Non-executive directors are key to ESG governance

ESG

Non-executive directors have a vital role to play in corporate governance to ensure ESG commitments are met.

With a growing expectation for companies to care for more than just their bottom line, this pressure is being directed at the top. Non-executive directors (NEDs) and board members must be more devoted to good corporate governance more than ever before, otherwise they could fall foul of shareholders, court cases and increasingly critical public, media, and national and international legislation.

“For non-executive directors, whose job it is to keep executives and boards in check, this may be new but it is increasingly important,” said David W. Duffy, CEO and co-founder of the Corporate Governance Institute. “Celebrity CEOs, self-interested shareholders and a world growing more expectant of good ESG policies must be appeased to ensure success.”

Commitments to ESG and sustainability are under increasing scrutiny with the public, employees, legislators and politicians becoming more demanding that net zero commitments are adhered to. For example, the EU is banning Apple-only charger connections and the Corporate Sustainability Reporting Directive (CSRD) will enforce the transparency of climate impact just like a business’s yearly financials.

Shareholders are following suit and their participation in corporate affairs increasing with a 30 per cent increase in voting on the previous year. Activist groups are using this mechanism to demand more radical climate action from companies deemed to be lagging behind, and they are asking for more holistic and more radical changes in policies. This is also being done via judicial means and a rapidly growing number of companies are being taken to court due to insufficient decarbonisation policies.

For any NED charged with governing effectively and countering long-term risks, these growing threats to total independence should be noted. Boards should listen to those demanding more before they get on the wrong side of the law, legislation or the public.

NEDs have traditionally had a hands-off policy with many in the position because of who they know and not what they know. As the role becomes harder, they must be more engaged and more educated on the topics that matter to ensure better governance. This is made more imperative by a growing legal responsibility to avoid fraud and economic crime.

The Economic Crime and Transparency Bill, which should soon be passed in the UK, will make charges and potentially prison the punishment for board members, EDs, and NEDs, if fraud takes place, whether intentional or not.

“NEDs should play a fundamental role in corporate governance – engaging critically and independently in top-level business decisions,” added Duffy. “However, this isn’t always the case. Many spend more time on the golf course than they do in the board room or in the books.

“Things are changing with pressure, expectations and legal requirements mounting for businesses to do better, with NEDs a critical part of that process. Those businesses with management not engaged and educated on the topics that matter will soon find themselves open to an ever-growing number of risks.

“The world is growing more complex and NEDs will have to step up to the challenge and stay engaged and educated on the topics that matter.”

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