ESG and the Sustainable Economy - Diverse and Inclusive Businesses
While governance in the context of ESG considerations is generally focused on how a company is managed by its executives, directors, and management team, investors more focused on governance often look beyond the tone-setting thought leadership and dissect the internal system of practices, controls, and procedures companies adopt in order to govern themselves, make effective and conscious decisions, comply with the law, and meet the needs of internal and external stakeholders from the broader sustainable economy perspective. In essence, to excel in governance requires corporate behavior and leadership to master not only the letter of the law, but also the spirit of it.
Driving forces behind blue-ribbon corporate governance and behavior now stem from the companies’ employees, service providers, vendors, consumers, shareholders, non-governmental organizations, and other advocacy groups, all of which are increasingly questioning the C-suite about ESG- and sustainable economy-related issues. For example: How is the company giving back to the communities where it is located? How is the company holding itself accountable for full and honest corporate, financial, and sustainability reporting? Are the board members acting in a genuine fiduciary relationship with shareholders? Are there corporate responsibility, sustainability, or governance committees responsible for board-level accountability? Is executive compensation appropriately tied to increasing the long-term value, viability, and profitability of the business? What about ESG and sustainable economy targets? How is the company working to fix pay-equity issues based on gender, race, or other demographic factors? How does the company manage its human capital? Is health and wellness embedded into the workplace?
One of the hottest topics around governance during the last several years has been equity, diversity, and inclusion, particularly at the board level. Many businesses have embraced serious efforts to create more inclusive hiring and promotion systems, in part because of a greater agreement that equal pay is a key part of fair employment practices, which are not only essential for avoiding costly litigation, but also for recruiting and retaining a high-performing and innovative workforce. Proactive approaches taken by some companies include conducting equal pay audits, promoting salary transparency, standardizing compensation setting, and eliminating salary negotiation. The move toward equity, diversity, and inclusion increases in speed as businesses see organizations that matter to them joining the effort. For example, in December 2020, Nasdaq, Inc., which governs the Nasdaq stock exchange, proposed to the U.S. Securities and Exchange Commission (SEC) that Nasdaq be permitted to require that listed companies have at least one female board member and at least one board member who is a racial minority or self-identifies as lesbian, gay, bisexual, transgender, or queer.
In addition, many laws concerning diversity and inclusion have been enacted around the world, though these laws vary significantly depending on the enacting jurisdiction and its cultural and racial composition. For example, Sweden has required companies to promote gender equality since 2009 and has had laws otherwise seeking to combat gender discrimination for much longer, it has placed less emphasis on creating laws to combat racial and ethnic inequality. At the other end of the northern hemisphere, in 2018, the state of California passed a law mandating that public companies headquartered in California have at least one woman on their boards of directors by the end of 2019, with higher requirements of representation depending on board size. More recently, on 30 September 2020, California enacted a law requiring that, by the end of 2021, publicly held companies headquartered in the state must include members of underrepresented communities, defined as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender,” on their boards of directors.