Working Report, 2/2005 – Environmental Shareholder Value – 5 Introduction to Corporate Governance

Environmental Shareholder Value

5 Introduction to Corporate Governance

5.1 The Environment and Corporate Governance

Corporate Governance lays down the framework for responsible corporate management.

Corporate Governance has come even more into the spotlight in the wake of the major financial scandals in the US. Throughout the world, reports with principles for good corporate governance have been issued. In Denmark, the most important contribution has been the Nørby Committee's report on Corporate Governance in Denmark. ^[1]

The Nørby Committee defined Corporate Governance as "The goals, according to which a company is managed, and the major principles and frameworks which regulate the interaction between the company's managerial bodies, the owners as well as other parties, who are directly influenced by the company's dispositions and business (in this context jointly referred to as the company's "stakeholders"). Stakeholders include employees, creditors, suppliers, customers and the local community."

The Nørby Committee's report deals with the following seven main areas under Corporate Governance:

The role of the shareholders and their interaction with the management of the company: under this area, special priority is afforded to creating greater interaction between the shareholders and the management of the company, who have a joint interest in the company being as competitive as possible and creating as much value as possible. This means that shareholders must have better access to company information and they must be given good opportunity to exercise influence at general meetings.
The role of the stakeholders and their importance to the company: another aspect of good corporate governance is that the company maintains good relations with anyone affected by the company's activities. For example, this may be employees, neighbours, customers, or interest organisations. Specific initiatives include drafting policies for relevant areas such as the environment and the social area, as well as ongoing dialogue with stakeholders.
Openness and transparency: this means that the company should report and provide information about both financial aspects and supplementary aspects such as the environment, health and safety, ethics, and social responsibility. This information is necessary for dialogue with both shareholders and stakeholders.
The tasks and responsibilities of the board: the board of directors should be more systematic in taking responsibility for the company's overall strategic management, financial and managerial control of the company, and ongoing assessments of the work of the board of management. This requires more information sharing and good dialogue between the board of directors and the board of management.
The composition of the board: in order that the board of directors can carry out its duties in an appropriate manner, it is also important that the board is composed so that it possesses all the relevant knowledge and competences. Moreover it is important that the board is changed regularly and that regular assessments are carried out of the work of the board, the board of management, and cooperation between the board of directors and the board of management.
Remuneration to the directors and the managers: performance-related pay is recommended based on results so that the interests of management better correspond to those of the shareholders.
Risk management: the establishment of systems for risk management is stressed as this is a requirement for creating the knowledge necessary to manage the company.

The basic philosophy in all seven areas is that good corporate governance should secure a triple win-win situation for the company's management, shareholders, and stakeholders. Shareholders gain greater insight and more Shareholder Value. Stakeholders gain greater insight and their voice is heard by the company. The company earns goodwill from its stakeholders and is better able to raise capital from its shareholders.

5.1 The Environment and Corporate Governance

In the longer term, the success of any company depends on the sustainable development of society; economically, socially, and environmentally. Companies need society in order to have access to resources, potential markets, and goodwill - or a "license to operate". Corporate Governance is therefore also about the fact that companies must manage their environmental responsibilities in such a way that they maintain their opportunities to exist and expand their activities.

The Nørby Committee describes this observation as follows (page 37):

"In its decision-making and dispositions, company management must work to create long-term value added in the interests of the company and the shareholders. However, it is not enough that management focus exclusively on the interests of the shareholders. Safeguarding the interests of the shareholders is best taken care of through including consideration of other stakeholders to an appropriate degree."

Corporate Governance does not necessarily mean that environmental work should be afforded higher priority by the company. However, it does mean that senior management is clear about the existing level of environmental work and manages the company on the basis of knowledge about the opportunities and risks rather than acting on the basis of 'gut feeling'.

The Nørby Committee report mentions the environment as a parameter to be taken into account in connection with relations with stakeholders (area II), company reporting (area III) and the company's risk management (area VII). But this report shows that the environment is also connected with Shareholder Value. Therefore there is a direct connection to the interests of shareholders (area I). As the environment is an area significant for shareholders, stakeholders, and risk management, it must also be part of the work of the board of directors on strategic management (area IV). This requires the board having competence in managing environmental conditions (area V). Furthermore, environmental results can also be part of goal setting in performance pay (area VI).

These relationships will be further analysed and described in chapter 14 in which the three elements of Environment, Shareholder Value and Corporate Governance are integrated.

Footnotes

[1] The Nørby Committee was set up on 2 March 2001 by the Minister for Business and Industry at that time, Ole Stavad. The job of the committee was to assess the need for recommendations on corporate governance in Denmark and make proposals for such recommendations, if necessary. The result of this work was the Nørby Committee's report on Corporate Governance in Denmark, with recommendations for good corporate governance in Denmark. The Committee was composed of Lars Nørby Johansen (chairman), Jørgen Lindegaard, Waldemar Schmidt and Mads Øvlisen. In December 2003 the Copenhagen Stock Exchange's Committee on corporate governance published its proposals for adjustments to the recommendations for corporate governance. These proposals have no effect on the contents of this report on the Environmental Shareholder Value.