Episode Transcript
Speaker 0 00:00:00 It is early spring 2020, and employee safety is top of mind right now. This is especially the case for our healthcare, retail, grocery sanitation workers and neighbors and others. They are out every day doing the work to ensure we are comfortable, but just how comfortable and safe are they? Rumblings of walkouts are emerging. Employees are fearing for their safety as they are on the front lines when it comes to engaging with customers. Corporate leaders are working to determine how to engage in this new environment, taking into consideration worker safety measures, while also being mindful of demand for their products. Some CEOs have even cut their own salary so their teams can be taken care of from a pay perspective. Can corporate governance really make a difference in how we handle these scenarios in the future? Our guest today is Andrew Droste, board advisory specialist for the board and c e o Advisory partnership at Russell Reynolds Associates. Andrew, thank you for joining us.
Speaker 1 00:01:09 Thanks so much, Kesa. Great to be here.
Speaker 0 00:01:12 Great. So tell us, can governance play a role in ensuring safety for employees while meeting customer demand? And if so, how do you see that playing out in the future?
Speaker 1 00:01:21 Absolutely. It's a critical role of governance. Uh, typically when you're looking at it through a framework, for instance, like E, s and G, of course, standing for environmental, social, and governance, G is really one of the more important, uh, of the three acronyms there. Um, and, and I think that when you begin with g environmental and social issues, not only do they crop up, but you are then able to identify and then solve them as well. And so governance is absolutely key. We see this in the industry as well. Large institutional investors such as, for instance, gla, uh, Vanguard, BlackRock, state Street, um, most, when they're engaging with companies, they, they do, uh, implore them to start with the G because if you don't start with the G, at least from the management perspective and or the board oversight perspective, those issues cannot be identified at an early enough point to which then you need to solve them for a crisis like this. And so we will see a lot of companies, I think, in this day and age, either they will meet that, uh, criteria, uh, from a governance standpoint, or they won't, we'll be able to see whether or not these companies are actually solving for the issues that were there all along.
Speaker 0 00:02:42 Hmm, great point. You talk about some of the institutional investors and just coming from their point of view, what should they look for a governance team to do? If I'm an institutional investor, what in my mind is the role of a governance team at a firm, and how can I engage them better? When I'm looking at the current environment that we're looking at now, what's the best way to engage their governance team? What can they help us do?
Speaker 1 00:03:08 Sure. And do you mean from the company perspective or from the institutional investor side? Sure.
Speaker 0 00:03:13 So from the institutional investor side, what should I be expecting from the governance teams and how can they support?
Speaker 1 00:03:20 Sure. So institutional investors, I think not only during this crisis, but then thereafter, are really gonna have to focus on whether or not the company did what they said that they were going to do. And that is prior to the crisis, and then also in response to the crisis. And so corporate governance teams for institutional investors are going to have to really ramp up, uh, their level of analysis. I think not only from the disclosure standpoint, uh, what the company is disclosing, their portfolio companies are disclosing, uh, but then also I think tracking, for instance, wall Street Journal, uh, has a, a good, uh, well put together aggregate list of companies, for instance, that are either furloughing laying off and or adding employees as does just capital. Uh, Martin Whitaker over at Just Capital and his team there has put together a very, uh, concise grouping and list of companies that are doing this really well during the crisis.
Speaker 1 00:04:18 And I think that it's going to be data like that, uh, that is invaluable to teams when they eventually do engage with these portfolio companies, either during proxy season of 2020 or thereafter, whether it be the summertime or into the fall. But I do think that what's going to be paramount coming out of this crisis is whether or not the company can be trusted, whether or not they're social license to operate, for instance, can be renewed. And this will be an enormous reputational risk. And those companies, again, that have done this really well and have, have been ahead of it by using and leveraging, for instance, a stakeholder model in kind of crafting their E S G framework of disclosure, oversight management, et cetera, these are the companies that are going to be doing really well, uh, after the crisis as well. And so the ones that are doing it well within the crisis are actually gonna be weathering the storm better too.
Speaker 1 00:05:14 Uh, there's data coming out that says also, um, from George Shiff, him at Harvard Business School. Uh, it's not published yet, but it, he is looking at data with one of his colleagues, it's State Street that essentially says that if they have a better profile when it comes to human capital management, they are actually weathering this crisis much better. And we see that with a lot of data also coming out after this first month of the crisis, that those that were focused on sustainability E S G efforts, those companies weather this storm much better, and there was less volatility, which I think, of course is an advantage. So these corporate governance teams should absolutely be focused on whether or not, like I said in the beginning, are in fact, um, whether or not the companies are following through on, on what they said they were going to do.
