Corporate Governance and Sustainability in the context of contemporary organizations

As an investor, are you worried about bridging the gap of allocating power to directors or managers to ensure stakeholder vision is fulfilled and the current business model is sustainable beyond post covid 19 business environments? You must be vigilant on corporate governance and sustainability more than ever with a fragile economy due to the covid 19 pandemic.

Contemporarily organizations can gain a competitive edge over other companies by practicing better corporate governance principles and empower the long-term sustainability of the business. As globally accepted sustainable development underlines and synchronized development of environmental, social, and economic characteristics, rather than benefits of one facet at the expense of other facets of development (Coscieme et al., 2019). Strong and efficient corporate governance helps to nurture a company with a culture of integrity, leading to higher execution and a sustainable business globally and serve the purpose. If the company is having solid corporate governance practices, it indicates to the market that the organization is well managed, and the curiosity of management is affiliated with external stakeholders. Investors or the stakeholders assign managers or directors to drive the company while improving the shareholder wealth by increasing the profit and share prices. Corporate governance indicates a systematic approach and proper structure of processes, rules, and practices to drive a company to excellence. Stakeholders traditionally used audits, accounting procedures or any form of internal control to track that the financial capital disbursed by them is inaction by the directors or managers and they have not abused their careful stewardship of investment. Lehman Brothers had inadequate corporate governance procedures which failed to protect against unnecessary risk which finally led to the economic disaster. The key areas of weakness that have been highlighted are corporate risk management, Board of directors, Remuneration scheme, Nomination of committees (Kwaku and Mawutor, 2014).

Corporate governance frameworks the activities of the Board and its connection with shareholders, managers/directors and external stakeholders ex: auditors and regulators (Tricker, 2012). Governance provides a framework for the organizations to specifies how the authority and responsibilities are dispersed to make decisions with a strategic vision that significantly improves the relationship between corporate governance and competitiveness.  (Ho, C.-K.2005). (Fama et al.,1983) recognize the board as the most important control mechanism available as it is considered as the highest authority of a firm’s internal governance structure. Boards may have executive and non-executive directors. However, as per (Davidson et al., 2019) it is confirming that there is a significant negative relationship between earnings management and the presence of a board comprised of a majority of non-executive directors. Even though the concepts of corporate governance more concentrated on boards and shareholders by tradition with the recent trends, it was moved towards the bit of a wider role of boards and purpose of corporations. Corporates were looking towards more of a strategic vision among investors laid the groundwork to shift from traditional view to basic purpose and the success should be measured and defines based on sustainability.

Corporate governance needs to ensure that the stakeholder interests are recognized and achieved (Jamali, M. Safieddine and Rabbath., 2008). Goals and targets of stakeholders need to be refined in an open ecosystem so that all groups are aware of the liabilities where everyone can participate to make the objective a success (H. Holsman and Peyton, 2009). Conversely, corporate governance also defined as procedures and processes according to which an organization is directed and controlled (Gee and Co. Ltd., 1992)

Humans live beyond the ecological ceiling defined by the concept of doughnut economies regarding long-term sustainability. Ex: Chemical pollution, air pollution and freshwater withdrawals (Ceil, 2021). Sustainable development requires more of a promotion of values which encourage consumption standard which dwells within the limits of social foundations and ecological ceiling for all humans can live with. This is considered an ecologically safe and socially justifiable space in which humanity should strive to live. Economies should encourage to help to achieve this and stay there over a longer period without being a shortfall or an overshoot which refers to as Doughnut Economies (Meet the doughnut: the new economic model that could help end inequality, 2021).

Corporate sustainability is recognized as the ability of companies to positively influence environmental, social, and economic development through their governance practices and market presence (Krechovská., & Procházková., 2014). To accomplish sustainable development economic, environmental and social elements of sustainability needs to be attained. This is referred to as the triple bottom line approach announced by Elkington (A Simple Explanation of the Triple Bottom Line | University of Wisconsin, 2021). Controversy researchers argue that concentrating on the economic dimension is most required as it will provide liquidity and make the road clear towards the early departure of the organization due to a financial crisis (Francisco and Marianna, 2005). Balancing all three aspects of the above dimensions will ultimately lead an organization towards lasting corporate sustainability.

