Walk the talk on good corporate governance

Many companies face challenges in its implementation due to the substantial costs in its process, Sultan Nazrin says


COMPANIES need to transparently demonstrate how they fulfil their commitments on the practice of good corporate governance.

The Sultan of Perak Sultan Nazrin Muizzuddin Shah (picture) said many companies face challenges in implementing good principles and practices in their governance mainly due to the substantial costs involved in the process.

“The principles and practice of good governance are well-established and broadly undisputed. But serious challenges remain, however, in the implementation.

“This is particularly the case for small and medium enterprises (SMEs) with limited resources. Even for larger companies, putting these codes of conduct into practice is far easier said than done.

“This is partly due to the substantial costs that are involved. It also reflects the significant time commitment on the part of management and staff that is necessary to understand and then implement the various requirements,” he said in his royal address during the launch of “Corporate Governance and Ethics” book in Kuala Lumpur yesterday.

He said the challenge has only deepened with the addition of environmental, social and governance (ESG) goals and metrics as few companies yet to have the expertise to implement these properly.

ESG metrics have become a standard and expected part of company reporting, said Sultan Nazrin, adding that they are increasingly viewed as an essential element of corporate governance.

The interests of stakeholders have broadened with increasing awareness of ESG which includes interests of direct shareholders, potential employees as well as consumers who are all concerned about a wide range of environmental impacts.

“It is here that ESG reporting comes in. There are growing sets of metrics in each of these areas of ESG. These all aim to record and quantify the various steps that companies are taking.

“They reflect the progress that companies have made towards meeting their ESG goals and fulfilling the expectations of their stakeholders in this regard.

“Companies can no longer only pay lip-service in these areas, but have to demonstrate they are taking action and having positive impacts,” he said.

He reiterated implementation of good governance practices will remain a challenge mainly for SMEs and the difficult current operating environment has only made things worse.

The disruption of global supply chains and inflationary pressures resulting from Covid-19 pandemic are being heightened by the war in Ukraine, said Sultan Nazrin.

The Perak ruler noted that many businesses may be tempted to de-prioritise their governance efforts to save both time and money, and they also may prefer to focus more on immediate and pressing issues.

However, he said ESG efforts have become an integral part of a company’s image and reputation.

“Companies that are lacking in these areas are increasingly likely to be penalised whether by their employees or potential employees, by customers, or by their shareholders and investors. Conversely, those that perform well will be rewarded.

“So, despite these difficulties they may face in financing these efforts and training staff to implement them, companies must make all efforts to implement better corporate governance.

“And it is no longer enough to just have an ESG plan. Companies must walk the talk and demonstrate transparently how they are meeting their targets and fulfilling their commitments. Again, this is increasingly essential not only for ethical reasons, but because it makes good business sense,” he added.

He also underscored the importance of having an effective board of directors to guide and oversee decision-making processes.

Board members must strike the right balance between oversight and detachment, he said.

“A strongly-developed sense of ethics and duty is of course another absolute essential quality for board members. Anyone lacking this basic moral commitment is fundamentally unfit to serve on a corporate board,” he said.