Poor Performing Directors & ESG

In April 2020, I wrote an article which I published on LinkedIn about “poor performing directors and bullying in the boardroom.”

So, how does the rapid adoption of ESG principles – an investing approach that prioritizes Environmental, Social and Corporate Governance issues – impact this? Does it change directors’ behaviour or are directors’ part of an exclusive breed of people – all care but devoid of responsibility?

The ASX is littered with poor-performing non-executive directors and Chairs, as evidenced by the failure of corporate governance.

PWC, Qantas and Crown Casino are just a few examples of this failure. Milton Friedman, the American economist, introduced a theory in a 1970 essay for The New York Times titled “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits.” He argued that shareholders are the only group to which a firm is socially responsible and that a company has no social responsibility to the public or society; its only responsibility is to its shareholders.

PWC, Qantas and Crown embraced the Milton Friedman theory, “profits at all costs.”

In an article published in the MIT Sloan Management Review, “The Shareholders vs Stakeholders Debate,” it stated that the Friedman doctrine is controversial, with critics arguing that it was wrong on financial, economic, legal, social or moral grounds.

Australia is not alone in the failure of Corporate Governance. WeWork, once valued at $47 billion, saw its planned IPO fail to support its valuation.  WeWork was losing substantial money and had no real path to profitability. Theranos, the subject of the book Bad Blood, chronicles the story of Elizabeth Holmes and the rise and fall of Theranos, which at its peak was valued at $11 billion. Holmes is currently serving an 11-year prison sentence. So, where were the Boards in all of this?

In recent years, Environmental, Social and Governance principles (ESG) have come to the fore, or to put this in fewer words, “responsible investing.” Many governments are implementing mandatory climate reporting for large corporations, and many companies are including these statements in their ESG reporting, which aims to shed light on a company’s ESG activities while improving investor transparency and inspiring other organisations to do the same.

ESG is specific – it should encompass response to climate change, responsible investment, supply chains, anti-competitive practices, board diversity, business ethics and corruption, to name a few.  New buzz words have arisen: Social, Green, Blue and Pink Washing, terms used to describe making false or misleading statements about the environmental benefits of a product or practice or creating a facade of social responsibility and positive impact with unsubstantiated claims lacking tangible actions.

All Boards face issues. How they deal with these issues depend on the Chair and the rest of the Directors. Boards need Directors who are not afraid to speak their mind and who can act in the best interest of all stakeholders, which include shareholders, staff, suppliers and customers.

Unfortunately, many directors are there only for the fees, and try to preserve their own position at all costs. These directors appear to have no regard – or perhaps no real understanding as to what really needs to be done and are unable to make decisions in the best interest of the company and all the stakeholders.

Sometimes good directors – those who understand what is happening in the business, end up resigning, having being bullied off the board, being unable to agree on a position taken by the rest of the board, or, even more frighteningly for the Shareholders, resigning over significant issues in the business, that other directors refuse to address.

Do directors really understand what is required of them?

In an article published by Institutional Shareholder Services Group (ISS), the proxy advisors to shareholders of many of the top 200 ASX companies, ISS provides four key tenets that underlie their approach to developing recommendations on managements and shareholder proposals for ASX companies:

Accountability – Boards are accountable to shareholders.

Stewardship – A company’s governance, social, and environmental practices should meet or exceed the standards of its market regulations and general practices and should take into account relevant factors that may impact significantly the company’s long-term value creation. 

Independence – Boards should be sufficiently independent to ensure that they can and are motivated to effectively supervise management’s performance and remuneration for the benefit of all shareholders.

Transparency – Companies should provide sufficient and timely information that enables shareholders to understand key issues, make informed voting decisions, and effectively engage with companies on substantive matters that impact shareholders’ long-term interests.

Despite all the above, many directors still do not perform in the best interests of the company, or act in their own interest or that of the CEO by:

• Insisting on keeping a poor-performing CEO – despite the CEO consistently missing guidance, bullying, and poor staff morale.

• Giving bonuses to poor-performing management.

• Acting as executive directors.

• Bullying dissenting directors.

• Not reading board papers or being prepared for board meetings.

• Making no contribution.

How is this problem avoided?

• Chairs and Directors need to be strong, and not beholden to any group

• They must be Fiercely independent and not dependent on the salary

• They should keep their egos in check

• They must have common sense – common sense is less common than people think

A good Chair will consider all opinions around the board. In the end, hopefully, sanity will prevail and a board who is prepared to listen to all opinions will come to the right conclusions.

Author: Jon Brett

Jon Brett is Non-Executive Director of Corporate Travel Management (CTM) and Chair of the Audit and Risk Committee. Jon is also a Non-Executive director of Raiz Invest (RZI), the NASDAQ  listed Mobilicom, and the Chair-elect of Infomedia (IFM).

Jon is the author of the very successful podcast series “The Taking of Vocus” which chronicles the extraordinary rise of Vocus, what went wrong with the M2 merger and concludes with the privatisation of Vocus. The podcast is accessible on his LinkedIn profile: https://www.linkedin.com/in/jon-brett-95734732/