The Era of Accelerated Governance “Visualization”
In 2024, ISS STOXX added the “Governance Quality Score” to its corporate ratings. This new metric quantifies and evaluates a company’s governance structure.
Many business owners think, “We’re an SME, so scores don’t matter.” However, this trend has implications that SMEs cannot ignore.
Why? Because if financial institutions and business partners start referencing this score, it could directly impact loan terms and business conditions. In fact, with ESG assessments now widespread, the entire supply chain is being asked about the quality of its governance.
This article deciphers the essence of the “Governance Quality Score” and considers how SMEs should leverage it.
The True Meaning of Scoring: It’s Not About Being Evaluated
Many executives tend to think, “What should we do to raise our score?” But this misses the point.
ISS STOXX’s score evaluates elements like:
- Board composition and independence
- Protection of shareholder rights
- Transparent information disclosure
- Risk management systems
These are standards designed for large corporations. Trying to apply them directly to an SME could create an excessive burden.
So, how should SMEs approach this?
The answer is not “to raise the score,” but “to design governance that fits your company’s business purpose.”
The score is merely a tool for “visualization.” How you use it is where a manager’s skill truly shines.
“Realistic Governance” Required for SMEs
The governance needs of large corporations and SMEs are fundamentally different.
For large companies, the top priority is “preventing scandals.” For SMEs, it’s “growing the business.”
For example, increasing outside directors to enhance board independence is effective for large firms. However, for an SME, it risks slowing down management decisions.
The key is to determine “which governance elements contribute to our company’s growth.”
Specifically, consider this order of priority:
- Transparency in decision-making (Is it clear who made a decision and why?)
- Visualization of risks (Is it clear which risks to take and which to avoid?)
- Scope of information disclosure (What information do we share with partners and financial institutions?)
If you cover these, the score will naturally follow.
The Relationship Between AI Investment and Governance: Lessons from Mythos
An article in the Nikkei, “Japan’s AI, Lessons from ‘Mythos’,” cuts to the heart of governance.
As the headline “Without investment, there can be no governance” suggests, upfront investment is essential for utilizing AI. However, many SMEs postpone AI adoption due to cost concerns.
Here, we need to consider the relationship between “investment” and “governance.”
Governance isn’t about following rules. It’s about strategically arranging rules related to legal, accounting, and tax matters from an overall optimization perspective to achieve business goals.
The same applies to AI investment. Introducing AI requires new governance structures, such as data management protocols and ethical standards.
Conversely, introducing AI without designing governance can expose you to risks.
For instance, if AI mishandles customer data, it could violate the Personal Information Protection Law. This stems from a lack of governance.
The lesson from Mythos isn’t limited to AI. Whenever you start a new technology or business, you must design the governance for it.
“Governance Investments” SMEs Can Make Right Now
Of course, large-scale investments are difficult for SMEs. So, here are some realistic investment methods.
First, start with “organizing information.”
Map out your business processes and visualize where risks lie. This alone is the first step toward good governance.
Next, set priorities.
For example, check items like these:
- Are contracts with business partners up to date?
- Do employee work regulations comply with the law?
- Is data backed up regularly?
These can be improved without significant cost.
Then, keep a “record” of the improvements you make. This serves as evidence to boost your score.
How to Turn the Score into a “Compass for Management”
Finally, here are specific ways to use the Governance Quality Score in your management.
The key point is “don’t make the score your goal.”
The score is just an indicator of your current state. If you make it your goal, you’ll end up with superficial measures.
Instead, think like this:
- What is our company’s business purpose?
- Which governance elements are necessary to achieve that purpose?
- Where should we start to strengthen those elements?
If you think in this order, your score will naturally rise.
For example, when launching a new business, transparency in decision-making is crucial. Clarify who selects which projects and based on what criteria.
Risk management is also necessary. Decide how many resources to allocate to the new venture and what the exit criteria will be.
If you organize these things, a low score isn’t a problem. Why? Because you have governance that fits your company.
Common Mistake: “Superficial Measures” Just to Raise the Score
A common pitfall for SMEs is taking “superficial measures” just to boost their score.
For example, appointing an outside director as a formality. It’s meaningless if they don’t play a substantive role.
Similarly, creating a compliance manual is useless if it’s not used on the ground.
What matters is the “substance.”
The score is a result, not a goal. The goal is to grow your business.
Design governance for that purpose. This is the mindset required of SME leaders.
Summary: Scoring is a Chance to “Redesign”
ISS STOXX’s Governance Quality Score is not a threat for SMEs; it’s an opportunity.
Why? Because it provides a reason to review your own governance.
Don’t obsess over raising the score. Design governance that aligns with your company’s business purpose.
As a result, if your score improves, so will the trust from financial institutions and business partners.
Start with small steps. Organize information, set priorities, and record the results of your improvements. This alone can significantly change your governance.
Use the score as a compass for your management.
(References: Nikkei “Japan’s AI, Lessons from ‘Mythos’: Without Investment, No Governance”; Sustainable Japan “ISS STOXX Adds ‘Governance Quality Score’ to Corporate Ratings”)
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