Issue #27                                                                                                April 2021
Should Boards of Directors Care About People?
by Professor Jordi Canals

The current season of annual shareholders meetings has brought about new topics in the corporate governance debate. In recent years, executive compensation has been the key theme of discussion. This year, sustainability has taken the top spot on the priorities’ list of proxy advisory firms and institutional investors.  They are right in pointing out their concerns about some risks that have material effects on the firm’s performance and value. Boards of directors need to take these considerations into account and present consistent proposals. 

As with other ESG factors, there is a race toward sustainability that may not be effective in the long term. Even if long-term goals – net to zero by 2050 – are clear, the pathway is not. Moreover, when direction is unclear, establishing intermediate goals and milestones becomes more complex. The lack of accounting standards for ESG factors is also an obstacle in this process.  Comparisons among companies and across industries are difficult to draw. The need to reach agreements at the international level in ESG standards for reporting is urgent. The outcome is that many companies try to overcome these obstacles by formally complying with long lists of factors, but without connecting the different dots. Sometimes this is almost impossible, or only with high uncertainty about the positive long-term effects of policies.

This case illustrates the recent history of ESG factors. While these have good been defined with good intentions, they have been designed essentially by institutional investors, proxy advisory firms and consultants to force companies disclose material risks, without a solid understanding of the business realities behind those lists.  The fact is that investors make the list longer every year, yet it is not clear that companies are getting to the heart of relevant issues or become more effective in solving the problems.

People management has also become a thorny issue. Until very recently, few people management policies were examined by investors and proxy advisory firms, including executive compensation or work conditions in developing countries. The concern for gender equality in management positions, compensation and careers has recently become a factor of interest. Investors have quickly defined indicators to be included under the S (Social) factors. Over the past year, the explosion racial violence cases in the U.S. has placed race discrimination among investors’ top concerns. Unfortunately, these actions seem to reveal that investors are more concerned about their own protection against some risks – reputation, lawsuits, public scorn, regulatory backlash, etc. – than a true concern for the central issue: how boards and investors asses the quality of the firm’s employees and the professional context that a company offers its own people.

It is not a small surprise to observe that in the list of S factors suggested by major institutional investors, questions related to employees are a small fraction of the total list of indicators to be disclosed. Most of these indicators refer to issues of pay discrimination by gender or race.  They are important issues. But this selection reveals that investors seem to be more concerned with formal issues than the substance of people development. Experienced CEOs point out that the fight against discrimination is necessary in many countries, but other relevant questions are: Why do people want to work in this company? How does this company attract good professionals? Why do good professionals stay in the company? Why do some professionals leave the company? What capabilities and attitudes will the company need over the next 10 years? Is it hiring people with those capabilities? What is the quality of the professional context that a company offers its own people? 

Diversity indicators are useful, but we need to reflect on the real drivers of discrimination in the workplace. Discrimination reveals that a company does not respect individuals and their dignity and identity, and an organization based on trust is simply not feasible. This is neither good for individuals, nor for the company or society at large. It is also important that good governance forces companies to consider the adoption of good practices that value each person, that create a culture of fairness and respect for each person and her contribution. In a nutshell, the people factor should not be just one more list of indicators. The P (people) factor should take center stage in corporate governance. At the risk of creating a new acronym and more confusion, ESG should be replaced by PESG.

It is true that diagnosing some of these dimensions is more complex than disclosing a list of variables, both for companies and institutional investors. Nevertheless, the long-term success of companies and their potential for value creation depend on how professional, prepared and committed their employees are. As people management experts know well, this is difficult to assess, but experience indicates that there are methodologies and tools to do this well. Unfortunately, all of them require time to understand each company and its culture. Time and people to engage with companies are prerequisites that few institutional investors are willing to commit to in order to improve company governance.

Boards of directors shouldn’t wait for institutional investors or regulators – as the SEC did in the U.S. a few months ago – to present another list of factors, even if they are presented as People factors. The Covid-19 crisis has shown once again that companies that are doing reasonably well are the ones that have been able to mobilize their own people, who are doing extraordinary things in extraordinary times. It is time that boards of directors and CEOs work on people issues with the same level of depth and professionalism as financial or strategic issues. Companies that have fantastic, committed, prepared and engaged professionals will help companies survive and succeed. Technology can be bought and capital can be raised overnight. Developing a context that attracts, develops and retains quality people is more difficult. And developing engaged people is even more complex. But these are essential factors for the firm’s long-term success. This is why boards should pay more attention to the firm’s people, even if most institutional investors don’t care much about it yet.

