Sustainable Expectations: how the ESG investment agenda is shifting

Investors are placing environmental, social and governance issues at the top of their agendas, and they expect companies to do the same. They are increasingly looking for companies that have adjusted the balance between short and long-term value creation to develop strategies that lean toward sustainable outcomes and provide societal good.

US investment house BlackRock has been taking a lead in this area, their CEO, Larry Fink, has written to companies reminding them that he sees his firm’s responsibility to engage and vote with them as more important than ever. He wrote “companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”

Quarterly reporting, activist shareholders and the immediacy of investor demands can combine to force directors to take decisions that, while giving a quick response to an immediate issue, might have longer-lasting consequences.

Much of this comes down to good stewardship. In the UK, the Financial Reporting Council’s Stewardship Code, first published in 2012, sets out how stewardship aims to promote the long-term success of companies so that the ultimate providers of capital—the investors—also prosper. The primary responsibility for stewardship rests with the company board, but investors also play an important role in holding the board to account over the fulfilment of its responsibilities. However, the code is directed in the first instance at institutional investors. They are expected to do more than vote; those that sign up to the code commit to meaningful engagement with companies over matters such as strategy, performance, risk, capital structure and corporate governance.

Last year, the Organisation for Economic Cooperation and Development (OECD) published an in-depth review of responsible business conduct for institutional investors, setting out key considerations for due diligence under the OECD’s guidelines for multinational enterprises. By carrying out due diligence in line with these guidelines, the OECD believes that investors will not only avoid the negative impacts of their investments on society and the environment, but will also avoid financial and reputational risks, respond to the expectations of their clients and beneficiaries, and contribute to global goals on climate and sustainable development. The OECD has commented that “Increasingly, failing to consider long-term investment value drivers, which include environmental, social and governance (ESG) issues, in investment practice is seen to be a failure of fiduciary duty”. Institutional investors are changing their own internal procedures in light of the OECD’s guidelines; they are now approaching quoted companies and saying that they can’t invest in them until they are on top of their ESG agenda. ESG is no longer a sideshow…we see certain investors really trying to make a difference.

 

This blog is an excerpt of an article, “Sustainable expectations: how the ESG investment agenda is shifting” which appears in the Spring 2018 edition of Board Agenda. The full article can be found here.

 

By Richard Karmel & Anthony Carey

A very strategic engagement: stakeholders and long-term value

Companies have always had a responsibility to their shareholders, and now that responsibility is widening to include all stakeholders – employees, customers, suppliers and regulators – as well as the impact their actions have on wider society – the environment, the local and national economy, tax policy, the local community.

Attending to the needs of all stakeholders will make an enterprise more successful in the long-term, but it’s up to boards to engage with them in a fair and open way.

Ultimately, businesses create value, but that value has to be shared across a range of stakeholders. Companies need to make a strategic allocation of that value across this range of stakeholders, and if they allocate it properly, then tomorrow they will have more value to distribute.

The board should place a strong emphasis on engaging with its stakeholders and treating them fairly, including in financial terms. The board needs to set out, in a clear statement, the nature of the relationship it will seek to develop with each of the principal stakeholders in the business.

For instance, on employee matters, the board should develop clear policies and targets with regard to diversity and inclusion, including gender and ethnic diversity in senior roles, monitor them and report on progress being made towards meeting its goals. If the values are to be seen by members of staff, in particular, as being at the heart of the business, it is essential that they are visibly ‘lived’ by board members and those in senior management positions.

The culture of the business is the glue that holds it together. There is increasing interdependency in the way we behave, and it can tip one way or another very quickly. There will either be a virtuous cycle or a vicious circle. If you get it wrong, it will destroy the business. Our values at Mazars have been engrained as part of our Board Charter below:

Mazars' Board Charter 5

This blog is an excerpt of an article, “A very strategic engagement: stakeholders and long-term value” which appears in the Winter 2018 edition of Board Agenda. The full article can be found here.

 

Evolving a corporate governance role that’s fit for purpose

Corporate governance is rarely out of the business headlines. In spite of 25 years of an evolving corporate governance framework for UK listed companies, in the wake of any high profile collapse or breach, the finger of blame inevitably tends to etch out terms such as ‘management failure’, ‘domineering bosses’ or ‘toxic company culture’.

