Generali Group

                                 

          20 October 2021 - 14:45

          Rethinking corporate governance models

          The effects of the Covid-19 pandemic on our way of working and on the idea of business-society relationship

          The Covid-19 pandemic has emphasized the need to move towards corporate governance models that focus on corporate health and resilience, triggering a profound re-evaluation of the relationship that exists between businesses and society.

          The pandemic has made it apparent that society relies on high-performing buinesses to fulfil its most elementary needs and that companies do not exist for the sole purpose of maximising returns. Hence, corporations should concern themselves not only with returns but also with the broad range of factors that allow a company to create value consistently, over time.

          Paradoxically, this extended competence does not decrease the responsibility of businesses, but entails changes in the nature and scope of this responsibility. In other words, the pandemic has shown that companies cannot disconnect themselves so easily from society as a whole.

          As the Harvard Business Review has clearly demonstrated, Covid-19 started out as a public health crisis and quickly evolved into a financial and economic crisis of global proportions, sparing no company (with very few exceptions). Therefore, many companies had to invent new ways of working in a very short time, or share prices collapsed or they experienced unprecedented volatility.

          Faced with incosistent and sometimes ineffective government responses, and with economic recovery still uncertain, many companies stepped up to fill the gap: some rose to the occasion, reorganising their production lines to develop necessary equipment; others performed below expectations and came under public scrutiny for trying to exploit government programmes aimed at the less fortunate.

          In addition, many boards and senior managers were forced to face public accountability issues at a time when they were dealing with a crisis for which they were unprepared. The pandemic has shown that atavistic issues such as increasing income and wealth inequality, environmental degradation, climate change, racial and ethnic discrimination, declining public health and education, rising corruption or deteriorating public institutions are not only legitimate areas of concern for businesses, but also, and more importantly, sources of both risk and opportunity.

          In this regard, the Covid-19 pandemic has also accelerated action among international bodies: in 2019, the OECD launched Business for Inclusive Growth (B4IG), a strategic partnership between the OECD and 35 large global companies, created with the aim of changing the way business is done.

          According to OECD data, the increase in sustainable finance among companies is a sign that important change is underway. More than 30 trillion dollars of global assets now meet environmental, social and governance criteria, an increase of more than 30 percent since 2016. Like market forces, social forces can also profoundly influence business and the competitive environment.

          It is therefore becoming increasingly apparent that companies need to look beyond corporate governance models focused solely on shareholder expectations and profits (the so-called 'agency theory'). In doing so, companies must ensure that their management and supervisory systems include the risks arising from these large-scale social issues, and that the company's strategic planning and resource allocation processes take these issues into account, so that the resulting activities do not exacerbate these problems and, ideally, contribute to improving them.

          Consequently, it is highly likely that careful consideration of sustainability, corporate responsibility, social engagement, and corporate citizenship by businesses - summarised in environmental, social and corporate governance (ESG) - will move away from being the exception and become the norm.