​​​​​Jordi Canals 
IESE Center for Corporate Governance

Corporate Governance News

The fall from favor of Danone’s purpose-driven chief
According to Financial Times’ correspondent Leila Abboud, the ousting of Emmanuel Faber underlines the challenges of pursuing profits and ESG goals… read more ​​(subscriber content)
Corporate greenwashing is all the rage. How can we stop it?
Former CEO of Unilever and cofounder and chair of IMAGINE Paul Polman raises the question about what counts as credible environmentally friendly activity versus pure PR bluster. According to Polman, sustainability standards setters could end up becoming the ultimate climate saviors, as they can establish a robust legal framework to expose superficial ESG claims and reward serious action… read more
BlackRock's Fink wants more sustainability data from private companies
BlackRock Inc Chief Executive Larry Fink on Wednesday called for more disclosure requirements for private companies as governments create new accounting standards for sustainable business areas like climate change… read more ​​​​​
After Wirecard, Germany’s Proposed Audit Overhaul Worries Finance Executives 
The German parliament’s investigation committee held a hearing in March on the Wirecard scandal. Lawmakers are working on an overhaul of the country’s accounting regulations. Proposed legislation calls for higher fines for audit firms and more oversight of regulator BaFin… read more ​​​​​
Spain has approved the Law amending the Companies Act to encourage long-term shareholder engagement at listed companies
The reform that encourages long-term shareholder engagement at listed companies has been approved and it introduces amendments in terms of corporate governance and the functioning of capital markets. Law firm Garrigues analyzes the implications of the reform… read more ​​​​​
Britain to shake up how companies are run and audited
Britain sent out proposals on Thursday to tighten corporate governance and inject more rigor and competition into audits, a combination it hopes will prevent more company collapses such as the failures of retailer BHS and builder Carillion… read more ​​​​​
What CEOs and boards need to know about shareholder activism
Proxy season is coming and no company is immune from activist campaigns. EY Americas Center for Board Matters Leader Steve Klemash and EY Americas Shareholder Activism Defense Leader David Hunker take a look at what attracts an activist investor, common activist objectives and how to be prepared for anything… read more ​​​​​

In Case You're Interested...

Global Summit on Climate Governance (recordings made available)

The four-day Global Summit of the Climate Governance Initiative took place on March 23-26 via online. Th event was co-organized by the Chapters of the Climate Governance Initiative in collaboration with the World Economic Forum. The IESE Center for Corporate Governance endorsed the event. The summit gathered world-renowned board members, regulators, experts, scholars and other corporate governance leaders to understand and come up with actions to respond to the risks and opportunities the climate emergency poses to the long-term resilience and business success of companies... watch here ​​​​​

2021 Climate Check: Business' Views on Environmental Sustainability

This Deloitte Climate Check report, informed by a global survey of 750 executives conducted in January and February 2021, evaluates business’ responses to climate change issues in the context of the coronavirus pandemic and economic downturn. Business leaders see that climate change is no longer a distant threat. Nearly 30% of executives say their organizations already feel the operational impacts of climate-related disasters and more than a quarter are facing a scarcity of resources due to climate change. However, according to this research, the pandemic has impacted corporate leaders’ ability to fight climate change… read more ​​​​​

Spring Cleaning: Time to Review Your Internal Controls

This article argues that although financial accounting controls have implications across the organization, no one has line of sight, responsibility for, or even an understanding of, the company’s entire control structure and operation. Everyone has a piece of a company’s internal controls – some more than others, as CFOs watch over a company’s financial controls, but no one in reality takes responsibility for such a massive undertaking. As a result, companies have varying policies, procedures and controls across the organization. This means that there is no consistency in the way a company defines its operations, describes its rules, or mitigates its risks… read more ​​​​​

Glasgow Climate Change Conference

The COP26 UN climate change conference set to take place in Glasgow in November 2020 was postponed due to COVID-19. Dates for a rescheduled conference in 2021, hosted in Glasgow by the UK in partnership with Italy, have been set to 1-12 November 2021. The COP26 summit will bring parties together to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change… read more ​​​​​

IESE's Recent Research on Corporate Governance 

“Alliance Governance Mechanisms in the Face of Disruption”

Journal article (March 2021)

Authors: Arne Keller, Fabrice Lumineau, Thomas Mellewigt, Africa Ariño
Journal: Organization Science
Read more

“Research on the Competitive Consequences of Common Ownership: A Methodological Critique”

Journal article (January 2021)

Authors: Azar, J., Schmalz, M. C., Tecu, I. 
Journal: The Antitrust Bulletin
Read more

“Ingka in 2020. Corporate Governance, Purpose and Transformation”

Case-study (2021)

Authors: Masclans, R., Canals, J.
Journal: IESE, SM-1698-E
Read more

IESE CCG-ECGI Corporate Governance Conference


In the context of the current shareholder vs. stakeholder debate, the IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) organized the “Can Purpose Deliver Better Corporate Governance?” Conference, which took place on October 28-30, 2020

Leading scholars together with prominent CEOs and board directors, delved into some of the pressing issues surrounding corporate purpose and governance. Over 1,900 people participated in the conference. 

The conference sessions are now available for viewing and you can download the conference report. Find all the papers and presentations on the conference website under the tab "Program & Papers". 

Upcoming Programs

Executive Program: “Mujeres en Consejos de Administración”

Date: April 12-13 and May 10-11, 2021

Location: IESE, Madrid Campus

Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 24-27, 2021

Location: IESE, Barcelona Campus

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