In other words, governance is about leadership. And as such, the principal guardians of governance are a company’s board of directors and executive leaders.
In this, the final installment of our three-part ESG series, we’ll examine why governance is a critical aspect of ESG. If you want to catch up, check out our blogs on the environment and social elements of ESG.
Governance is about how groups of people organize to make decisions and achieve goals – whether they form corporations, governments, non-profits, or any other type of formal group. Governance encompasses every part of management – from internal controls and action plans to performance measurement and disclosure. Good governance can make the difference between a company’s success or failure. And that’s why investors and shareholders want to know that governance is a high priority for the companies they invest in, including pipeline companies.
Here are some of the factors that investors weigh when measuring governance factors for ESG performance.
- Board oversight and direction – Most corporations have a board committee that encompasses ESG oversight in their responsibility. An ESG-focused board committee keeps an eye on corporate policies and practices that support
- Board independence and expertise – Independent directors act as guides, viewing the organization through impartial and objective lenses. They typically have a diversified skill set, as well as experience and involvement in companies outside of the industry. That enables them to offer different perspectives and identify risks and opportunities that management may not naturally see.
- Board diversity – Beginning in 2020, publicly-traded corporations must now send a report to the government on the diversity of their board of directors and senior management teams. For gender diversity, a National Bank of Canada report on ESG points out there’s an expectation that 30 per cent of all board members will be women.
- Board and Executive Compensation – To provide incentives for performance and sustainable growth, it’s important that companies’ compensation policies and plans be competitive, equitable, and transparent. Board compensation committees are responsible for reviewing and setting executive compensation. And they generally rely on data from comparable groups of similarly sized companies to inform their work.
- Financial Auditors – Reputable third-party auditors help ensure the integrity of financial performance. From a governance perspective, rotating auditors every 10 to 12 years is becoming a gold standard. That helps ensure the auditors’ continued independence when there’s a long-standing relationship between the auditor and the client. Requests for Proposals (RFPs) for audit services every three to five years is also another indicator of sound financial governance.
- GHG Emissions Auditors – An emerging trend under governance is third-party verification of a company’s total GHG emissions. That way, investors can assess and compare data across various companies and industries.
- Executive ESG leadership – With the growing importance of ESG disclosure and performance, pipeline companies increasingly have dedicated executive management roles to oversee those areas.
Thoughtful leadership, rigorous ESG performance and disclosure, and a commitment to safety – these are all things that place the pipeline industry in a strong position to support to Canada’s economic recovery. And, pipelines are essential to help meet the growing global demand for responsible energy. To learn more, visit the 2020 transmission pipeline industry performance report.