Modern companies have evolved into complex undertakings with greater far-reaching impact and influence on society than their earlier counterparts in previous periods.

In those early days, the structures and processes associated with the control, decision-making and management of companies were purely centred on the maximisation of company profits for the benefit of shareholders, with little to no regard for the interests of other stakeholders such as the employees, creditors/lenders, regulators, host communities and the environment itself.

As history has shown us, a model where companies are driven only by maximising shareholders’ immediate returns at the expense of other key stakeholders, results in the risk of less attention and investment being directed to areas such as the environment, and the health and safety of employees and host communities.

Many global industrial disasters that have caused significant health, economic or environmental damage are often attributable to such risks.

Cases in point are the Deepwater Horizon oil spill, which is regarded as one of the largest environmental disasters in American history, and Brazil’s Doce River disaster, in which a mine dam holding back waste water from an iron ore mine collapsed, sending 60 million cubic meters of iron waste into the Doce River.

In this regard, an approach where corporates only pursue returns for shareholders is not sustainable and ultimately leads to the detriment of the shareholders themselves. This is so because the long-term prosperity of a corporate requires an appropriate investment towards the interests of other stakeholders and the environment in which the corporate operates.

As an alternative to the shareholder supremacy approach, there’s the stakeholder-inclusive approach which takes the position that the purpose of the company is to operate for all material stakeholders (not only shareholders), such as employees, customers, suppliers, creditors and society at large.

Shareholder value

This is known as the “enlightened shareholder value approach” which requires that the maximisation of shareholder value in the long term be counterbalanced by taking proper account of wider objectives, including the interests of other stakeholders, like mining communities, who are central to the continued and sustainable long-term prosperity of the company.

Put differently, this approach requires companies to recognise that in order for there to be long-term prosperity for the company and its stakeholders, the company must, of necessity, promote the interests of all stakeholders. This includes investing in the safety and wellbeing of employees, promoting the welfare of the community, and protecting the environment in which the company operates.

In the United Kingdom, the enlightened shareholder value approach has somewhat been embraced through legislative reform, as indicated in the UK Companies Act of 2006. This provides that a director of a company must act in the way they consider the most likely to promote the success of the company for the benefit of its shareholders as a whole, and in doing so, have regard to:

• The likely consequences of any decision in the long term;
• The interests of the company’s employees;
• The need to foster the company’s business relationships with suppliers, customers and others; and
• The impact of the company’s operations on the community and the environment.

Environmental, social and governance (ESG) advocacy is part of the shift in corporate law and is a corporate governance system that seeks to promote good corporate citizenship and recognition that a company is an integral part of the broader society in which it operates.

In this regard, considerations relating to the environment include conscious natural resource management, pollution and climate change impacts.

Considerations relating to social aspects of ESG include the protection and promotion of good societal values such as human rights, health and safety as well as stakeholder and community engagement.

Last, considerations relating to governance include;

• The adoption of a good governance framework;
• Promoting diversity and inclusivity;
• Ensuring adequate financial and corporate reporting;
• Adopting measures for anti-bribery and corruption;
• Anti-money laundering;
• Ensuring accountability for directors and officers; and
• Risk management and oversight.

ESG is gaining formal and legal recognition in certain jurisdictions such as the United States. For instance, as recently as May 2022, the US Securities and Exchange Commission proposed rules and reform amendments that, if adopted, would require specific additional disclosures regarding ESG practices for certain registered investment advisors and companies.

In the South African context, ESG should not only be a buzzword or be reduced to a mere box-ticking exercise. Rather, ESG ought to be concretised and infused into South African corporate culture. This will require a genuine buy-in and recognition by companies that ESG is not only a compliance practice, but is in fact good for the long-term prospects of the business.

Visit Daily Maverick’s home page for more news, analysis and investigations

In addition, all other stakeholders in the business community (including financial institutions, exchanges, regulators and government agencies) need to actively assess and measure the adoption and implementation of an impact-driven ESG framework by the companies in which they invest, lend or grant licences.

Similarly, a review of an impact-driven ESG framework between company-to-company for procurement purposes will also be critical to drive the adoption of ESG as a value system.

The adoption and implementation of an impact-driven ESG framework as suggested, will go a long way to transform the South African corporate landscape and minimise industrial disasters such as that at Jagersfontein. DM

Isaac Fenyane is an executive in the Corporate Commercial Department of law firm ENSafrica. Thato Tomotomo is senior associate in the department.