure Practices

ESG disclosures are crafted with input from stakeholders such as investors, employees, and other constituents and are designed to be easily understood by them. These disclosures can take various forms, such as sustainability reports, other reports and filings, and even be found on company websites.

Contents vary per company, but currently, regulators are continuously working to establish sets of guidance to assist companies in their disclosures:

The International Sustainability Standards Board (ISSB)’s IFRS S1 exposure draft requires a company to provide disclosure on both significant sustainability-related risks and opportunities with the following core content, as lifted from the exposure draft:

a. governance—the governance processes, controls, and procedures the entity uses to monitor and manage sustainability-related risks and opportunities;

b. strategy—the approach for addressing sustainability-related risks and opportunities that could affect the entity’s business model and strategy over the short, medium, and long term;

c. risk management—the processes the entity used to identify, assess and manage sustainability-related risks and;

d. metrics and targets—information used to assess, manage and monitor the entity’s performance in relation to sustainability-related risks and opportunities over time.

The Corporate Sustainability Reporting Directive (CSRD), on the other hand, considerably extends to apply to more European and non-European companies listed and operating in the EU-regulated markets. EU rules require large companies to publish reports, including disclosures on governance such as anti-corruption and bribery, diversity in board composition (considering age, educational background, gender, and professional background), etc.

Aside from the two mentioned above, US SEC, since 2010, has been guiding public companies on climate change matters. In 2022, SEC released two (2) climate proposals dealing with ESG funds and public companies.

Specific to governance disclosures, the United Nations Conference on Trade and Development (UNCTAD) released a publication guiding good practices in corporate governance disclosure. Some of the recommended governance disclosures that companies can adopt can include company governance objectives, the structure, role, functions, and qualifications of the board, directors’ remuneration, conflict of interest, ethics policy and support structure, the role of employees in corporate governance, all material issues relating to corporate governance, and any awards or accolades for its good governance practices.

Further, the Global Reporting Initiative (GRI) Standards also contain proposed disclosures on governance embedded within the Universal, Sector, and Topic standards. The guidance includes disclosures of performance and policies on economic impacts, procurement practices, anti-corruption, anti-competitive behavior, tax management, payments to the government, and non-discrimination, to name a few.

Companies commonly include ESG disclosure reporting in their annual reports to ensure consistency in reporting and alignment of the coverage period between financial and ESG performance.

What to expect?

There are different perspectives to which the future of ESG reporting starts to prosper: regulatory changes, industry coalescence, and inter-framework consolidation.

The SEC recently released its 2023 Regulatory Agenda consisting of significant ESG-related rules. SEC plans to finalize these ESG rules in 2023, specifically mandating investment advisers and companies to expand on transparency and disclosures about how ESG factors are treated as investment strategies.

SEC expects to finalize the following governance rules in 2023:

a. Cybersecurity Risk Governance – Registrants – April 2023

b. Corporate Board Diversity – October 2023

c. Enhanced Disclosures on Investment Companies and Investment Advisers – ESG Factors – October 2023

On the other hand, in the European Union, the following standards were designed to make corporate sustainability reporting more common, consistent, and standardized like financial accounting and reporting:

a. Corporate Sustainability Reporting Directive (CSRD), which is the EU ESG Standards passed in 2022 by the European Council

b. European Union Sustainability Reporting Standards (ESRS), an upcoming set of EU compliance and disclosure requirements

As CSRD takes effect for eligible listed entities in FY2024, FY2025 for large non-listed entities, and FY2026 for SMEs, they need to implement this ESG reporting standard. This means that companies need to prepare and plan the implementation to stay compliant.

As companies adopt ESG reporting, they are also considering industry-specific practices and preferences, leading to the development of sector-specific ESG frameworks. Additionally, there is a trend towards framework consolidation, as seen in the agreement between IFRS and GRI to coordinate their standard-setting efforts. Although these agreements are not formal consolidations, they may indicate a shift towards frameworks focusing on different areas of ESG impact.

How Scrubbed can help?

Companies may find it challenging to adopt and transition to the upcoming reporting requirements that meet regulatory and stakeholder demands. To assist companies in complying with the current and developing requirements, the Scrubbed ESG team stays informed on standard-setting developments and regulations. Our ESG Team can help you:

(a) prepare sustainability reports compliant with GRI, which add credibility to the report;

(b) assess ESG risks and opportunities within existing processes and controls;

(c) assist in establishing ESG-compliant processes and controls;

(d) provide ESG Awareness and GRI training to your teams and other needs to promote governance transparency.

Contact Scrubbed to assist you in this transition to a sustainable business.