Governance is fundamental to growth and survival

Interview with Robert Scharfe

Governance is not just one part of the ESG trio, argues ILA board member Robert Scharfe. He sees it as being fundamental to the way businesses work towards sustainability, in the fullest meaning of the term. Building strong financial, business, environmental and social foundations requires boards to take their full range of responsibilities.

“If you understand the need for your organisation to deepen its commitment to environmental and social elements, you also ultimately recognise the fundamental importance of governance as the way to make this happen,” Robert said. After nearly a decade sitting on ILA’s leadership body and a career in the financial sector, he sees clearly that strong governance practices are central to creating organisations that are both market leaders and respected corporate citizens.

Crises underline need for governance

“As a banker most of my career, I saw first-hand how the global financial crisis underlined the need for strong governance principles regarding core business activity,” he said. “The Covid crisis has had a similar effect on how we view business’ relationships with society and the planet as a whole,” he added. 

Hence when he became CEO of the Luxembourg Stock Exchange (LuxSE) in 2012 he was keen to use this role to help the development of corporate governance culture across Luxembourg’s financial sector and beyond. Thus, in the same year he was pleased to join the board of ILA, which at this stage, was still a relatively young but growing organisation. 

LuxSE governance benchmark

Establishing this formal link was particularly important as the stock exchange has a long history promoting high standards of transparency, business ethics and controls. In particular its ten corporate governance principles first published in 2003 was a landmark document. It focuses on setting out rules around board composition, professional ethics, remuneration policy and the like for publicly listed companies. Since then, the code has become a key reference text in the Grand Duchy for how boards should operate.

When sustainability started moving up the business agenda, the exchange saw the need to adjust these rules, and three years ago respect for environmental and social responsibility became one of the ten principles. Henceforth principle 9 states: “the company shall define its corporate social responsibility policy with respect, including to it those responsibilities related to social and environmental aspects. It shall set out the measures taken for its implementation of that policy and shall provide for these to be adequately published.” 

Setting the tone

Robert is an advocate of this type of soft regulatory approach. Although EU law only requires publicly listed companies to apply corporate governance codes, these norms have percolated through the entire business community in Luxembourg. “Documents such as this set the tone and create benchmarks. Boards need to justify to themselves and others why they do not meet these rules, or indeed why they do not do more,” he said.

Furthermore, for Robert establishing strong corporate principles must not be a box ticking exercise. “Good governance is not simply about applying best practice, it's a question of survival of organisations,” says Robert. “Companies that do not understand the impact of E and S – and therefore G –on their business, customers, investors and society at large are putting their business at risk.” 

ESG and diversity key

He also believes the need to embrace diversity is another major lesson from the two big 21st century crises, and that this should inform how business address future challenges. “If we are to understand the full range of social and environmental challenges when strategy is being set, then we need input from as many different backgrounds as possible,” said Robert. Different personality types will tend to gravitate towards different aspects of business life. Environmental and social considerations often require completely fresh thinking that is facilitated by diversity of gender and background.

Robert retired as LuxSE CEO this year, to be replaced by Julie Becker who is in line to replace him on the ILA board after the AGM. He will however join the Education Committee. He will focus his attention on the competences required for directorship mandates, with particular respect to ESG, while also actively promoting gender diversity. These are challenges he relishes. “The beauty of independent directorships is that they don’t have the day-to-day constraints of the executive team. They can focus on the governance of the company, and the way it behaves and that's where you can really add value for the long term,” he said. “And we should also bear in mind, that if we’re not contributing to ESG, it might hit us in the face fairly soon.”