Why governance maturity matters

Most board directors and CEOs I speak to about the "G" in ESG (environment, social and governance) have the sense that governance is the element that is most under control, particularly when compared to the state of their companies concerning social and environment.

In some ways, I can understand them. The effects of bad governance have resulted in significant economic crises every few years, which has led to the introduction of codes, regulations and legislation.

Most boards now have board members and corporate secretaries with at least some education in the domain. They also have policies, board minutes, audit committees, audited accounts, etc. Many also conduct regular board self-evaluations, either by themselves or with the help of consultants.

For many, "environment" has been almost entirely out of sight, and "social" – well, there has been CSR, and they honestly want to do it, and they can point to several initiatives that people have received well.

But all is not well.

Consider these facts:

The climate, pollution, biodiversity, inequality and other crises involve organisations. The slow progress towards achieving the SDGs also involves organisations of all types – including private and public. Each of these has a governing body, and they may all feel that their governance is reasonable.

But the crises we have today result from the inadequacy of governance. Environment and social dimensions have not been governed. Even the relationship between corporate financial success and positive well-being is primarily assumed because not many have measured or managed this.

Even if we take a very narrow view of governance, as in the ESG reporting standards, where business conduct is a prominent theme, there is much evidence that organisations are involved in huge misdemeanours – corruption and human-rights violations. We are not yet where we ought to be.

When I support boards in doing board evaluations, I find boards consistently score themselves lowest on how they manage their governance performance.

Many are starting on the environment and social dimensions because standards on what to disclose are expected to move from optional to mandatory.

But when you look at the nature of the ESG standards, it becomes clear that having to show that you are taking reasonable action to preserve (primarily financial) value is not the same as providing guidance for how to ensure you increase the amount of sustainable value you generate.

Disclosure standards do not guide the development of your governance and management systems to generate as much positive change for people and nature – that is not their scope. Let us consider one of the oldest and most accomplished larger Caribbean companies. The company reports in its ESG and annual reports that it has engaged advisers and started its ESG journey with an ESG materiality assessment, that it commits to (an unspecified) alignment with select SDG goals, and isreporting related strategic initiatives as "targets."

Is that enough?

It is reasonable to expect that ESG disclosures will not go away and will become mandatory for more and more companies.

However, companies that take the lead in this situation need to do more than align with SDG goals in almost unspecified ways and prepare for disclosure regulations. They need to transform their governance and management, go beyond business as usual and actually increase the value they generate by moving the needle on authentic sustainability.

What we need most is an increase in measured and audited sustainable value. We need more organisations to increase both the quantity and the rate at which they generate sustainable value.

So what should boards and CEOs do? How can they assess themselves and improve their performance?

The recommendation may seem obvious. If you want to improve your governance and management, so that you increase sustainable value, and, as a result of that, also be able to report and meet the ESG expectations, you must use governance and management standards that were developed for that purpose.

Use the right tools for the right job. ISO and the UNDP SDG Impact standards are two such tools. These are not regulatory controls, but standards that organisations can voluntarily use to implement best practices in a domain to increase the value they generate and, in that process, also meet regulatory or legal requirements.

This is not an argument against regulation and legislation. This is an argument for better governance and management decision-making.

Let's return to the governance. For this dimension, the global consensus and benchmark for the governance of organisations that enable sustainable development is ISO 37000:2021 Governance of Organisations – Guidance. This standard has also been adopted as the national standard in Jamaica, St Lucia and TT.

One of the advantages of ISO standards in particular is that they are developed to fit with other ISO standards. So organisations that want, for example, to develop a plan to assess governance performance or benchmark their governance maturity against ISO 37000 can use ISO 37004:2023 Governance of Organisations – Governance Maturity Model: Guidance.

Good governance has three outcomes – effective performance, ethical behaviour and responsible stewardship.

There are many governance maturity models, each developed for a specific purpose and different degrees of rigour and consensus.

The governance maturity model of ISO 37004 is unique. It builds explicitly on the seven governance conditions and 11 principles in ISO 37000. In this way, organisations and their stakeholders can be assured that the purpose of the organisation has the best chance of being fulfilled and that governance outcomes are achieved.

Many other maturity models prescribe the same highest level of maturity practices across all dimensions in their model for all organisations with mature practices.

In order not to paint with too broad a brush, some create different matrices for different types of organisations, in different industries and for different stages of development.

ISO 37004 is unique in this dimension as well. It helps organisations to determine what is right for them by building, as many ISO standards do, by taking a risk-based approach. This approach enables organisations to determine what is best specifically for them by balancing the effects of different levels of governance maturity against achieving the governance outcomes: effective performance, ethical behaviour and responsible stewardship.

Companies generate the highest levels of value that contribute to sustainable development through integrated governance and management systems.

Our generation and those to come have no choice but to live with the consequences of decisions that boards, managers, and other personnel of our organisations take today.

Let us urgently upgrade the maturity of our practices and give ourselves the best shot for a liveable future.

Dr Axel Kravatzky is managing partner of TT-based Syntegra-360 Ltd, vice-chair of ISO/TC309 Governance of Organizations and president of EUROCHAMTT. He enables companies to flourish through integrated governance, certified management systems and transformational leadership.