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Organizations have come to appreciate health, safety, security, and the environment (HSSE) as a valuable tool for increased performance. Corporate Social Responsibility (CSR) programmes enabled companies to go beyond simple compliance with the law. However, profit is still regarded as the real measure of success. This leads to a kind of double speak in which the directors are looking at revenue and profit; and everyone else is suspicious of HSE and CSR as developments to mask a company’s true goal. This is one of the challenges that boards and directors face today.
For more than 50 years, most people, many directors included, thought that it was obvious that the purpose of a company is simply to make a profit while following the prescriptions of the law. In that view, HSE (Health, Safety, and Environment) matters were to be taken into account mainly because the risks associated with HSE breaches, for example, fines, disruption in the work process, and reputation, were onerous.
Company acts around the world contain a clause that clearly states that directors need to act in the best interest of the company they are serving. Company acts expand on that point in a variety of ways, specifying a range of different aspects that directors should consider when determining what is the best interest of the organization: shareholder interests are not the only concern; people must always feature as well. But the underlying purpose was still thought to be profit.
Over the recent 20 years, it has become clear to most organizations that employee health, safety, security, and the environment (HSSE) as well as respectful treatment of other stakeholders and responsibility to society as a whole can actually lead to greater profitability and shareholder returns. Organizations with well-functioning HSE programmes have come to appreciate HSE as a valuable tool for increased performance. Corporate Social Responsibility (CSR) programmes have aligned with this perspective and enable companies to go beyond simply complying with the law. However, these expanded perspectives have not necessarily succeeded in replacing the foundational assumption: profit is still seen as the ultimate measure of success.
2,000 years ago, corporations were formed to create socially beneficial outcomes in ways that are viable over time. The world is now turning back to this original intent and there is a global shift to build on the historical roots. Companies today are expected to turn away profiting that creates or results in harm to humans or nature, and to solve meaningful problems of people and planet in profitable ways.
The modern corporate form is different in a number of ways; these differences pertain to some quite specific expectations. Corporations need to also produce sufficient returns to the providers of capital, to generate safe, meaningful work opportunities for people to earn at least a living wage; to protect and restore the natural capital on which companies rely; to sustain ethical business relationships with their suppliers; to contribute to the vibrancy of the communities in which they operate, and to contribute the functioning of societies through the payment of fair taxes. Environmental, Social, and Governance (ESG) reporting frameworks are aligned with this perspective.
One key aspect to note is that under this more modern conception, excelling in HSE is seen to be important not only because it leads to increased profits, but also because it leads to the generation of other types of value, and that is important irrespective of the level of returns to shareholders.
There is also an expansion in the legal due diligence responsibility for directors under way; such as coded in the proposed EU Corporate Sustainability Due Diligence Directive (CSDDD).
From the governance and HSE perspective, what is important to note is that the dimensions of both governance and HSE have expanded and intertwined in complementary and complex ways. This overlapping indicates the extent of a board’s duty of care, to employees, stakeholders, society and nature. This is very critical because outdated approaches will produce sub-optimal results for the company, as well as all the stakeholders, society, and nature.
There are a number of management system and HSE specific standards to be followed for good practice. From the perspective of governance, ISO 37000 is the global benchmark for good organizational governance. ISO 37000 provides guidance on how to govern in an integrated manner. One of the benefits is that this reduces complexity and costs, while enabling transparency and comparability across organizations, sectors, and countries.
All the functions of governance – direction, oversight, and accountability – are absolutely vital for an effective and efficient HSE system. In this column, we’ll highlight one key aspect of one specific governance function: the internal control system as a necessary part of effective oversight by the governing body. Accidents and losses are the consequence when oversight and internal control processes are not working as they should.
ISO 37000 gives, for the first-time ever, clarity at a global level on the nature, elements of and integration into organizations of the internal control system and the assurance processes.
Oversight by the board of the organizational performance is to ensure that intentions and expectations of the organization, its ethical behaviour and its compliance obligations are met. And in order to be oversee effectively, the board must ensure that an internal control system is implemented. The effective internal control system includes a risk management system, a compliance management system and a system of financial controls.
In order for the board to be able to conduct its oversight function effectively, it relies on timely and accurate management reports from those to whom it has delegated responsibility; as well as from direct reports and private meetings with the risk management, compliance management, and internal audit functions. In addition, boards should conduct audits through direct verification and through independent third parties.
Effective whistleblower processes and channels for feedback from employees and customers are essential parts of oversight systems.
A further essential aspect of oversight is that the governing body must assure itself of the accuracy of reports and evidence it receives, and be satisfied by the effectiveness of the internal control system.
In this way organisational performance can be assured to be consistent with governing body intentions and expectations, corrective action be taken, and the organizational purpose fulfilled.
Dr Axel Kravatzky is managing partner of Syntegra-ESG Inc., chair of TTBS/TC309 Mirror Committee, vice-chair of ISO/TC309 Governance of organizations, and the co-convenor and editor of ISO 37000 Governance of organizations – Guidance. He is currently the project leader for ISO 37006 Indicators of effective governance.