WHY ENVIRONMENTAL, SOCIAL, AND (CORPORATE) GOVERNANCE (ESG) MATTERS EVEN MORE FOR ORGANISATIONS IN EMERGING MARKETS

Organizations are now not only responsible for boosting their shareholder value but are also responsible for the wellbeing of their external stakeholders in order to be successful in competitive global markets

A. Relevance of Environmental, Social, and (Corporate) Governance in Emerging Markets

Emerging markets are often inherently unpredictable and volatile in nature not only from a geopolitical, macroeconomic, and legal compliance perspective but also in view of quickly unfolding societal shifts, repercussions from climate change and poverty. Often only those organizations that can establish robust and practical relevant compliance and corporate governance frameworks within an agile organizational setup are able to manage diverse risk factors such as legal and compliance risk, pervasive regulatory changes and even security threats and at the same time prevent corruption, mismanagement, and poor decision-making, among others. Therefore, when navigating in riskier jurisdictions, it is particularly important for stakeholders to build resilient organizations based on strong fundamentals such as ethical principles, compliant and transparent decision-making processes, deep anchored corporate values, and culture based on sustainable governance frameworks which help organizations to optimally weather perilous situations and threatening events.

With climate change increasingly impacting vulnerable developing countries, private sector companies are now more than ever important societal pillars that are contributing to their external stakeholders' wellbeing in relevant target markets by promoting environmental projects and initiating social projects which are positively impacting the lives of the local population. Of course, despite these difficulties, emerging economies are extremely attractive for risk taking entrepreneurs looking for unsaturated new sales markets with an abundance of promising business opportunities that have substantial socioeconomic growth perspectives.

In addition, there have been numerous corporate scandals in the recent past (not necessarily as a result of the COVID-19 pandemic) both in emerging and developed markets – which have pointed to the growing role of corporate governance in preventing fraud and ensuring the overall well-being of businesses.

Good corporate governance and robust compliance frameworks are of overriding importance while designing effective and sustainable organizations. The OECD in its policy recommendation paper "G20/OECD Principles of Corporate Governance"¹ defined the purpose of corporate governance as a tool that helps build an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies. The OECD provides in its definition and paper an excellent summary of some key principles and values which are worth considering while designing resilient organizations.

Corporate Governance principles and related legal frameworks are often laid down in regulated sectors such as in companies' laws, banking laws, capital market laws and insurance laws just to mention a few of them. Such regulations generally give a good understanding of the applicable corporate governance standards and regulatory compliance culture of a respective jurisdiction.

B. Key Good Governance Principles

So, what are the good governance key principles worth being considered by stakeholders while designing efficient organizations in developing economies? The answer certainly depends on various relevant factors such as the type of organization for example is it a publicly listed or privately held company, is the company a SME or a sizable conglomerate and/or family business and in which business sector and industry is the corporation operating in noting that undertakings in highly regulated sectors often face higher governmental scrutiny. Finally, it also depends on the respective inherent jurisdictional risk profile.

Some of the key fundamentals which ideally should define effective management and decision-making processes of an organization can be summarized as rule of law, moral integrity, transparency, participation, responsibility and accountability, effectiveness, and efficiency as well as what sustainable societal and environmental impact a company is able to create for its external stakeholders often referred to as Environmental, Social, and (Corporate) Governance ("ESG"). A lot of times it is only those internalized and deeply-rooted fundamentals in the organizational system and corporate culture which can help to manage challenging environments while the outside world is in turmoil.

C. A Quick Due Diligence Guide and Corporate Governance Health Check

Below are some corporate governance risks and useful questions which can serve as a preliminary due diligence process to understand whether your organization maintains an appropriate governance framework or if there are some gaps which need to be addressed.

1. Lack of oversight and management control leading to poor organizational performance.

a. Which management control and oversight structures does your Organization have in place?

b. Who is responsible for reviewing, adjusting, and improving those structures?

2. Lack of checks & balances causing compliance and legal violations.

a. What kind of checks & balances system does your Organization have in place?

b. Who is responsible for its implementation/monitoring?

3. Lack of efficient communication leading to poor decisions and triggering risk and liabilities.

a. What are your Organizational communication channels and participation between the Board, the CEO, middle management, and employees?

b. Which function(s) in your Organization is maintaining and improving those channels?

4. Lack of adherence/compliance with (newly) issued regulations during COVID-19.

a. What is your organizational compliance structure?

b. Which function(s) in your Organization is monitoring, implementing, and improving your compliance structure?

D. Business Insider Series

In light of these challenging times, Agema Analysts (Agema Analysts) and ALN Kenya | Anjarwalla&Khanna (A&K), in conjunction with Capital Club East Africa have developed the Business Insider Series which aims to delve into some of the arising corporate governance issues. Through a series of seminars, Agema Analysts and ALN Kenya intend to provide businesses with a basic understanding of how to adapt their corporate governance frameworks with a view to ensuring sustainability. The first seminar (Developing Resilient Corporate Governance Frameworks for Challenging Times) took place on 25 March 2020. The presenters were Gregor Pannike (Managing Partner, Agema Analysts) and Rosa Nduati-Mutero (Partner, ALN Kenya).

E. Conclusion

Adopting and incorporating sound ESG standards are indispensable in today's quickly evolving world which appears to have been turned upside down by a generational COVID-19 pandemic threat and an ever-growing climate change that is not only challenging societal value systems and fundamental orders of countries but also the very livelihood of people. Organizations are now not only responsible for boosting their shareholder value but are also responsible for the wellbeing of their external stakeholders in order to be successful in competitive global markets. Good corporate governance ensures corporate success and economic growth and at the same time, maintains investors' confidence, as a result of which, a company can raise capital efficiently and effectively and therefore lower the capital cost due to reduced risk premiums. Optimal governance frameworks also minimize wastage, corruption, risks, and mismanagement and hence reduce liability and boost brand equity formation and development, which are essential in a world that is heavily influenced and judged by the powerful multimedia sector and global dissemination of public opinions.

F. How can we help your organization?

We assist many organizations in developing and customising effective Environmental, Social, and Corporate Governance frameworks in various developed and emerging markets addressing many of the evolving challenges for private companies and would be delighted to discuss your organization's needs.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.