Sustainability is turned into an international movement in recent decades and companies currently facing immense challenges to integrating the concept of corporate governance and sustainability to gain rewards. Enterprises need to react swiftly to sustain the market by overcoming fragile human thinking and behavioral patterns and business environmental changes which offer the massive potential of creating greater returns for stakeholders. Maintaining the market presence and improving practices to influence ecologies and economic development considered as the ability to being sustainable as a company.  This is achieved by distributing wealth by dividends, paying reasonable wages, and obligate to supplier payments, etc. Sustainability will create positive effects on environmental, social, and economic concerns by the governance through company policies and its stakeholders (Lda, 2010).

Companies try to practice corporate governance and sustainability by addressing the social influence, environmental, organizational culture, financial aspects of sustainability. Companies that have an in-depth understanding of both sustainability and corporate governance are performing better (Guller.,2008). Incorporating sustainability into strategic management and business planning, activities in financial performance, and identify performance metrics using social, environmental, and economic indicators will uplift and link sustainability with corporate governance which is considered as an effort together by both stakeholders and managers/directors (Krechovská., & Procházková., 2014).

Demand for fashion is unlikely to revert to pre-pandemic levels due to discreet spending power, unemployment, and growing inequality of wealth. Considering Sri Lanka, a developing country in South Asia, many fashion and lifestyle organizations lead by individuals who are enthusiastic about the environment and sustainability, moved to green energy and giving back to the environment. MAS Holdings; a 1.6$ Billion enterprise, garment manufacturer in Sri Lanka stated recently, that they are now outfitted with solar roofing for 18 of their manufacturing facilities and the dedication to renewable energy is important and efforts are taken to change the planet for good (MAS completes first phase of ‘Photon,’ largest solar roof initiative in Sri Lanka | Daily FT, 2021). On the other hand, Hela Clothing Sri Lanka also adhering to the concepts of circular economies (World Environment Day 2021: Accelerating the shift to a circular economy | Daily FT, 2021) and sustainability with the pandemic hit in 2020, state that the apparel industry is gifted with an opportunity to pause, reflect, and rethink its future (Hela Clothing’s commitment to sustainability recognized with ‘Most Sustainable Factory’ award | Daily FT, 2021)].

During the pandemic, the global fashion industry faces its toughest year with almost 75% of listed companies recording a severe decline in its profits (The State of Fashion 2021: In search of promise in perilous times, 2021). Consumer behaviors are significantly shifted; supply chains are disturbed but few companies were able to be within the 25% of the companies who traversed through the pandemic with strategic leadership and sustainable business initiatives. Apparel industries would require transformational leadership strategies to overcome post-pandemic economic hits globally. Business leaders are curious while seeking to innovate on continuing to engage the core businesses. Transformational leadership creates progressive change in the followers with the end goal of developing followers into leaders while enhancing the motivation, morale and performance (Turning accountants into leaders – Echelon, 2021). The best example for transformational leadership in Sri Lankan apparel context is Mr. Dian Gomes – ex group director of MAS Holdings Pvt (Ltd) (Dian Gomes - IMDb, 2021).  

Apparel leaders are more alarmed about ROI at even at the store level where the work in progress (WIP) is elevated due to drastic consumer behavior changes which will eventually lead to overproduction. Ramping up omnichannel deliveries will improve sales and the importance of investing in digital presence is forecasted to be sustained in the post-pandemic economies (The State of Fashion 2021: In search of promise in perilous times, 2021).

In contrast to the pandemic, corporate governance and sustainability need to be more focused on challenges and opportunities with the post-pandemic global economy. An enduring new model for work is likely to emerge as fashion companies refine their blends of remote and on-premises working, invest in reskilling talents, and instill a greater sense of shared employee purpose and belonging. However, it is a key organizational objective and an added advantage that can be environmentally benefited to flexible, dynamic working, especially if organizations are careful to consciously factor sustainability into reorganization plans (Itpro.co.uk. 2021). 51% of Gen Z and 53% of Gen Y surveyed stated that they were concerned about the environmental impact of commuting, the light of evidence suggests that most humans are now being concerned about the planet more than ever (Mitra & Saphores., 2019).

As an investor, allocating power to directors or to managers should be performed wisely and strategically while ensuring sustainable leadership is promoted within the organization. Leadership needs to be ethically concerned and governed the organization with clear financial visibility. CSR aspects also required to be an integral part of governance. Governance, Ethics, financial transparency and CSR are important to the organization's long-term sustainability. This will eventually promote the financial performance and nurture the stakeholder interest and maximize wealth which proves the relationship between financial performance and ethical performance of corporate governance and sustainability in an organization (Nguyen et al, 2021).

 

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