Speaker 1 00:06:03 It's just gonna be very interesting to see kind of what comes out of that. Because ultimately, too, I mean, thi this is, I, my assumption is that this would be considered a Black Swan event, um, by definition. And what this then looks like in a world where we're having Green Swan events, I think is going to be, um, very interesting because this is really the, the primer for it then, right? It's like, you know, do you have, does your company have any sort of resiliency through a Black Swan event, a tail risk like this? And if so, you know, what are the characteristics of the firm that then investors should be looking at at those firms, for instance, that did weather it well, because we will inevitably run into a Green Swan event, um, once, if not twice, if not three times, um, in the coming decades here because of the climate crisis and how companies deal with that is gonna be really interesting. And this is gonna be a great case study for something like that when supply chains are disrupted, um, and when employees are being laid off because of it too, because it's disrupting, um, consumer business. And so, um, how society steps up during that too is gonna be interesting because we can't have a 2 trillion package being passed every decade because we have, you know, a, a climate crisis that impacts, you know, half the country or the entire world. Um, it, it will be interesting to get those data points.
Speaker 0 00:07:26 So let's unpack that a bit. We talked about reputational risk. You mentioned that in the context of social license and also the treatment of human capital, human resources. Tell us how do those things fit in the E S G materiality framework? Are we simply looking at these different areas being data points of that materiality framework, framework, or does it go deeper than human capital reputational, um, damage or management being simply data points within that framework?
Speaker 1 00:08:01 Yeah, it, it, it's a great question because I think that, um, that's where the trip up is sometimes with e g and sustainability. Really, E S G is the framework. Uh, like I had mentioned before, sustainability is really the outcome. And so when we're talking about things, for instance, like, uh, a social license to operate or human capital management, um, we are kind of putting it in a bucket, whether that be on the environmental side, if you're talking emissions, for instance, social, uh, like we talked about with human capital management, uh, or governance per se. Uh, you know, any of the issues then that, that are under governance, for instance, anti-corruption, et cetera. And so, um, it, it really is the E S G is really providing the framework for companies to then, uh, look at these issues through. And I think that when you start, uh, from a materiality standpoint, obviously every company has to put forth risk factors in their, their 10 K every single year.
Speaker 1 00:08:56 And you see these, um, also crop up, for instance, in other, uh, disclosure that they have as well. Um, but I think that if, if a company is able to, um, integrate this e s G information and data into their existing E R M framework, and they're able to identify these, uh, material risks, whether they be human capital management, you know, essentially non-traditional quote unquote non-financial metrics that we're seeing over and over again, they in fact do, uh, you know, impact the bottom line. And I think that the companies, again, that are, are ahead of the curve. They've identified this, you know, years ago. S A P is a great example. They have, you know, exemplary disclosure and they have integrated reporting. And so they are able to spot these tail risks and not only identify them, but then solve for them during. And I think that, um, again, this is something that companies, if they have done this well in the past, uh, then we're gonna see that bode well for them during a crisis like this, a Black Swan event. Um, but I think that those companies that really were just disclosing information and maybe didn't have a materiality approach to their E S G, uh, and really it was just some window dressing in what we call, um, greenwashing, then we're gonna see that in the results of these companies through metrics like human capital management related to things like retention, uh, recruitment, et cetera, afterward. And so those companies that have done it well have integrated it into their materiality assessments.
Speaker 0 00:10:30 So Andrew, what are the top three focus points that institutional investors should consider as it relates to what good governance looks like? And I wanna take a step further in, let's say we're, let's pretend we're at the end of 2020. What would we say, what would institutional investors say good governance looked like during the Covid 19 crisis? You can give examples of companies with boards who responded, well, that would be great, but what did it look like after Covid 19?
Speaker 1 00:10:59 Sure. Um, you know, I, I don't know whether or not I have three, but I, but I certainly have, you know, a, a key word, uh, for after this crisis and, and it's gonna be resiliency. Um, you know, it, it, it's gonna be a question of which industries, which companies were better able to shift to remote work, for instance. Um, you know, or, or those companies, for instance, that could quickly shift their supply chains, right? From, from, for instance, you know, commercial to consumer. Um, I think those companies that will be able to show resiliency, uh, throughout this process, they'll, they'll have better productivity, uh, better costs, better culture, um, they'll have stayed together because there, there wouldn't have been as many furloughs or layoffs and ultimately that that leads to higher profit. And so I think that, uh, institutional investors are gonna have to evaluate whether or not these companies, for instance, um, ha have done well by their people.
Speaker 1 00:12:00 Um, and, and I think that that's gonna be a big shift that we see here after the crisis, which is that, uh, if, if a company isn't shifting toward a stakeholder capitalism driven type model, then they're gonna be behind not only in identifying issues like we talked about before, um, but then also if, if, if people aren't, uh, at the very top of that list, uh, then those companies not only will suffer from a reputational standpoint, um, but those companies won't be able to attract the talent after this crisis. I really think it's gonna be, uh, just this paradigm shift afterward. Not only, uh, you know, on the, on the corporate side, but also, um, societally, right? I mean, this is something that is going to impact the way in which we look at capitalism. And I do think that in 2019 when the B R t and when the Davos Manifesto came out, um, all shifting the focus to stakeholder capitalism in that model, uh, I, I think that that's what we're gonna see after this crisis. That it's gonna be absolutely a requirement for every single company to shift to that model in order to, again, not only identify risks, but then also take care of their people.
Speaker 0 00:13:10 So resiliency, making sure that a corporation includes all stakeholders when they make decisions, and also being ready to totally rethink the way that we approach capitalism. Thank you, Andrew, very much for your insight.
Speaker 1 00:13:25 Of course,
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