Anyone who’s followed the ups and mostly downs of Twitter and its mercurial CEO Elon Musk understands that the person running a company has tremendous influence on its long-term profits and sustainability. But most organizations don’t have CEOs who are as public as Musk, and investors and stakeholders can’t check their news feed for information about executive leadership and how they are running a company.
Fortunately, more than 90% of S&P 500 companies now publish environmental, social, and governance (ESG) reports, and the U.S. Securities and Exchange Commission (SEC) may soon require additional ESG reporting. Governance data, in particular, reveals how organizations are being run today and whether they are prepared to meet future challenges.
What is included in governance metrics?
Who is in the C-suite? Does the Board of Directors consist of diverse individuals? Is the company’s accounting accurate, and are its business practices ethical? What guiding principles, policies, and practices have executive leadership put in place? Governance metrics like these help stakeholders and investors assess the strength of the company, its leadership team, and their ability to manage risk.
While specific metrics may vary, companies commonly assess the following aspects of good governance practices:
- Leadership and oversight. Board of directors and leadership teams are diverse, executive compensation is aligned with industry norms, and a strong succession plan is in place.
- Fair labor practices. Company maintains pay equity, follows global human rights protocols, and complies with anti-discrimination laws.
- Risk management. Accounting procedures and financial reporting are transparent, data security and privacy are guarded, and workplace safety policies are followed.
- Business ethics. Employees abide by a code of conduct, corruption prevention safeguards are in place, and the company ensures its suppliers also follow ethical norms.
Why should companies track governance information?
The Securities and Exchange Commission and other global regulatory agencies are increasing pressure for companies to disclose ESG information such as board diversity, hiring practices, and pay equity. According to PwC, the SEC is expected to soon update its workforce – or human capital – disclosure requirements to include more of these nonfinancial metrics. There are also bottom-line advantages when organizations pay attention to governance criteria and real-world consequences when bad business practices are allowed to flourish.
In 2015, it was revealed that Volkswagen Group engineered 11 million diesel cars to fool emissions tests. While Volkswagen’s reputation and its stock price have recovered since the scandal, the company paid more than $30 billion in fines, penalties, restitution, and lawsuit settlements.
In a more recent example, Fox News is defending itself in a $1.6 billion defamation lawsuit brought by Dominion Voting Systems, accusing the network of falsely claiming the 2020 election results were inaccurate due to faulty voting machines. As part of the lawsuit, emails emerged from Fox executives urging on-air staff to stop correcting guests who were spreading the lies, because it was “bad for business.” However, the executives failed to anticipate the financial and reputational risks of their unethical behavior.
What is the link between DEI and good governance?
It’s clear how unethical behavior and poor oversight can impact an organization’s profitability, and there is growing understanding of the link between a robust diversity, equity, and inclusion (DEI) strategy and good corporate governance. Several common DEI practices demonstrate how organizations that invest in DEI can, at the same time, invest in good business practices. And, by collecting and tracking improvements in these areas, ESG managers gain important data that can be reported to stakeholders.
Increasing board diversity is one of the best ways that companies can demonstrate their commitment to ESG. Having a diverse board of directors is associated with better business outcomes as a result of stronger decision-making, faster problem-solving, and increased innovation. But improving board diversity is more than adding women or people of color to the boardroom. Diversity should include different generations, income brackets, professional skill sets, acquired experiences, and more.
A diverse board of directors is better able to provide oversight and hold executives accountable for their business decisions. When directors can provide a different perspective or alternative solution to a pressing business problem, there is less likelihood of risky executive behavior.
Because of overwhelming evidence of the power of diverse leadership, states including California and New York have begun to require public companies headquartered in their states to have a minimum number of women directors and/or at least one director from an underrepresented community. According to the American Bar Association, in 2021 there were at least ten pending shareholder derivative lawsuits alleging that a lack of board and management diversity constitutes a breach of fiduciary duty.
Pay equity is another common DEI goal, a key component of ESG reporting, and a vital piece of high-performing companies’ labor practices. When organizations equally compensate all employees who do the same work or have similar duties – regardless of race, gender, LGBTQ+ identity, or other dimension of diversity – they are more attractive to potential employees. In fact, transparency in compensation and promotion are important tools in attracting and retaining talented employees. By establishing a policy of wage equity, companies can also demonstrate to consumers, employees, and other stakeholders that leadership is committed to ethical business practices, contributing to a stronger brand reputation.
Tracking governance metrics
While there isn’t currently a consistent standard for collecting, tracking, and reporting metrics for ESG reporting, there is an increasing call for corporate transparency – from regulators as well as shareholders. ESG isn’t going away. Companies that can prove their commitment to ESG objectives with quantifiable data over time, put themselves at an advantage.
Effective DEI strategies begin with an objective, holistic assessment of a company’s strengths and weaknesses. These surveys enable companies to measure leadership diversity, pay equity and compensation transparency, and effectiveness of anti-discrimination policies and procedures. And, because they are already tracking key governance indicators, companies with strong commitments to DEI can improve and streamline their ESG reporting.
Analytics by The Diversity Movement is an AI-driven platform that enables you to track data across your enterprise and get a holistic view of your company’s DEI progress. In addition to collecting information on employee and leadership demographics, TDM Analytics also surveys attitudes and opinions about diversity, equity, belonging, and inclusion. You’ll be able to see at a glance where your efforts have been successful and where you need to improve.
