ESG Risk Integration - Governance Risks

Guideline and Policy risks

The Guideline and Policy risks are related to the company’s structure of internal rules, guidelines and policies. It varies according to how complete the coverage of all required areas is and how good they are. Although being internal, they often also deal with how the employees shall behave relative to external stakeholders. 

The Guidelines and Policies risks can lead to:

1. Higher costs due to unethical behaviour of employees, one example here is corruption.

2. Loss of revenue due to strict client demand on their supply chain with regards to for example ethical behaviour.

3. Reputational risk that can hit all kinds of parameters impacting the valuation of a company.

Program and training risks

The Program and Training risks are related to how the company is giving life to their policies and guidelines. A guideline is a written document and to ensure that the employees know it and stay compliant training and examination is required.

The Program and Training risks can lead to:

1. Higher costs due to unethical behaviour of employees, one example here is corruption.

2. Loss of revenue due to strict client demand on their supply chain with regards to for example ethical behaviour.

3. Reputational risk that can hit all kinds of parameters impacting the valuation of a company.

Power Equilibrium risks

The Power Equilibrium risks are related to how the Board of Directors is organised. In sustainable business, all stakeholders are taken into account, at least more stakeholders than traditionally. The latter is aligned with traditional financial theory and focus on one group of stakeholders, the owners. So, while it historically was ok that only shareholders were directors on the Board, today an optimal situation is a Board with independent directors. One of the practices that has disappeared in most companies is the combined role of CEO and Chairperson of the Board.  Furthermore, the Board committees like Audit and Remuneration committees are preferably made out of independent members. Independent is requiring independency in all dimensions; to the a) shareholders, b) the company (suppliers and clients are dependent)and c) the management.

The Power Equilibrium risks can lead to:

1.  Biased decisions if the Board is not independent. The bias will go in favour of the dependency link to the cost of other important stakeholders.

Board of Directors risks

Shareholder Treatment risksThe Board of Directors risks are related to the effectiveness and competence of the Board. Ineffective Boards are characterised by one or several of the following issues; Unquestioned leadership, Blindness of concentration and Overconfidence. For the three categories mentioned, known sub points are Groupthink, Sunk costs, Confirmation bias, Excess optimism, Loss aversion, Anchor , Halo effect, etc.The list can be long. Therefore the structure of Board reelection, the maximum membership, the above mentioned independency are important factors here. The skillset of the Board is of course also important here.

The Board of Directors risks can lead to:

1. Wrong strategic decisions leading to loss of competitive positioning and in the worst case bankruptcy.

Shareholder Treatment risks

The Shareholder Treatment risks are related to how the company is treating their shareholders. Do they all have the same rights? It is also important to see how the company is ensuring that minority shareholders are treated the same way as larger shareholders in takeover situations and other critical events for the company.

The Shareholder Treatment risks can lead to:

1. Reputational risk leading to higher costs of financing as minority shareholders do not wish to take the risk due to bad reputation or history.

2. Direct risk of unfavourable treatment of yourself as a minority investor

CEO Remuneration risks

The CEO Remuneration risks are related to how the CEO is remunerated. The main point is whether the CEO remuneration system is built so that it vill be profitable for the CEO to ensure the strategy set by the Board of Directors is executed.

The CEO Remuneration risks can lead to:

1.  CEO and top management decisions that are not in line with short term and long term targets of the strategy set by the Board of Directors.