The UK’s FRC has published proposals for a streamlined Combined Code. One of the FRC’s key considerations was to attain an appropriate balance between principles, provisions and guidance, while retaining the Combined Code’s perceived strengths, particularly its ‘comply or explain’ approach.

In the UK, ‘comply or explain’ works satisfactorily as long as it is used responsibly. Among large, listed companies, most comply with provisions fully or ‘explain’ with regard to just one or two provisions. It is important when companies choose to explain that they make clear how they are applying the principle, the reason for the departure and whether it is likely to be temporary or not.

For boards to be effective, both individual and collective engagement – or how well they bring their collective experience and expertise to bear – are vital. That will include how well the board provides both challenge and support to the executive team. Perceptions of independence are important, particularly when it comes to complying with provisions within the Combined Code. However, independence of mind is really critical – board members must have the courage to ask difficult questions in a constructive manner.

Boards must make sure that they not only look good on paper, but that they operate effectively in practice. Disclosures in the annual report, should provide the starting point for effective engagement by leading investors with the board. A continually evolving corporate governance framework, with a strong focus on the stewardship code for investors as well as the national governance code, should assist in clarifying how this objective can be achieved.

This blog is an excerpt of an article “Evolving a corporate governance role that’s fit for purpose” which appears in the Winter 2018 edition of Board Agenda. The full article can be found here.

 

The importance of tone at the top in times of uncertainty

Whether a business achieves sustainable success for the benefit of its stakeholders and wider society is critically influenced both by the board’s decisions and, also very importantly, by how board members act in the boardroom.

Boardroom behaviour has a crucial impact on corporate culture since how the executive and non-executive directors treat each other reverberates across the organisation.

Four types of board culture

We have identified four different types of board culture based on a 2×2 matrix that considers the degree of support and challenge respectively that exists in the boardroom. Ideally, there will be an ‘engaged’ board with high levels of both, but alas the three other options are also found in practice and in their different ways each will hold the business back from achieving its full potential: the ‘cosy’ board with high support and low challenge; the ‘us and them’ board with low support and high challenge; and, the ‘semi-detached’ board offering neither challenge nor support.

four types of board culture

1. The ‘engaged’ board

There will be strong degrees of openness and trust between board members on an ‘engaged’ board with high-quality information made available to the board and its committees in a timely fashion. There will be no issues ‘off agenda’ and challenging situations will be discussed at an early stage of arising with the collective intelligence of the board being brought to bear in determining the best way forward. Board meetings will be well-structured with time allocated for discussion and clear decisions taken after. In addition to dealing with regular board issues, time will be set aside for an annual ‘away day’ to provide an opportunity to review progress towards achieving the longer-term strategy and to consider other issues requiring significant time for reflection and discussion. The board also needs to know when it would be helpful to have external advice to assist in making decisions possibly, for instance, on issues related to cyber security or wider aspects of technology.

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Two cheers for Green Paper on Corporate Governance Reform

Two cheers for the Government’s Green Paper on Corporate Governance Reform published last week. The first is for indicating that ‘we need to support strong businesses that focus on long-term value creation and command public confidence and respect’.The second is for focusing on strengthening the employee, customer and wider stakeholder voice in a relatively broad and open-minded way and moving away from the idea of compulsory employee directors just as it has implicitly accepted that there are no silver bullets when it comes to addressing the vexed issue of executive remuneration.

The missing cheer is because it has not grasped the opportunity to take a thorough look at how changes in corporate governance and investor stewardship could help facilitate a real drive by UK listed companies towards striving for long-term sustainable success which brings benefits to all their stakeholders and wider society. (more…)

Thriving, not just surviving, in turbulent times

We should always be cautious in saying we are living through periods of unprecedented change. At this time of year one is very conscious that in the 20th century there were two world wars but there can be little doubt that historians will look back on 2016 as a year of major political change in the Western World that was not generally foreseen and the full political and economic outcomes of which will not be known for some time yet.

So, what are the implications for boards of listed companies and other significant businesses? (more…)