Governance, ethics, and compliance
Governance, ethics, and compliance tests board effectiveness, fiduciary duty, ethics programs, and the controls that make ESG claims credible.
Core rules
- The board owes fiduciary duties of care and loyalty. Independence requires no material relationship with the company. Separating chair and CEO, and having independent audit, risk, and remuneration committees, supports oversight.
- Board oversight should include strategy, risk appetite, financial and sustainability reporting, and executive remuneration. ESG-linked pay needs measurable, stretching metrics and clawback provisions.
- Ethics and compliance programs require a code, training, risk assessment, third-party due diligence, whistleblowing channels, investigation, and discipline. Anti-bribery laws such as the FCPA and UK Bribery Act have extraterritorial reach.
- Manage conflicts of interest and related-party transactions through disclosure, recusal, and approval by independent directors.
- Tax transparency and data privacy are governance issues because they involve legal, reputational, and stakeholder risk.
Worked example
A board has a combined CEO-chair, no independent audit committee, and a sustainability committee reporting only to the CEO. It links 20% of bonus to an unverified carbon-intensity target. Red flags: concentrated power, weak independent oversight, unclear escalation, and a pay metric that can be gamed. A stronger structure separates the roles, gives the audit committee independence, and sets a verified target with a malus/clawback rule. The reasoning is that governance is about authority, incentives, and verification-not the existence of a policy.
Traps
- Treating disclosure as proof of practice.
- Calling a director independent despite family or commercial ties.
- Creating an ESG committee without board authority or budget.
- Adopting a code without enforcement.
- Ignoring related-party transactions.