A fundamental issue in business and economics is the sustainability—and not merely the growth—of economic development, which crucially hinges on the socially responsible operational and investment behavior of modern corporations (Porter, 1991). There is a widespread recognition, as well as growing empirical evidence, that corporate social responsibility (CSR) can substantially contribute to social progress and stakeholder wealth, including the wealth of shareholders (e.g., Dimson, Karakas, and Li, 2012; Deng, Kang, and Low, 2013). In our paper, The Foundations of Corporate Social Responsibility, which was recently made publicly available on SSRN, we examine the forces that fundamentally steer companies to behave as good citizens in society.
Posts Tagged ‘Sustainability’
The principal corporate governance campaigns of the past decade have reached a plateau in terms of both investor commitment and implementation. These governance issues (such as majority voting, de-classifying staggered boards, eliminating super-majority votes and executive compensation excesses) are not by any means going away. Indeed, there are concerted investor-led efforts to push favored corporate governance “best practices” down the corporate chain to mid-cap and small-cap companies. However, the activist community has clearly won the policy battles surrounding these governance principles, and their “sizzle” is dissipating.
Policy stasis does not become corporate governance activism, as its very name implies. Corporate governance activists will develop new “green fields” to plow; otherwise they risk becoming irrelevant. The question is not whether corporate governance activists will move on but rather where they will go.
While there are a number of possible new foci, two stand out in particular:
Companies today are being called upon by their shareholders and other stakeholders to not only boost the bottom line, but also to help address some of the country’s most challenging problems, including those concerning economic development and the environment. While opinions differ on how responsibility should be allocated across the public and private sectors, corporate stakeholders (which typically include shareholders, employees, customers, suppliers, communities, governments and regulators) are demanding that companies recognize a broader scope of responsibility in addressing those problems. As a result, companies are increasingly working with stakeholders to understand their views and concerns on various environmental, social, corporate governance and economic issues (such issues often referred to as corporate social responsibility (“CSR”) issues) and to incorporate and address those views and concerns in the company’s strategic decision-making processes.
The Florida State Board of Administration (the “SBA”) takes steps on behalf of its participants, beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices among its equity investments in both U.S. and international capital markets. The SBA adopts and reports clearly stated, understandable, and consistent policies to guide its approach to key issues. These policies are disclosed to all clients and beneficiaries.
The SBA supports the adoption of internationally recognized governance practices for well-managed corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures that clearly explain board decisions surrounding executive compensation.
The California State Teachers’ Retirement System (CalSTRS) was established in 1913 for the benefit of California’s public school teachers. This year we celebrate our 100th anniversary serving the retirement needs of our 862,000 members and beneficiaries. The long-term nature of CalSTRS liabilities, and our responsibilities as fiduciaries to the educators of California, makes us keenly interested in governance issues that affect our investment portfolio. We expect the companies in our portfolio to be responsible stewards of our capital and we have an obligation to effectively engage those companies while balancing risks and rewards.
This year, CalSTRS published its inaugural corporate governance report to communicate our governance program priorities to the investment community. While we pursue a variety of initiatives throughout the year, our engagements focused on four main themes:
…continue reading: CalSTRS Releases First Annual Corporate Governance Report
Shareholder activists are meeting now to consider what proposals they will file for the 2014 proxy season and the results are largely in from the 2013 proxy season, with analysis coming from all the different proponent groups, the proxy advisory firms and others interested in what happened this year. Si2’s own report in August showed that the upward climb of investor support for social and environmental policy proposals continued this year, with average support hitting a record level of 21.3 percent and requests for more board and workplace diversity, sustainability reporting and corporate political activity disclosure got the highest levels of support. (More information on these overall findings and overall trends, illustrated with charts, appears here.)
One group that reports on proxy season findings is Proxy Monitor, a project of the Manhattan Institute’s Center for Legal Studies. It focuses on resolutions that go to votes at the 250 largest U.S. firms, reporting on the vote results and presenting analysis of the trends on its website. The group’s analyses of proxy season results trends have some significant blind spots that are not always apparent to the novice proxy analyst, but its reports nonetheless are widely quoted in the press. As such, they deserve some scrutiny, which this post offers. Si2 took a look at all the shareholder resolutions filed since 2010 and compared the results to the Proxy Monitor database to see precisely how PM reaches its conclusions.
