A financial services company obtained licence to operate nationally in Nigeria. Within two years, the firm had made significant profit and opened branches in the key regions of the country. However, when it came to embedding strong Environmental, Social, and Governance (ESG) practices into their operations, the company privately said, “We are not yet ready, and it is not a primary focus for us.”
Meanwhile, here are some know facts:
- The company operates in a jurisdiction where there are multiple regulatory requirements for corporate governance (including ESG) compliance covering its operations.
- Within its annual report, the company states that it has corporate governance and ESG policies which conform to national and international best practices.
- While the Board has the ultimate responsibility for ensuring corporate governance compliance, the company secretary has the primary responsibility of supporting the Board and Management in the fulfilment of their compliance duties. Outside of these two roles, ESG responsibility does not appear within other business functions.
- The company privately attributed their lack of readiness to the fact that they were prioritising profitability as this was what was paramount to the shareholders.
While the publicly demonstrated policies and disclosures suggest that the company is taking corporate governance and ESG seriously, its private utterances raise some key matters discussed below.
The gap between what the company discloses and what it needs to do
A company’s annual report (including the financial statements) should give comfort to shareholders, regulators and the market regarding its current practices and where it intends to be. However, where the financial statements give a particular posturing (in this case – national and international best practices compliance) when in fact the organisation is in a work-in-progress state, the gap created exceeds that of communication. It represents a removal of one of the conditions that genuine sustainability depends on, which is the recognition that the achievement of genuine sustainability is an ongoing journey not a destination.
By its very nature, sustainability requires that an organisation keeps locating the distance between where it is in its practices and where it says it wants to be and lets that distance drive continued improvement and correction.
However, what a public claim of full conformity does is that it closes that gap on paper even when it exists in practice, thereby providing a false sense of comfort. Though this is problematic in itself, it also points to another gap between what an organisation believes and what it practices.
The gap between what the company says and what it actually prioritises
An annual report can be a good descriptor of actions, but it is not necessarily a good representation of organisational values and culture, as demonstrated in this case. The organisation publicly said that its policies and processes conform with national and international best practices. Even if that seems true on the surface, what the company says privately reveals a real priority ordering – that profitability supersedes sustainability in how decisions get made. Interestingly, this is not a rare or random admission. Many organisations are also quietly working through the question of whether they continue to operate profitably without necessarily having conversations about sustainability.
Unfortunately, the fact that a pattern is common does not make it costless neither does it resolve the question that the case raises. Rather it tells us that the question is bigger than one company and points us to another related concern.
Are corporate governance and sustainability matters being treated as a checklist?
Think about these questions:
- Can the corporate governance and sustainability requirements in your organisation be fulfilled without changing a single decision within the business?
- Do you only encounter corporate governance and sustainability subjects in your organisation’s annual reports?
- Does corporate governance and ESG responsibilities sit only within one office function within your organisation?
This is not an exhaustive list but if your answer to any of the above is yes, then there is a chance that corporate governance and sustainability is being treated as a checklist item in your organisation. When this is the case, you will find that policy documents exist, board packs and annual reports reference them, every item a regulator would look for is present but none of these has much meaning for how business is conducted. This is because checklist governance does not require that that ESG considerations show up in key business decisions such as who to lend to, who to hire and which markets to expand to.
Following this, the question arises: What motivates organisations to treat corporate governance and sustainability as checklist items. Of all the reasons I have encountered (including the lack of know-how), two particularly stand out to me: Firstly, the way local policies and regulatory requirements are written sometimes carry ambiguity in exactly what needs to be measured and how. An example of this is Principle 26 (Sustainability) of the [Nigerian Code of Corporate Governance 2018] which asks boards to pay adequate attention to sustainability issues including environment, social, occupational and community health and safety towards ensuring long term business performance. On the face of it, the principle is broad enough, however a look through the adjoining recommended practices shows that it fails to provide quantitative metrics that may signal depth of assessment and compliance.
The second reason relates to the way ESG agendas have been pushed as compliance-first with an assumption of automatic buy-in when in fact many organisations are yet to believe in the meaningfulness of the idea. Consequently, organisations are content with ensuring compliance with less interest in achieving integration of its principles in their business practices. This is especially important when organisations know that admitting a gap may attract regulatory and/or market penalties. Unfortunately, while checklist governance may keep an organisation within regulatory compliance lines, it defeats the achievement of genuine sustainability and the deeper reason for its necessity in the first place.
The broader conversation that we need to be having
Emerging public discussions of ESG in Nigeria tend to gravitate towards emissions, carbon disclosures and environmental metrics. When that is not happening, it would be an attempt to broaden the scope of its treatment within organisations beyond charitable work and corporate social responsibility. Both are valid, yet both tunnel approaches miss the mark of the essence of ESG conversations – running businesses not just for profit but in a way that centres humanity.
Profits are important, but in the long run, what benefit would profits have when humanity and the environment have been lost because we failed to preserve and honour what creates it? When organisations understand ESG not just as compliance but as a way of ensuring that we do not lose our own souls in the chase of profit, both organisations and humanity benefit collectively.
Considerations for leaders
Many leaders reading this may currently be experiencing the type of dissonance revealed in this case study, whether to prioritise compliance (whether checkbox or not) or to state exactly where they are. While the specific answers to these questions would not be generic, here are a few considerations that can help you move forward. These considerations assume an organisation that wants to close the gap but has not yet built the discipline to do it.
- Separate the disclosure conversation from the readiness conversation and have both deliberately. Rather than seeking to appear perfect, seek to be transparent while demonstrating the ambition of where you intend to be. Statements which say, “We are building towards this and here is our timeline” can carry more long-term credibility than one that says we are already which turns out to be inaccurate. Whilst there can be regulatory and/ or market consequences for governance gaps, one owned by the Board and reported against with a timeline for addressing is more likely to signal that the Board has things under control, earning some leniency.
- Locate ESG conversations across functions (such as within business units that are making the decisions it is meant to shape) rather than in a single function. While co-ordination of compliance can be centrally managed, co-ownership of ESG responsibilities not just from top to bottom but also from bottom up can work positively for its achievement.
- Treat the discomfort of the dissonance you are feeling as useful information that can propel you towards taking action. The distance between what your organisation says and believes is not necessarily evidence of bad faith. However, it can become that when the only response is an attempt to explain it better instead of correcting it.
Courageous leadership is not the absence of difficult leadership situations but choosing correction before the market, regulators or other stakeholders set it for you.
About the Author Dr Basirat Razaq-Shuaib is an executive advisor to leaders and organisations on embedding courageous, inclusive and values-driven practices into strategy, policy, and operations within African leadership, education, and business contexts. She is the founder of The Winford Centre for Children and Women and The Blooming Mum, and an external expert to the African Union’s Committee of Experts on the Rights and Welfare of the Child (ACERWC), working with its Working Group on Children with Disabilities. She holds a Cambridge PhD and has recognised expertise in strategic leadership, stakeholder management, policy analysis, gender equality and social inclusion advocacy, financial reporting and risk management. She also serves on the boards of change-making social impact organisations.