Culture, Ethics and ESG: Expanding the Scope of Governance

Corporate governance was once preoccupied with balance sheets, audit committees, and director independence. These remain essential, but the landscape has broadened. Today, boards are judged not only on financial probity but on culture, ethics, and environmental and social responsibility.

Culture is the atmosphere in which decisions are made; ethics is the compass that guides them; ESG is the framework that translates both into measurable commitments. Together they represent the expanding scope of governance—a recognition that corporations exist not in a vacuum, but in a society that grants them licence to operate.

This article, part of our governance series following Good Corporate Governance – Foundations of Trust and Accountability, explores how boards confront these new frontiers, and why culture, ethics, and ESG are now inseparable from effective governance.

Culture: The Invisible Hand of Behaviour

Culture is often called the “soft” side of governance, but it may be the hardest element to master. Formal structures can dictate reporting lines, but culture dictates behaviour when no one is watching.

The Wells Fargo scandal illustrates the point. Under pressure to meet sales targets, employees opened millions of fake accounts. On paper, controls existed; in practice, the culture rewarded misconduct. The board eventually admitted that it had underestimated how incentive systems could corrode ethics.

Volkswagen’s “Dieselgate” crisis offered another example. Engineers manipulated emissions tests, reflecting a culture that prized performance and reputation over compliance. It was not that controls were absent, but that culture encouraged rule-bending in the name of corporate success.

These cases remind us: boards cannot delegate culture. They must measure it, discuss it, and shape it.

Ethics: The Compass Beyond Compliance

Ethics is governance stripped to its moral essentials. Compliance ensures legality; ethics asks whether actions are right. The distinction matters. Many of Enron’s transactions were legal in form but unethical in substance.

Boards that reduce governance to box-ticking miss the point. Ethical governance means asking:

Does this decision align with our stated values?
Would we be comfortable if this appeared on the front page of tomorrow’s newspaper?
Are we rewarding behaviours we claim to condemn?

The role of ethics committees, codes of conduct, and whistleblower protection has grown accordingly. But the ultimate safeguard is not paperwork—it is a tone at the top that makes ethics non-negotiable.

ESG: From Side Issue to Strategic Core

A decade ago, ESG was dismissed as a niche concern of socially responsible investors. Today, it is mainstream. BlackRock, State Street, and Norway’s sovereign wealth fund demand ESG disclosure. The EU’s Corporate Sustainability Reporting Directive (CSRD) mandates detailed sustainability reporting. The International Sustainability Standards Board (ISSB) now sets global baselines.

Boards can no longer treat ESG as philanthropy. Climate change, social inequality, and governance failures are material risks. The ExxonMobil battle with Engine No. 1 showed that investors will enforce ESG through board representation if necessary. ESG is not about virtue-signalling; it is about long-term viability.

Case Studies: Culture, Ethics, ESG in Action

Wells Fargo: When Incentives Turn Toxic

The Wells Fargo scandal of 2016 did not emerge from a lack of controls on paper—internal audit, compliance, and whistleblower systems all existed. What brought the bank to its knees was the perverse logic of its incentive structure. Employees were told to “cross-sell” products aggressively, and those who failed were punished. The inevitable result was millions of fake accounts opened without customer consent.
The board had reports, but culture muffled their impact. It was only when the scandal exploded publicly that directors grasped the scale of the rot. The lesson was not about forms or committees, but about the corrosive power of incentives. A culture that rewards misconduct will overwhelm even the most carefully designed control framework.

Volkswagen: Performance at Any Price

In 2015, Volkswagen’s reputation as Germany’s engineering pride was shattered by the Dieselgate scandal. Engineers had installed software to cheat emissions tests, allowing cars to pass regulatory thresholds in the lab while emitting illegal levels on the road. At the root was a culture that exalted performance and market dominance above all else. Managers understood the expectations—win global market share, prove German superiority—and compliance with emissions standards became secondary.
The result was billions in fines, criminal prosecutions, and lasting reputational damage. Dieselgate was not a technical failure but a cultural one: a board too focused on success metrics to ask whether the methods were consistent with ethics.

