ESG under the microscope – G for Governance
Many companies still have no idea what the acronym ESG means for them in practice. That is why we decided to bring this issue closer to you with the ESG under the microscope series. After the first part focused on the letter E for Environmental and the second part focused on the letter S for Social, we will turn our attention to evaluating corporate management.
G for Governance
The last letter in ESG represents the evaluation of corporate management. It covers supervision of the company's operations, the overall approach of management and transparency towards shareholders.
Understanding the risks and opportunities in the field of governance and management is crucial when investing, because poor management can lead to crises and declines in company value. An example of poor management is the misuse of data by Facebook or the falsification of emissions tests by Volkswagen.
What is the company's purpose?
While the earlier view of what interests should be prioritized in corporate decision-making focused primarily on maximizing shareholder returns, a more modern approach also covers benefiting customers, employees and communities. Thus, within their ESG initiatives, companies must focus not only on generating profit, but also on responsible management with a positive impact on the company's wider surroundings.
Another important topic in the field of governance is gender diversity and equality. We wrote a separate article about diversity and inclusion. Responsible shareholders demand better representation of women on company boards and in leadership positions, and equal pay.
A growing number of companies are highlighting the financial benefits of creating inclusive workplaces.
Research by S&P Global Market Intelligence found that companies with more women on boards and in leadership positions
show higher financial performance.
Compensation under control
Another element of ESG management is the supervision of executive compensation. There is already an effort to limit the growth of CEO compensation and to disclose the ratio of CEO compensation to the median compensation of the rest of the employees as part of ESG.
However, many aspects of remuneration remain unregulated, leaving boards of directors solely responsible for this key component of governance. The basis should be sufficient internal control mechanisms.
In last place
Although the G comes last in ESG, understanding it is key. The reason is primarily that risks and opportunities in the field of administration and management will become more as social and cultural attitudes develop.
In other words, more than just maximizing short-term profits will become increasingly important for investors, but also responsible management that thinks about employees, the environment and the wider group of people on whom the company's business has an impact.
Published: 19 December, 2022