Part 3
Many companies have implemented environmental, social, and governance (“ESG”) programs over the past five to ten years. Of the three components, none is as important to in-house lawyers as “governance.” In this context, governance refers to how a company is controlled and managed, including issues involving the board of directors, management structure, accountability, ethics, compliance, and transparency.
Unlike environmental and social factors, which are primarily externally focused, governance mostly involves the internal processes of a company that influence how decisions are made and how a company conducts its business on a day-to-day basis.
For in-house lawyers, understanding and navigating the “G” in ESG is a crucial part of their job, as it involves:
- Ensuring compliance with legal requirements,
- promoting the company’s ethical standards, and
- corporate governance in general.
Today, in the third and final installment in a series of articles discussing the importance of ESG to in-house counsel, we will discuss why governance is so important and provide a guide for in-house lawyers on the key aspects of governance in the context of ESG including how to best integrate governance principles into the company’s legal and business strategy.
Jump to ↓
| Corporate governance |
| Ethics and integrity |
| Measuring governance success |
| The risks |
Corporate governance
A company’s corporate governance structure dictates:
- How decisions are made.
- Who is accountable.
- How risks are managed.
For in-house lawyers, ensuring that the company’s governance structure aligns with best practices and supports any ESG objectives is key. The board of directors is a central element of corporate governance, responsible for overseeing the company’s management and ensuring that it adheres to legal and ethical standards. In-house lawyers work to ensure that the board is equipped to provide effective oversight. Likewise, ensuring that the board has the right committees in place to address governance issues is essential. These typically include the audit committee, risk committee, and governance committees among others.
From the board comes accountability of senior executives. In-house lawyers work with, or at the direction of, the board and other parts of the company to ensure the right policies and processes are in place to catch wrongdoing and, if necessary, conduct a thorough investigation of improper (or even illegal) activity – recognizing that the in-house lawyer’s client is the company and not any one executive or individual. Likewise, they help advise on executive compensation structures that align with the company’s long-term governance goals. This may even include tying executive compensation to specific ESG targets.
Lastly, governance is fundamentally about ensuring compliance with a wide range of laws and regulations that govern corporate conduct. For in-house lawyers, keeping up with the evolving regulatory landscape surrounding corporate governance is a given. The harder part is getting your arms around the different corporate governance laws around the globe, which vary by jurisdiction.
For example, Sarbanes-Oxley Act mandates strict financial transparency and accountability measures for publicly traded companies here in the US. Many countries, including the US, have antibribery laws and sanctions programs that companies must adhere to. Some companies are now required to disclose their governance structures and practices as part of broader ESG reporting obligations (e.g., the European Union’s Corporate Sustainability Reporting Directive).
For publicly traded companies, such disclosures often appear in annual reports, proxy statements, and mandatory sustainability reports. Similarly, companies may be required to disclose how they address conflicts of interest, how whistleblower policies are implemented, and how executive compensation aligns with long-term governance goals. Ensuring that these disclosures are both legally compliant and reflective of the company’s governance philosophy is an important responsibility of the in-house legal department.
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Ethics and integrity
In-house lawyers are often tasked with developing and enforcing the company’s code of conduct, if not directly then by working hand-in-hand with the compliance office. In-house counsel should, with direction from the board and the C-Suite, help develop (and regularly update) a comprehensive code of conduct that outlines the company’s governance policies and expectations for employee behavior. The code should address important issues such as, from the above, conflicts of interest, anti-bribery, corruption, and fair business practices.
For example, policies for managing conflicts of interest among board members, executives, and other stakeholders are paramount for good governance. Governance failures related to conflicts of interest can lead to significant legal and reputational risks, so procedures that identify and address conflicts in a transparent and compliant manner are table stakes. Moreover, in-house lawyers are also responsible for ensuring that these policies are communicated effectively throughout the organization and enforced consistently. Training programs should be put in place to educate employees and management on the importance of ethical governance and to provide clear guidance on how to report unethical behavior.
In-house lawyers must develop and implement robust anti-corruption policies that comply with laws like the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act. Policies must include clear procedures for identifying and mitigating corruption risks, particularly when dealing with third parties, joint ventures, or government officials. In-house lawyers help ensure that the company has strong internal controls in place to prevent and detect corrupt activities, such as regular audits and monitoring programs.
Companies need an effective whistleblower program that allows employees to report unethical or illegal behavior without fear of retaliation. Whistleblower programs are not only an aspect of good governance but are a legal requirement under various regulatory frameworks. A strong whistleblower policy enhances transparency and helps prevent governance failures before they blow up. In-house lawyers should ensure that the whistleblower program is easily accessible, confidential, and supported by a culture that encourages ethical behavior.
Governance also involves ensuring that shareholders have an appropriate voice in the company’s decision-making processes, particularly regarding governance matters. In-house lawyers should advise on the company’s approach to shareholder engagement, ensuring opportunities to participate in discussions about governance issues, such as board elections, executive compensation, and ESG strategy. Moreover, in-house counsel should be prepared to respond to and manage shareholder activism. This requires navigating the legal and strategic challenges associated with such activity which, while potentially disruptive, requires balancing the interests of shareholders with the company’s long-term governance goals.
Measuring governance success
In the era of ESG, governance performance is increasingly being measured using specific ESG-related metrics, and in-house lawyers must be aware of these metrics to ensure that the company is meeting investor and regulatory expectations. Common governance metrics include board composition, audit committee oversight, executive accountability, and shareholder rights. In-house counsel should work with management to ensure that these metrics are tracked and reported accurately.
For many investors, the diversity and independence of the board are critical to their investment decisions. In addition, many companies subject their governance practices to third-party audits or evaluations. In-house lawyers should be involved in these audits, ensuring that governance practices are well-documented, transparent, and aligned with ESG standards.
The risks
Finally, another reason why governance is so important is that poor governance practices can expose the company to significant legal risks, including shareholder lawsuits, regulatory investigations, and reputational damage. In-house lawyers must be proactive in identifying and mitigating governance risks to protect the company from legal and financial consequences.
One of the most significant risks of poor governance is shareholder litigation. Shareholders may sue the company for failing to meet governance standards, particularly if there is a lack of transparency or accountability in decision-making processes. In-house lawyers can help ensure that the company’s governance practices are legally sound and that there are robust internal controls in place to prevent governance failures.
For in-house lawyers, the “G” in ESG is about ensuring that the company’s governance practices support its long-term sustainability, accountability, and ethical standards. It requires a proactive approach to compliance, ethics, risk management, and shareholder engagement. By integrating good governance practices into the company’s legal and business strategy, in-house counsel can help build a stronger, more resilient organization.
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