How does effective corporate governance create long-term value?

Effective corporate governance is essential for the promotion of sustainability by Greek companies.

The formulation of policies to address climate change is primarily the responsibility of national governments, which design and implement regulations to encourage sustainable practices, provide incentives, enforce stringent environmental standards, and enter into international agreements. However, the implementation of these policies and making meaningful progress largely depend on businesses, which are called to take up the most critical initiatives, by drastically changing the way they operate to improve their environmental footprint.

Companies should switch to renewable energy sources, improve energy efficiency, reduce greenhouse gas emissions and waste, while investing in innovation. At the same time, they should leverage their relationship with consumers to educate them on the importance of sustainable choices and encourage responsible consumption.

As the EY Long-Term Value and Corporate Governance Survey Greece 2023 shows, the promotion of value-led sustainability depends, to a great extent, on effective corporate governance.

Value-led sustainability

Our recent report, EY Sustainable Value Study Greece 2023, published in July 2023, has confirmed that businesses that take decisive climate action, do not just create more value for the planet and various stakeholders - including, among others, the society, customers, and employees - but also capture greater financial value for themselves. Companies’ green transition can lead to medium-term improvement in their revenues, by analyzing new societal needs, reducing operating costs through the use of new and less energy-intensive products and equipment, as well as reducing operational risks.

EY describes this mechanism as "value-led sustainability"; that is, sustainability resulting from policies designed with the goal of creating value for everyone – society, the planet and business. It is noteworthy that, according to the EY Sustainable Value Study Greece 2023, 45% of the respondents in Greece and 69% in Europe believe they have captured greater financial value from their climate initiatives than expected.

The EY Long-Term Value and Corporate Governance Survey Greece 2023, which recorded the views of 100 top executives and members of the boards of directors (BoD) of Greek companies, also confirms this optimistic outlook. Seventy-two percent of respondents state that the capital investments they have made so far in executing their ESG strategy have delivered positive financial impact, reflected in their revenues or profits. An impressive 92%, indicate that they intend to increase these investments over the next 12 months.

Companies, therefore, need to approach their transition to this new model not as a threat but as an opportunity. This realization does not negate the need to balance long-term sustainability investments with the organization's short-term goals, an issue on which there will always be different opinions and approaches among stakeholders. As this survey highlights, the alignment of these differing viewpoints inevitably creates tensions.

Ninety-three percent of the participants observe significant differences of opinion within their leadership team, on how to balance short-term considerations with long-term investments and sustainability. At the same time, 87% report pressures for short-term profits from investors.

Resolving these differences and aligning priorities, requires effective corporate governance structures.

Potential for improving Boards’ capabilities to oversee ESG practices

Greek executives participating in the study appear to be more satisfied with the effectiveness of their BoDs in relation to their climate actions, compared to participants in the rest of Europe. However, significant percentages of respondents consider their BoDs to be only "somewhat" or "not at all effective" in terms of challenging the management on its climate plans (59%), exercising board oversight on execution and progress against climate pledges (45%), and engaging with shareholders about climate plans and action (48%).

The report suggests that there is a need to define more clearly the board members' mission and responsibilities around climate change. It identifies the internal factors that impact businesses' ability to generate long-term value through a strong ESG proposition, the challenges they face, and the measures they take to fully integrate ESG into decision-making structures and processes.

For instance, only one out of four participants (27%) believes that no further changes or refinements are needed and that ESG has been fully integrated into the structure and decision-making processes of the Board. In contrast, 56% state that moderate change is needed, while 17% believe significant change is necessary.

The key takeaway from the survey is that, for businesses to fulfill their role in mitigating climate change and deliver value-led sustainability, they will need to establish systematic, accountable and authentic governance. This requires mechanisms and regulations that ensure alignment among shareholders, the boards of directors, and the management, in terms of their goals and implementation methods, substantial oversight of ESG practices, meaningful KPIs, and linking compensation policies to the organization’s progress and the achievement of specific goals.

Enhancing companies’ green transition and reinforcing corporate governance, are essential components of their overall transformation. EY in Greece actively assists Greek businesses in implementing their transformation plans, through a wide range of specialized services. In this context, the current report may help companies comprehend the challenges along their sustainability journey and implement the required changes in their corporate governance to achieve their objectives.