How good governance boosts the bottom line
Good governance pays.
That’s the message an expert on corporate governance and sustainability relayed to representatives of some of the world’s largest companies at the COMMIT!Forum in New York City last week.
“Sound governance is a key element of sustainability," said Margie Flynn, principal of BrownFlynn, a responsible business strategy consultancy. "It correlates with stock value and contributes to a company’s reputation, which comprises a large percentage of the intangible assets of business value today." Her comments kicked off an in-depth look at governance and reporting practices.
Representatives from Lockheed Martin, Cocoa Cola, Monsanto, ING, State Street and other corporations learned the ins and outs of the current Global Reporting Initiative G3.1 governance-related guidelines and got a preview of proposed changes in the G4 Exposure draft.
Why Governance Matters
Flynn made two key points about the importance of sustainability to a business's bottom line.
First: A culture of sustainability (which includes an emphasis on strong governance) correlates closely with strong business performance.
Recent research supports this observation. High sustainability corporations -- those that voluntarily adopted environmental and social policies two decades ago -- "exhibit fundamentally different characteristics than firms that adopted almost none of these policies," according to research published by Harvard Business School.
The study found that the boards of directors of these companies were more likely to be responsible for sustainability, and incentives for top executives were more likely to be linked to sustainability metrics. Beyond that, these companies were "more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information."
The payoff: These high sustainability companies "significantly outperform(ed) their counterparts over the long-term, both in terms of stock market and accounting performance."
KPMG found similar results in its most recent study comparing the performance of companies that do and do not follow GRI, which looked at 3,400 companies representing the national leaders from 34 countries around the world, including the largest 250 global companies based on the Fortune Global 500 ranking. The study assessed companies on five elements:
• Assurance, both level and scope
• Multiple channel communications
• Use of GRI standards (which includes governance)
• Integrated reporting
What KPMG dubbed "Leaders of the Pack" demonstrated the highest quality of communications and level of process maturity, which includes governance, controls and process. Still, the study showed plenty of room for improvement: 35 percent of G250 companies and 40 percent of N100 companies do not currently include information on CR governance or control mechanisms in their CR reports.
KPMG’s prediction: It will become increasingly important for organizations to build a framework of CR processes, information systems, controls and governance on par with those already in place to support financial reporting.
Flynn's second point: Governance correlates with stock value.
Firms with weaker governance perform more poorly, are less profitable, have lower dividends, and are more risky than firms with better governance, according to a study conducted by Georgia State University for Institutional Shareholder Services.
Many investors already know this, which is why they care about governance. The word "sustainability" doesn’t carry much weight with them; they’re more interested in data on ESG (environmental, social and governance) performance and gravitate toward companies that demonstrated leadership in these areas. This preference for well-managed firms is even stronger among investors more focused on the long-term, such as pension fund managers.
Investment managers can track this information with increasing ease, now that ESG data is accessible with a click of key from the Bloomberg computer terminals located on more than 250,000 analysts’ desks worldwide. Much of this ESG data comes from publicly available sources such as -- yes, sustainability reports, annual reports and 10-Ks.
Good Information on Good Governance
Finally, here’s a tip for keeping up to speed on critical governance issues as they relate to sustainability. Executive Director of the GRI U.S. Focal Point, Mike Wallace, recommends checking out the Ceres website for the latest on governance issues. While you’re there, check out The Road to 2020, Ceres’s progress report showing how 600 U.S. companies are performing compared to the expectations set out in The 21st Century Corporation: The Ceres Roadmap for Sustainability. The first three chapters of that report focus on the sustainability strategies that drive accountability throughout a corporation: governance, stakeholder engagement and disclosure.