Michael Volkov argues CCOs have to refuse leadership of ESG but dovetail their oversight with their roles in the overall governance framework. The “G” can be leveraged to build an even better corporate culture and improve governance operations.
Forgive me for going out on a limb here. But this issue is fairly obvious. A simple question:
Should the Chief Compliance Officer be responsible for the Environmental, Social and Governance function?
I have to set it up this way to give the dogmatic, binary, yes-or-no answer, and then continue to outline a more nuanced discussion of the relationship between CCO and the ESG function. My review will also outline all the ways in which a CCO can and should collaborate with the ESG function, and the reasons why such coordination is critical and logical from an internal control perspective.
So, let’s start with the basic question – and the answer is (ding) – A resounding “No.” CCOs have enough responsibilities on their respective plates. The last thing they need is to assume responsibility for a whole new set of tasks, controls, reporting obligations and international ESG regulations mandating disclosure and substantive requirements.
No, CCOs Should Not Take Responsibility for ESG
This is not just a simple risk of “mission creep.” To the contrary, the risk to CCOs, while attractive in concept, would be devastating in reality. CCOs have a lot of work to do. At the outset, they are stewards of a company’s corporate culture, as directed by ethics and compliance standards, the Justice Department, Treasury Department and other regulatory agencies. It is one thing to craft a set of compliance policies and procedures, ensure efficient operation of such controls, manage employee reporting systems, internal investigations, training and financial/compliance functions. It is quite another when you add on CCOs’ responsibilities for a company’s corporate culture.
— Michael Volkov (@mikevolkov20) June 16, 2021
A company’s corporate culture is its lifeblood. Studies have estimated that a company’s culture, hence its reputational value, equals approximately 30 to 40 percent of its stock value (if a public company). A company’s culture is basically its most important intangible asset.
To put it bluntly, compliance has more than enough to do. The last thing it needs is a new and critical mission. If CCOs somehow are pushed to expand their portfolio to include ESG, they should resist and do so with all their might.
Having Said That …
Having said all that (see Curb Your Enthusiasm routine between Larry and Jerry on this topic), by definition, CCOs play an important role in the company’s governance structure, and hence, are an integral player in the “G” of ESG. Even more important, however, is that CCOs are an important partner beyond the Governance element to the ESG function.
As stewards of the company’s culture, CCOs bring important perspective, resources and strategies to the overall ESG function. A company’s culture permeates every aspect of ESG, and CCOs should be given a seat at the ESG table.
CCOs have several other important attributes important to the ESFG function. CCOs have an expertise in providing a “line-of- sight” across the organization, and the compliance function is familiar with the process of embedding culture and compliance values and functions in the company’s business operations.
The design and implementation of an ESG function throughout a company bears a striking resemblance to the compliance function – the program has to be defined with the support and direction of the board and senior management; the ESG program has to include specific policies and procedures for implementing the ESG requirements; ESG performance has to be defined, measured and reported; and the company’s senior management has to be held accountable for oversight, monitoring and reporting of the company’s ESG program.
After reading this last part, some may question my initial position – CCOs have no business assuming responsibility for a company’s ESG program. While there are striking similarities in design and function between compliance and ESG programs, CCOs have to refuse the temptation, avoid the overwhelming responsibilities, and protect themselves from being dragged into such a significant challenge.
In the end, CCOs have to use ESG to leverage their own roles in the overall governance framework, dedicate time and effort to the ESG initiative as a CCO, and use the “G” framework to build an even better corporate culture and improved governance operations to advance the company’s mission.
This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.