Internal Sustainability-Related Codes and Policies

Effective sustainability governance and management requires a structure through which the objectives of the company are set, the means of attaining those objectives and monitoring performance are determined, and the company and its people are held accountable.[1]  In order for their governance procedures to be effective, companies must establish and maintain the appropriate “control environment” (i.e., the mindset and philosophy that drives decisions and attitudes throughout the organization).  One of the first steps in establishing the appropriate control environment is the adoption and dissemination of internal governance codes, policies and procedures, which are consistent with the long-standing regulatory approach to corporate governance, sustainability and corporate social responsibility (“CSR”) based largely on voluntary codes and self-regulation.  These instruments provide guidance to everyone inside and outside the company about the principles that should be applied when decisions are made about strategy and operational matters; however, they must be more than just words on paper and the directors and executive officers of the company must commit to support and enforce them.  Companies must also be prepared to regularly report to all of their stakeholders on the effectiveness of the instruments and the steps that have been taken to put them into practice.

The scope and contents of a company’s internal governance codes, policies and procedures will be strongly influenced by whether or not the company’s securities are listed on public securities exchanges, which have adopted stringent requirements covering a wide range of topics; however, many of the larger private companies use the same governance instruments as public companies, often at the insistence of their stockholders and in recognition of the fact that their operations can be extensive and involve contact with a variety of different stakeholders.  At a minimum, the corporate governance instruments for public companies should include a code of business conduct for directors, officers, employees and contractors; corporate governance principles; guidelines for director qualifications and evaluations; in situations where the board has appointed a “lead independent director”, a description of the duties and responsibilities associated with that role; a code of ethics for directors and the company’s chief executive and senior financial officers; and charters for each of the committees established by the board (e.g., audit, governance and nominating and compensation committees).

The principles and specific guidelines in each of the corporate governance instruments referenced above are essential for effective sustainability governance and management and reference should be made to extensive guidance and commentaries on each of them that is readily available from the securities exchanges, regulators and other sources.[2]  In this article, attention is placed on codes, policies and other communications specifically focused on topics that are foundational to sustainability-related management topics.  For example, codes of conduct and ethics should include sustainability commitments that are supported by a related instrument that lays out in detail the company’s adoption and commitment to overriding principles of corporate responsibility.  A supplier code of conduct should also be implemented to provide guidance on overseeing the actions of supply chain partners with respect to key sustainability issues such as working conditions and environmental and community impacts and demonstrate commitment to sustainability across the value chain and comply with emerging disclosure and reporting requirements (e.g., California Transparency in Supply Chains Act).  Companies often supplement their corporate governance principles and ethics codes with additional policies on specific topics and issues beyond those mentioned in this article.  For example, the board of directors, either directly or through the lead of one of its committees, may implement policies relating to work environment and human resources, human rights, social responsibility, political contributions, anti-bribery, conflicts of interest, health and safety practices and/or stakeholder engagement and community development.  In addition, companies often adopt statements of mission, purpose and values to provide context for the various governance and sustainability instruments.[3]

Code of Conduct

Adopting and adhering to ethical behavior is a core principle and characteristic of a sustainable business and the foundation of any sustainable governance and management framework is a code of conduct that sets the basic internal standards to be observed by all directors, officers, employees and contractors of the company in order to establish, maintain and strengthen the business ethics and compliance systems throughout the company.  The code of conduct is intended to serve as a guide for everyone acting on behalf of the company to make good decisions and conduct business ethically.  In addition to legal and regulatory compliance standards, the code of conduct should also state the company’s intention to engage in ethical business practices with respect to such areas as labor standards, respect for human rights, safety of products and services, environmental conservation and information disclosure, all subjects that may be addressed in greater detail in separate, yet related, principles of corporate responsibility discussed below.

Principles of Corporate Responsibility

In general, the topics that are typically covered in the code of conduct described above are primarily focused on compliance with existing laws and regulations as opposed to the “beyond the law” standards and aspirations associated with sustainability and CSR.  There are obviously very good reasons, notably the requirements of the US Sentencing Guidelines and the securities exchanges, for having such a code of conduct; however, more and more companies are supplementing those codes by laying out a set of principles necessary for them to operate as responsible companies which include, at a high level, the company’s corporate responsibility policies and operating guidelines related to stakeholder relations and otherwise acting as a responsible business.[4]  There is no “standard” for the contents of the principles of corporate responsibility, and variations are likely due to size of operations and factors unique to the sectors in which the company operations; however, the principles generally should address, at a minimum, legal compliance, financial responsibility, fair competition, prohibitions on bribery and corruption, conflicts of interest, customer relationships, supply chain relationships, workplace conditions and employee wellbeing, environmental responsibility and community relations; environmental policies; human resources policies and principles of responsible purchasing.[5]  In many cases, the code will incorporate by reference applicable principles from external standards and instruments such as the International Labor Organization’s core labor standards, the principles of the United Nations Global Compact and/or the Universal Declaration of Human Rights.

