Last week, my colleague John Jenkins wrote this article on TheCorporateCounsel.net about corporate governance, in which he said “critics of some of the corporate governance reforms put in place over the past two decades like to suggest that the increased ‘navel gazing’ required of corporate boards in the name of good governance makes public companies less innovative.”
He references a study a study that looked at data across 58 countries from 2000 to 2015 and found that as companies reformed their internal governance, they became
… less incentivized to conduct explorative innovation compared to exploitive innovation. Therefore, the findings are consistent with the argument that intensified board governance induces managerial myopia that comprises long-term innovation outcomes, especially those perceived to be highly risky yet likely to open up technological breakthroughs…. one-size-fits-all board reforms are not inducive to complex investment activities that involve greater risk and uncertainty.
Might there be an odd conundrum that improving internal corporate governance may create difficulties in environmental and social innovations of corporate ESG programs? That sounds a little ridiculous given how much emphasis there is on ESG (i.e., an tripartite integrated concept) at the moment, but consider this scenario:
- A company commits to significant carbon emissions reductions as part of its Net Zero plans. Achieving the emissions reductions will require significant changes in operations, power sourcing/use, product design, transportation and even its use by the customer. Changes of this magnitude would be analyzed through the lens of reformed corporate governance elements which, according to the study, “induces managerial myopia that comprises long-term innovation outcomes, especially those perceived to be highly risky yet likely to open up technological breakthroughs.”
Perhaps it is more likely after all.
What You Can Do
We – and others – have emphasized many times that corporate ESG initiatives should be a multi-functional endeavor. In house technical, product and business experts can help governance executives understand the importance of needed environmental and social innovations. At the same time, governance processes must be respected. The challenge is finding the correct balance between governance and a company’s ability to innovate and achieve E&S commitments.
Clear and direct communications between all relevant departments is absolutely critical in finding that balance. Continually demonstrate an atmosphere that supports open and candid conversations, without coercion or fear of being ridiculed. Some participants may be too timid to speak up even though they have valuable input; consider setting up a separate process for anyone to anonymously submit input to the ESG team – not as a grievance but as a way to gather comprehensive context for all sides to evaluate. It could be valuable to establish an internal appeals process for decisions made where objections exist in the ESG team or even at the Board level.
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Post script: John lamented that he is still waiting for his jetpack – well, here it is.
