The international standard-setter launches into the debate on corporate governance

An international standards body has worked to push companies to move beyond traditional ideas of good governance to include models that are more respectful of the environment and society.

The International Organization for Standardization, a non-governmental group that has set common requirements for everything from how food is harvested to the symbols that should appear on a car’s dashboard, last week released its first good governance framework, or the system by which companies are directed and controlled.

While there are many competing best practices, the Geneva-based ISO governance framework is unique as it represents the result of a consensus process involving more than 70 countries, according to experts involved in creating the standard. .

The standard, which aims to provide a common language that will transcend national borders, comes amid growing concerns about climate change and investor emphasis on sustainability.

The evolution of ideas of good governance has been linked to a debate on the role that business plays in society. In recent years, business leaders have moved away from the decades-old theory, championed by economist Milton Friedman, that the sole purpose of a business is to maximize shareholder value. This change was marked in part by the revision in 2019 by the Business Roundtable of its declaration on the corporate purpose. Business decision-makers should consider “all stakeholders,” including employees, customers and society at large, according to the Business Roundtable, whose members include CEOs of dozens of America’s largest companies.

The framework published by ISO echoes similar themes, defining governance as a system by which an organization is held accountable for achieving a defined goal in an ethically and accountable manner. The standard also sets out guidelines for internal controls, which include a company’s risk management system, compliance program, and financial controls.

One of the goals of the standard is to push companies to move beyond a conception of governance that is put in place simply to optimize financial results, said Victoria Hurth, member of the Institute for Sustainability Leadership. from the University of Cambridge who co-chaired a group of experts who developed the ISO standard.

“What you are seeing here is governance that really takes into account external systems and external stakeholders,” she said.

It remains to be seen what the exact influence of such a broad framework will be in the long run, independent governance experts have said. An ISO standard on anti-corruption management systems published in 2016 took a long time to gain acceptance for companies, in part because the framework did not go much beyond the principles already laid down by the US authorities. on how to comply with anti-corruption laws.

Most US state-owned companies and large multinationals already have large and sophisticated governance structures, said David Curran, head of sustainability and environment, social affairs and governance at law firm Paul, Weiss. , Rifkind, Wharton & Garrison LLP. But he said the ISO framework could help small businesses catch up with best practices and ensure some consistency internationally given the growing emphasis on governance and sustainability.

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“You can have whatever aspirations, targets, and goals you want, but to make something work in an organization of any size and complexity, you need governance mechanisms,” Curran said. “No business does anything without a policy and a procedure. “

Public companies are subject to specific laws or rules related to governance issued by regulators or stock exchanges. On the other hand, broader good governance principles such as those described by ISO can vary widely and come from interest groups like the Business Roundtable or groups like the Sustainability Accounting Standards Board that assess companies on their own. environmental, social and governance efforts, known as ESG.

While the popularity of ESG investments has led to the proliferation of related metrics to measure the sustainability of companies, the focus has been on environmental and social metrics, according to governance experts. This could mean assessing a company’s carbon emissions or the diversity of its workforce. Less attention has been paid to what constitutes good governance or how to measure it.

“We are in the midst of a real, subtle but noticeable shift in the pendulum towards more engaged corporate governance,” said Michael Peregrine, corporate governance expert and partner at McDermott Will & Emery LLP.

“I think [the ISO standard] will make a surprising contribution to the debate not only on the corporate purpose and ESG, but to the broader debate on corporate governance, ”he added.

Write to Dylan Tokar at [email protected]

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