ESG, or Environmental, Social and Governance, is a growing consideration for investors and can generate value for businesses,1 including those organized by Indigenous communities in pursuit of economic development objectives. Many of these businesses are organized by Chief and Council, as the elected government (the “Government”), who are faced with the dilemma of how much control or oversight they should maintain. Hence, the first important ESG consideration is the level of participation that Government will have in the business’ governance.
It is no secret that Government is affected by community politics, and it is common knowledge that running a community is busy work. Considering this with the potentially conflicting duties to the community and to the business, too much oversight or control by Government can result in governance challenges. These challenges include opportunities for political interference or capture, and delays in decision-making.
Political interference or capture occurs when the interest of the business is subjugated to outside interests. For example, a business may need to make a decision on a matter that will have long-term benefits but is opposed by the community because of the short-term impacts. In this situation, the Government may feel pressure from the community to veto the decision despite that it may be overall beneficial.
Delays may also occur where the Government controls decision-making. There will inevitably be instances where decisions must be made quickly, require the review of a large volume of information, or both. In these instances, decisions may be delayed for review, or made hastily without sufficient due diligence as a result of the Government balancing directorial duties with their already significant duties to the community.
The foregoing impacts the “Governance” criterion of ESG, which concerns the company’s leadership, its internal controls, practices and procedures, audits, board governance oversight and executive pay, and more.2 Good governance is necessary to make effective decisions and generate returns3 and is closely intertwined with the Social and Environmental criteria of ESG as it is the driving force for most of the decisions in those areas. Maintaining a level of independence between Government and the business will benefit each of these considerations by avoiding political influences and delays.
The foregoing is not to say that the Government should not have any oversight or influence over Indigenous businesses. In fact, Government is charged with the duty of exercising the community’s rights as shareholder and/or limited partner of the Indigenous business. With careful drafting of corporate bylaws, shareholder agreements, and partnership agreements, an Indigenous community can ensure that specific rights and terms are provided to the Government in a balance that maximizes the Governance criterion. An especially important consideration is ensuring that the board can make decisions without the Government, but that ensures regular reporting.
ESG has the potential to add value to Indigenous businesses, attract investors and may even be considered by potential business partners. When considering ESG in an Indigenous business, the first step begins with good governance. Good governance includes the implementation of proper decisions making procedures, effective administration and leadership, and board oversight. Where governance may be influenced by delays or outside community interests, or where the board may have conflicting duties, the Governance criterion of ESG is not maximized. Hence, it is important for Indigenous businesses to strike an appropriate level of independence from the Government. Though there is no fit-all approach, there are many options available to achieve this balance through good drafting of corporate bylaws, shareholder agreements, and partnership agreements.
Andrew Dusevic is an associate at McKercher LLP’s Saskatoon office practicing in the areas of Indigenous, corporate governance, regulation, natural resources and energy law.
McKercher LLP is a leading Saskatchewan law firm in the areas of emerging energy, resources and technology. Our lawyers are skillful within all related legal areas, including: Indigenous, energy, natural resource, project development, project financing, procurement, supply chain, regulatory, environmental, engagement and consolation, government relations, and M&A. For inquiries with McKercher LLP on Indigenous law or emerging energy, resources and technology contact Saskatoon-based Partner, Christopher J. Masich.
1Witold Henisz, Tim Koller & Robin Nuttall, “Five ways that ESG creates value”, McKinsey Quarterly (November 2019).
2Business Development Bank of Canada, “What is ESG and what does it mean for your business?” Environment (Blog), online: <https://www.bdc.ca/en/articles-tools/sustainability/environment/what-esg-and-what-does-mean-business>.
3Henisz, supra 1 at 1.