For those who have been thinking that assessing a company's environmental, social, and corporate governance factors (ESG) is simply fluff, heed the lessons of Volkswagen. According to Howard Sherman, head of corporate governance business development at MSCI, "We have had concerns about VW for some time. [The carmaker's] corporate governance score [on an MSCI proprietary ranking] was already in the 28th percentile, which means it was lower than 72 per cent of companies globally." (VW Investors Ignored Corporate Governance Warnings, Financial Times, 9/27/15)
We've seen a variation on this story before. A contrite Andrew Fastow, the former chief financial officer of Enron Corp., explained to the Canadian Society of Corporate Secretaries in August how Enron's board signed off on his schemes. "[Fastow] said members failed to consider the moral implications or the company's own long-term interests - an attitude that exists at most corporate boards." (Former Enron Executive Speaks of Convictions, Offers Business Advice, The Globe and Mail, August 18, 2015) Fastow pleaded guilty to two counts of conspiracy and spent more than five years in prison for securities fraud.
- You can make a fairly good determination of whether a company is well governed and well managed. Based on my research of dozens of companies for A Better World, Inc.: How Companies Profit by Solving Global Problems (Palgrave Macmillan, 2014), there are the three core questions--related to board focus, stakeholder engagement, and partnerships--I recommend asking to make your assessment (Huffington Post, 8/2/14). Smart investors also subscribe to MSCI's ESG research, ratings, and analysis, which did in fact show red flags for Volkswagen.
- Companies can build better boards for more effective oversight and also to grow value in today's changing marketplace.
- Here's advice on how to grow value by focusing the board of directors' attention on innovation and global problem-solving: Better Boards for a Better World (Directors & Boards, 2015)
- Here's advice on refreshing your board with people with more relevant and diverse experience and expertise: How to Double Your Company's Profits: Begin by Refreshing Your Company's Board of Directors (Huffington Post, 4/14/14)
Those boards which fail to exert proper oversight and address the demands of a changing marketplace are dooming their companies and their investors. Opportunities abound for companies and boards that grow value by finding solutions to global problems.