The “G” in ESG: Beyond Policies and Reports

In my previous article, I focused on the social aspect of ESG standards, the “S”. Today, I would like to turn to corporate governance, the “G” in ESG, and explain what it actually represents.

I am certain that many people who do not work directly in this field have never explored its structure in detail or considered just how important it is. In my view, governance is one of the most significant and, at the same time, one of the most challenging areas of ESG.

Why? Because this is where we talk about what happens “behind closed doors”: how decisions are made, how money and risks are managed, how rules are established and how responsibility is assigned to those who lead a company.

Ethics, Transparency and the Fight Against Corruption

I would place business ethics and transparency at the top of the list. There is no simple global solution to corruption, conflicts of interest or nepotism. This is precisely why companies today have codes of ethics, internal policies, contractual provisions and procedures designed to prevent misconduct.

However, having rules on paper is not enough. What matters is whether there are people or bodies responsible for monitoring their implementation and whether clear procedures exist when misconduct is suspected. Do employees know whom they should contact? Are there independent reporting channels, commonly known as whistleblowing channels, through which suspected corruption, money laundering or other irregularities can be reported?

Continuous employee education, particularly for those in management positions, can reduce the risk of corruption and conflicts of interest. When assessing business ethics, companies are also evaluated through concrete indicators such as regulatory fines for non-compliance, tax irregularities and other violations of business rules.

Financial Transparency and Shareholder Rights

Financial reporting is one of the foundations of responsible corporate governance, particularly for publicly listed and joint-stock companies.

This brings us to shareholder rights. Large corporations often have dedicated investor relations departments or individuals responsible for communicating with investors, and their role becomes particularly important ahead of annual general meetings.

One of the key questions concerns voting rights. Do all shareholders have equal rights? Particular attention is paid to the “one share, one vote” principle. Are there preferred shares that give certain shareholders greater decision-making power, or does the company maintain equal voting rights among its shareholders?

Who Governs the Company?

Another important area concerns the structure of the company’s governing bodies. Who sits on the board? How independent are its members? Is there sufficient diversity of experience and perspectives? What is the representation of women and men at the highest levels of decision-making?

People in these positions make decisions that have a long-term impact on the company, its employees, investors and reputation. This is why the “G” factor considers the independence, diversity and accountability of those responsible for governing the company.

Executive Compensation and Accountability

One of the most sensitive areas of corporate governance concerns executive and board compensation. What is the executive’s base salary? How significant are the bonuses? Are they justified by the company’s performance? Most importantly in the context of ESG, are executive incentives linked to the achievement of ESG targets?

The effectiveness and fairness of compensation systems can also be assessed through the pay ratio, which compares executive compensation with the average or median salary of employees within the company.

The amount of compensation itself is not the only issue. It is equally important to understand what is being rewarded. If a company publicly commits to ESG targets, it is reasonable to ask whether the people making its most important decisions are also financially incentivised to achieve them.

Data Privacy and Cybersecurity

Corporate governance today is increasingly connected to data privacy and cybersecurity.

Cyberattacks and security incidents demonstrate how serious the consequences of inadequate risk management can be, particularly when customer or employee data is compromised.

Companies are therefore investing significant resources in cybersecurity and infrastructure protection. However, purchasing technology alone is not enough. Companies also need clearly defined responsibilities, procedures for responding to incidents, effective control systems and continuous employee education.

How Is the “G” Factor Measured?

There are different methods for measuring the governance factor within ESG. Assessments combine quantitative and qualitative indicators, ranging from numerical data to an analysis of how corporate policies and governance principles are actually implemented in practice.

Specialised ESG rating agencies have developed their own methodologies and metrics. They examine factors such as the structure of governing bodies, board independence, shareholder rights, business ethics, cases of corruption and regulatory penalties, whistleblowing mechanisms, executive compensation, risk management, data protection and cybersecurity.

For this reason, the “G” in ESG cannot be addressed simply by introducing a policy or adding a sentence to an ESG report. What ultimately matters is what a company actually does in practice.

Paper Can Withstand Anything

I hope this article has helped you learn something new, just as I learned more about the subject while preparing it and analysing different examples from practice.

Perhaps it will encourage a board member, manager or consultant to take another look at existing ESG standards and review the way their company approaches corporate governance.

As I mentioned at the beginning, corporate governance is one of the most challenging areas of ESG. Transparency is often discussed, but genuine transparency begins only when we are prepared to show what happens behind closed doors.

As I like to say, “Paper can withstand anything.”

The real question is what happens when we compare what is written on paper with what actually happens in practice.