ESG for tech companies series (4/5): The importance of governance

Good corporate governance can help companies thrive by reflecting changing attitudes towards environmental, social, and sustainability issues.

While the three areas of ESG are interconnected, governance can act as the glue that binds them all together. In this blog, we’ll explore what governance is and why it's essential, as well as provide examples of best practices to improve in this area.

What is corporate governance?

Corporate governance refers to a company's internal structure, policies, and procedures that allow senior management, such as the board of directors, to supervise the corporation, take accountability, and ensure they uphold the corporation's key values. This can include board structure, diversity and compensation, codes of conduct, and other related factors.

Why is governance so important?

Good governance is a vital pillar of ESG reporting, not only to avoid penalties, sanctions and PR nightmares but also to reduce overall risk exposure and help businesses thrive. One of the main issues covered by governance is the company's list of priorities for its stakeholders. For tech companies, it’s common that they will go through funding rounds, which in turn increases the number of stakeholders they have – namely shareholders. For shareholders, maximising returns is the key goal, but for long-term success, there should also be other priorities that focus on the company’s value and other non-financial objectives.

What are the areas of governance that your business should practice?

In addition to the above, there are several areas of governance that your business should practice to improve its ESG credentials:

Diversity in the boardroom: Companies need to focus on appointing the right senior leaders based on merit, culture, and skillset, with a particular emphasis on gender, social, and ethnic diversity. As we covered in our last blog, diversity in tech remains a problem and this extends to c-suite roles. In the UK, the new Corporate Governance Code promotes diversity in appointments and succession plans, including measurable targets for ethnicity representation.
Ethical operations: Companies need to operate ethically and have robust procedures to prevent fraud, bribery, and corruption, and comply with anti-money laundering rules.
Executive pay: Companies should disclose or review the level of executive pay and how it relates to their duties and compares to other employees within the organisation.
Accountability: Business leaders should take accountability for the company's compliance, performance, and risk exposure, as well as upholding the values set by the board.
Reporting transparency: Companies should ensure accurate and transparent reporting to stakeholders, not just on the company's financial performance but also on non-financial performance and strategy.
Succession planning: Companies should have strong succession plans in place to ensure continuity and stability.
Data Protection: This is an often overlooked point when it comes to good governance, but crucially important for tech companies, especially so when the business models for so many relies on collecting as much data as possible. There are plenty of examples of when this can go wrong, especially in big tech (see the Facebook Cambridge Analytica scandal for example!).

What next?

In our next and final article of this five-part series, we will summarise the next steps for businesses to start reporting on ESG. To receive this in your inbox along with other tech insights, you can subscribe to our tech mailing list here. If you need support with ESG reporting within your tech business, please reach out to your usual UHY advisor or contact James Foster at j.foster@uhy-uk.com.