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ESG (Environmental, Social, and Governance) – Governance Factors – Thematic Research

Corporate governance has come to the fore as directors and executives recognize that they are responsible not just to shareholders, as in the past, but to a wide range of stakeholders. Customers, partners, employees, and communities must be considered. Regulators and non-governmental organizations command attention. Few, if any, directors or executives would argue that they have no responsibility for the environment, especially as the effects of climate change grow more evident and more dire.

Why must companies take Governance seriously?

Free-market advocate Milton Friedman once proselytized the view that corporations were responsible only to one stakeholder – its investors – and results were almost purely financial. Today that view seems almost quaint. Investors still hold significant sway, but few executives would publicly proclaim they are responsible only to investors. Instead, nearly all would acknowledge responsibility to a broader group of stakeholders. The best-run companies tend to be those that take the broadest and longest-term view of stakeholders, risks, and responsibilities.

Modern business would not survive without software – for accounting, customer relationship management (CRM), resource planning, and much more – that provides visibility and control over corporate operations. Governance is no different. Governance software can facilitate all of the points enumerated above.

What are the main factors that determine good Governance?

Corporate structure

Corporate structure is typically defined by a company’s founders. This structure is unlikely to change much until a major event, such as a listing or a new tax structure, necessitates change. Poorly designed corporate structures can cause many problems. Executives can be paid too much and workers too little. The company’s strategy can result in conflict with shareholders or other stakeholders. Regulators may be deceived or obstructed when investigating crimes. Employees may not be able to access the pensions they have been promised. Minority shareholders may be mistreated, and executives may be encouraged to value short-term profits above sustainable, long-term growth, to the detriment of other stakeholders and society as a whole.

According to ESG data aggregator Censible, BMW is a top performer incorporate integrity and corporate leadership diversity. The company has doubled its number of female managers since 2011. Its UK subsidiary annually discloses its gender pay gap, which in 2019–20 had a mean of 20.9% and a median of 16.1% across all levels. In the same report, the subsidiary outlines how it intends to close the gap. In 2020, the company changed its bonus structure, moving away from bonuses based on a percentage of base pay (which favors majority-male senior leadership) to an approach that aims for equal value for all employees.

Risk management

Companies that manage and mitigate risks effectively and comprehensively are more likely to remain profitable long into the future. By contrast, poor risk management exposes a business to threats ranging from natural disasters, through financial uncertainties, to legal liabilities, which could significantly jeopardize an organization’s future viability.  A governance discussion could span myriad risks. Here we highlight four types with particular implications for long-term sustainability: lack of a sustainability plan; cybersecurity breaches; lack of stakeholder engagement; and lack of employee engagement. We may add more risks at a later stage.

UPM’s sustainability plan makes it a leader in this regard. The company is a member of The Climate Pledge, reports in accordance with the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) and has set a target through the Science-Based Targets initiative (SBTi). These actions help to increase transparency and accountability, two important factors for effective action on ESG. In each area (E, S, and G), UPM has identified indicators and targets for 2030 that map to the UN Sustainable Development Goals (SDGs). 

Corruption and bribery

Corruption can take many forms, including extortion, fraud, deception, collusion, money laundering, and bribery. The most common form of bribery is kickbacks, which involve an illegal payment in exchange for services. Another widespread form is facilitation payments, where money is paid to speed up or facilitate routine actions. Widespread corruption and bribery can hinder social and economic development by diverting scarce resources away from the most economically productive activity.

AB In-Bev is an anti-corruption advocate. At the 2020 World Economic Forum, CEO Carlos Brito and leaders from Microsoft invited other CEOs to join the first anti-corruption data analytics consortium. The consortium is based on the BrewRight platform and will help participants detect and protect against corruption while maintaining good cybersecurity practices. Investigating corruption can be time-consuming and expensive and can damage a company’s reputation.

Ethics

In today’s social media-dominated world, companies with unethical practices can quickly become targets of consumer and shareholder ire. This can result in a failure to attract top talent and the loss of business. French multinational grocer Carrefour has a good track record on social responsibility, including its response to the COVID-19 crisis. Since 2006, Carrefour has measured its ESG-related performance using an index of 22 indicators. Social indicators include ensuring that 100% of the countries where it operates implement action plans on workplace health, safety, and quality of life by 2020, and disabled employees will account for 4% of total employees by 2025.

Which are the leading companies focusing on governance?

Leading companies focused on governance include BMW, BlackRock, Chipotle Mexican Grill, BP, L’Oreal, Heineken, Wirecard and Volkswagen.

Market report scope

Outlook Year

2021
Key Players BMW, BlackRock, Chipotle Mexican Grill, BP, L’Oreal, Heineken, Wirecard, Volkswagen

Scope

  • This report provides an overview of governance, which is central to GlobalData’s environmental, social, and governance (ESG) framework.
  • Our ESG framework helps CEOs identify potential risks and implement mitigating actions that can improve their company’s ESG performance.
  • It sets out the reasons why companies must take governance seriously, looks at how corporate governance can go wrong and highlights practical steps that companies can take to improve governance.
  • Taking each aspect of governance in turn, this report provides examples of companies that are leading by example, and companies that have room to improve.
  • This report describes how corporate governance has shifted as disclosure requirements have given stakeholders greater access to information. Financial disclosure reveals whether executive pay structures are equitable, for example, while other types of reporting make it harder for companies to evade responsibility for pollution and unsafe or unjust workplace practices.
  • The report also provides numerous positive and negative examples that illustrate how corporate governance is inextricably tied to results.

Key Highlights

The “shareholders first” view of corporate management drives a short-term view of governance similar to short-term views of financial markets and performance. As Andrew Johnston, professor of corporate governance at the University of Sheffield, wrote in 2020, too great an emphasis on near-term financial results drives short-term behaviors. These include stock buybacks, excessive dividends, failure to invest in productive capabilities, and inattention to the corporation’s long-term sustainability.

The result, Johnston wrote, can be a “tragedy of the horizon” no less consequential than the “tragedy of the commons,” a legal and economic concept in which individuals acting out of unregulated individual self-interest produce a result detrimental to all. In the “commons” example, shepherds lacking a shared social structure allow their sheep to eat all the grass. In Johnston’s “horizon” example, companies may soar in the short term but fail in the long run.

Reasons to Buy

  • In 2021, ESG should be the most important theme discussed in corporate boardrooms worldwide. Over the coming decade, it will transform the way that business is conducted. Customers, voters, and politicians will demand greater action is taken on environmental, social, and governance issues. Companies that take ESG seriously now will be better placed to succeed in the future.
  • This report will help you understand what governance is in the context of ESG, why it is important, and what your business can do to become a leader in corporate governance.

Key Players

BMW

BlackRock

Chipotle Mexican Grill

BP

L’Oreal

Heineken

Wirecard

Volkswagen

UPM-Kymmene

Lockheed Martin

Coca-Cola

Gazprom

Glovo

Geico

Carillion

AB InBev

Airbus

Odebrecht

Carrefour

Allianz

Highways England

Purdue Pharmaceuticals

Turing Pharmaceuticals

Unilever

Smurfit Kappa

International Paper

Pro-Gest

Shell

Amazon

Table of Contents

Executive summary

GlobalData’s ESG framework

Why companies must take governance seriously

The four main factors determining good governance

Timeline

Glossary

Further reading

Thematic methodology

Frequently Asked Questions

Leading companies focused on governance include BMW, BlackRock, Chipotle Mexican Grill, BP, L’Oreal, Heineken, Wirecard and Volkswagen.

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