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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
President
IESE Center for Corporate Governance
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