Danone: ESG Idealism Meets Shareholder Realism

When Emmanuel Faber became CEO of Danone, he declared that the French food giant would lead a new model of “stakeholder capitalism,” prioritising sustainability and social responsibility. For a time, investors applauded. Yet when financial performance faltered and market share slipped, patience ran out. In 2021, activist investors pressed for his removal, and the board complied.
The episode showed the limits of ESG leadership without financial results. Faber’s intentions were genuine, but his board discovered that sustainability cannot substitute for profitability. Investors may demand long-term vision, but they also expect near-term discipline. The Danone story illustrates the tension every board now faces: balancing purpose with performance.

Unilever: Purpose Under Pressure

Unilever has long positioned itself as a champion of sustainable business, weaving purpose into its brand identity. Yet its ambitious sustainability narrative faced turbulence when major acquisitions—like the attempted purchase of GSK’s consumer health division—failed to deliver strategic clarity. Critics accused the company of being “purpose-led but strategy-light.”
Here the lesson was subtle: ESG must be embedded in business fundamentals. Sustainability cannot be a decorative narrative layered over shaky strategic decisions. For Unilever, the criticism was not that ESG was irrelevant, but that it risked becoming a distraction rather than a driver. Boards must ensure that sustainability is not merely aspirational language but integrated into hard financial choices.

Measuring the Immeasurable: Culture and ESG Metrics

Boards increasingly rely on surveys, whistleblower data, exit interviews, and cultural audits to measure culture. For ESG, they turn to sustainability reporting frameworks, scenario analysis, and climate risk stress tests.

Yet measurement has limits. Culture resists quantification, and ESG metrics can be manipulated. The challenge for boards is to avoid being blinded by dashboards and to remain attentive to the human signals—employee morale, stakeholder trust, reputational standing—that reveal the true state of affairs.

The Investor’s Role: Demanding More Than Profits

Institutional investors now act as arbiters of culture and ethics. BlackRock insists companies articulate a purpose beyond profit. The Norwegian fund excludes firms violating human rights. Proxy advisors evaluate ESG disclosure alongside financial governance.

Activism has broadened: today’s shareholders do not merely demand dividends; they demand decency. This is governance as stewardship of trust, not just capital.

Challenges and Criticisms

Greenwashing: Companies may trumpet ESG credentials without substantive change.
Short-term vs. long-term: Sustainability initiatives may conflict with immediate returns.
Cultural inertia: Boards struggle to shift entrenched behaviours.
Global variation: ESG expectations differ by jurisdiction, complicating multinational governance.

Yet these criticisms underscore, rather than diminish, the need for boards to treat culture and ESG seriously. Without vigilance, cynicism fills the vacuum.

Comparative Perspectives

United States: ESG contested politically, yet investors push for disclosure; culture often litigated post-fact.
United Kingdom: The UK Corporate Governance Code now embeds culture and stakeholder dialogue as board duties.
Europe: Strong regulatory frameworks (CSRD, taxonomy) make ESG mandatory, not optional.
Asia: Governance reforms are catching up; cultural hierarchies make whistleblowing difficult but ESG investment is rising.

The Future: Governance as a Social Contract

Looking forward, the scope of governance will only expand. Cybersecurity, AI ethics, and biodiversity are next on the agenda. Boards will be asked to act not only as fiduciaries for shareholders but as stewards of society’s broader interests.

This does not mean boards must become governments. It does mean they must recognise that their legitimacy depends on the trust of stakeholders. Culture, ethics, and ESG are no longer “extras”; they are the social contract of capitalism.

Not completely about corporate governance but more on political governance philosophical way Jean-Jacques Rousseau’s Social Contract.

Conclusion: Beyond Balance Sheets

The history of governance teaches that rules and structures matter, but they are never enough. Without a culture that prizes integrity, without ethics that guide decisions, and without ESG that aligns business with society’s future, governance becomes hollow.

The boardroom of the future is not just a chamber of strategy and finance; it is the custodian of trust, ethics, and sustainability. That may sound lofty, but it is increasingly the condition for corporate survival.

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