Suppliers’ Code of Conduct

Few companies are self-sufficient—able to create all the resources needed for their products and services and distribute them on their own and provide support to customers without the assistance of others.  As such, companies are typically dependent on the members of their supply chain, many of which operate in different legal and cultural environments throughout the world.  Companies striving to be environmentally and socially responsible must commit to ensuring that all of their suppliers and their facilities adhere to the same standards that the company has set for itself in its internal code of business conduct.  In turn, each supplier must also guarantee to the company that it will hold their own supply chain, including subcontractors and third party labor agencies, to the same high standards.  All of this means that companies should adopt and meticulously enforce a strong suppliers’ code of conduct which is tightly and formally linked to the legal contracts which form the basis for the relationship between the company and its suppliers.  Perhaps the most common and significant topic in a suppliers’ code of conduct is human rights and labor practices and suppliers should also be required to submit to compliance audits, maintained specified books and records, adhere to the principles in the company’s own code of conduct and create and maintain reporting systems (and accompanying protection for whistleblowers) that can be used to report violations of laws, regulations or any of the company’s codes of conduct and related policies.[6]

Environmental Policy

Formal laws and regulations pertaining to environmental issues have become a fixture and companies have experience in understanding and complying with requirements that have been imposed by legislators and regulators.  In fact, compliance with environmental laws and regulations is an important part of any company’s compliance and risk management activities.  However, sustainability and environmental responsibility calls on companies to take additional voluntary steps toward caring for and safeguarding the environment and balancing environmental considerations with successful pursuit of the company’s business goals.  One important step is the thoughtful development and adoption of an environmental policy.  Companies can face a variety of environmental challenges and a specific policy should take into account the unique issues raised by the company’s operational activities.  Development of an environmental policy should begin with an audit and assessment of the environmental impact of the company’s activities throughout its own operations and those of its major supply chain partners.  The results of this assessment can be used to develop an environmental strategy and establish benchmarks for measuring progress against internal goals and the performance of peer companies in the industry.  The policy itself should identify and describe the key goals and objectives and the strategies that the company intends to undertake with respect thereto.  In addition to environmental policies, companies may also promulgate issue-specific policies covering topics such as climate change.

CSR Manual

The principles of corporate responsibility and the various policies described above are often accompanied by and integrated within a comprehensive CSR manual or handbook.  Typical elements of a CSR manual would include an introduction, which would provide an overview of the purposes and contents of the manual and a message from the chairperson of the board of directors and/or managing director/CEO of the company; a lengthy section that include chapters or parts on each of the core subjects of the CSR with respect to the company such as corporate governance, staff welfare and human rights, labor practices, the environment, fair operating practice, consumer issues, supply chain partner relationships and community involvement and development; a section that describes how the company will engage with each of its key stakeholder groups; a section that describes how CSR performance will be monitored, reviewed and reported on to stakeholders; and a final section that guides readers on where they can obtain additional resources regarding the company’s CSR activities and how they can ask questions and raise concerns in a manner that is safe and free from risk of retaliation.  The manual itself is often supplemented by the various issue-specific policies and procedures discussed above relating to the core subjects (e.g., environmental management systems, policies and procedures and corporate governance guidelines that address compliance with laws, ethics and bribery/corruption).

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This article is an excerpt from the author’s forthcoming book on Sustainability Management, which will be published by Routledge in late 2020.  For further information, visit the following page on the author’s Sustainable Entrepreneurship Project website: https://alangutterman.com/topics/governance-management/

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About the Author

This article was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA.  Alan is currently a partner of GCA Law Partners LLP in Mountain View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development.  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at alangutterman@gmail.com, follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet.  The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole. 

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.

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[1] http://www.governanceinstitute.com.au/knowledge-resources/governance-foundations/more-thoughts-on-governance/

[2] Further discussion of each of these corporate governance instruments by the author of this publication (including references to guidance for preparation and use of such instruments) can be found in A. Gutterman, Sustainability and Corporate Governance (New York: Routledge, 2020).

[3] For further discussion of several of these policies, see A. Gutterman, Sustainability Management (New York: Routledge, 2020).

[4] Finnish Textile & Fashion Corporate Responsibility Manual (Helsinki: Finnish Textile & Fashion, 2016), 18.

[5] Id.

[6] For further discussion of supply chain management and policies and procedures for suppliers by the author of this publication, see A. Gutterman, Business and Human Rights (Chicago: Business Law Section of the American Bar Association, Forthcoming 2021).