Public interest groups and socially responsive investors have been for decades pushing for increased sustainability (also known as environmental, social, and governance or ESG) disclosure by public companies. Surprisingly, many mainstream investors (in the United States and worldwide) are now joining the call for better and more uniform sustainability disclosure, arguing that such disclosure is required for them to be able to make informed investment decisions. Some global stock exchanges have also thrown their support behind this campaign and the U.S. Securities and Exchange Commission (SEC) appears to be listening, too.
Shareholder activism, specifically submitting shareholder proposals to U.S. public companies for inclusion in such companies’ annual proxy statements on form DEF 14A was one of the original tools of public interest groups to compel companies to disclose and consider sustainability matters. This strategy had manifold benefits to the public interest groups, including forcing companies to focus on their sustainability issues, generating helpful written statements from the SEC in response to company no-further action letter requests to exclude these proposals from their proxies, and gaining media attention for the cause. This activism proved to be a fertile training ground for the interest groups who continue to submit various sustainability shareholder proposals, but are now focusing their sights on the next frontier, i.e., binding sustainability disclosure requirements.
While much has been published on the business case for sustainability during the last decade, businesses have been slow to adopt the green innovation and sustainability agenda. Reasons include a lack of consistency in the indicators employed by analysts, and a failure to effectively incorporate financial value drivers into the equation. This article defines a green business case model that includes seven core financial value drivers of special interest to financial analysts.
Researchers, management experts, and activists have published extensively over the last decade on the business case for sustainability. The accumulated evidence and experience makes it clear that sustainability actions do not have a negative or neutral impact on the financial performance of a business. Rather, it is a question of the degree to which sustainability actions have a positive impact on financial performance. One research overview has identified more than 60 benefits, clustered into seven overall business benefit areas.
As greater attention is paid today to integrated thinking and more sustainable business models, the link between sustainability actions and corporate financial performance remains central. However, the business case evidence collected to date has failed to have the expected scale of impact. One reason for this is the lack of consistency in indicators employed by analysts in their examination of possible cause and effect relations. Another is the gap in discipline between sustainability experts and financial officers, with each community conversing in its own language (jargon). Sustainability activists have failed to get a better grasp on corporate finance, while financial officers have failed to get a better grasp on the sustainability agenda.
All U.S. S&P 500 companies except one report some form of sustainability disclosure. This widespread reporting indeed is good news. But, isolated sustainability disclosures have proven to be of limited value to corporate management trying to improve the bottom line, and for investors seeking to gauge risk and opportunity.
New research from the Investor Responsibility Research Center Institute (IRRCi) and the Sustainable Investments Institute (Si2) – the first to benchmark the status of integrated reporting in the U.S. – finds that nearly all S&P 500 companies are failing to connect the disclosure dots. A mere seven companies are integrating financial and sustainability reporting. These trendsetters include American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines.
The study also finds companies typically are beginning to place a dollar figure on sustainability – about 74 percent of corporations. But, these disclosures frequently mention other initiatives without quantification of the benefits and costs. Also interesting is that some 44 percent of companies link executive compensation to sustainability criteria.
What’s driving increased disclosure is a combination of factors – rules, regulations, fines, and even the increased volume on the climate change debate. What’s problematic, however, is that the rules are disjointed. As a result, companies and investors don’t have a clear vision so they can factor sustainability into corporate planning and financials.
But this disorderly backdrop doesn’t mean companies lack the capability to quantify the impact of sustainability.
In a Director Note recently published, The Conference Board assesses how and to what extent social and environmental issues are integrated into the strategic agenda of the board of directors of U.S. public companies. The report is based on findings from a survey of 359 SEC-registered business corporations conducted by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext. Data are categorized and analyzed according to 22 industry groups (using their Standard Industrial Classification [SIC] codes), seven annual revenue groups (based on data received from manufacturing and nonfinancial services companies) and five asset value groups (based on data reported by financial companies, which tend to use this type of benchmarking).
The study updates a previous edition of “Sustainability in the Boardroom,” released by The Conference Board in June 2010.
The following are the main findings discussed in the study.