The losses on Terra Firma just keep piling up for our national treasures of great baseball players. Yesterday I wrote about one of my boyhood heroes, Joe Morgan. Today I want to honor the passing of Whitey Ford, who was a mainstay of the great New York Yankees teams from 1950 up to 1964. Ford is the sixth Hall of Famer to die in 2020 joining Al Kaline, Lou Brock, Tom Seaver, Joe Morgan and Bob Gibson. Albeit, a little before my prime baseball watching kicked in, I actually got to see Ford pitch in the second preseason game in the Astrodome in 1965. But while my memories of that day are a bit more limited, Ford’s greatness shown throughout his storied career.

According to his New York Times (NYT) obituary, Ford pitched “for 11 pennant-winners and six World Series champions.” He also “won 236 games, the most of any Yankee, and had a career winning percentage of .690, the best among pitchers with 200 or more victories in the 20th century.” He also holds a record which will never be broken, that of  33⅔ consecutive innings of scoreless pitching in the World Series. While Terra Firma has lost another great, the Field of Dreams has gained another star. Here’s to Whitey Ford and those great Yankee teams who won eight World Series from 1950 to 1962. Farewell to the Chairman of the Board.

I wanted to use Ford and the 1950s Yankees sustained greatness to introduce today’s topic of the Board of Directors’ role in sustainability. This issue was explored in a recent Harvard Business Review (HBR) article, entitled “Social-Impact Efforts That Create Real Value” by George Serafeim. (Readers of this blog will recognize Serafeim as the co-author, with Paul M. Healy, of An Analysis of Firm’s Self-Reported Anti-Corruption Efforts, which demonstrated that companies with robust compliance programs do better financially in countries prone to corruption than companies with less effective compliance programs.) Over the next couple of blog posts, I will be laying out the argument of why environmental, social, and governance (ESG) is something that every Chief Compliance Officer (CCO) and compliance professional needs to be aware of and move towards.

Serafeim posits that companies with robust ESG programs are “likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change.” This proved to be true during the first week of the Coronavirus health crisis, where Serafeim “found that the ones the public perceived as behaving more responsibly had less-negative stock returns than their competitors.” Finally, Serafeim only believes these trends will continue as “the crisis is likely to increase awareness that companies must consider societal needs, not just short-term profits.”  Black Lives Matter is leading a discussion on stronger diversity policies and fair employment practices in corporate America and compliance, as the corporate caretaker of institutional justice and institutional fairness needs to be a part of this internal corporate discussion going forward.

In many ways, ESG is where compliance was in 2005-2010, a check the box exercise. The reason it was done in compliance is because in that time frame, compliance was lawyer driven and seen as a legal response to the legal issue of increased Foreign Corrupt Practices Act (FCPA) by the Department of Justice (DOJ). Serafeim believes companies have embraced “a “box-ticking” culture that encourages the adoption of increasingly standardized ESG activities, many of them created by analysts and consultants who rely on industry benchmarks and best practices.”

The challenge for many corporate leaders is that they do not know how to move past this simplistic approach. Serafeim believes such business leaders “lack understanding of exactly where they should be focusing their attention and how they should be communicating their ESG efforts. Many executives incorrectly believe that simple actions will suffice: improving ESG disclosures, releasing a sustainability report, or holding a sustainability-focused investor relations event. Some companies take those actions, fail to see a benefit, and grow disappointed or frustrated.” Of course, there will always be a class of shareholders who will criticize any ESG efforts as they do not believe such initiatives will benefit the stock price.

Serafeim lays out four reasons he believes that ESG matters. I found them to be highly persuasive for every compliance professional. ESG, like compliance improves corporate culture because it drives “prosocial behavior.” Moreover, and once again similar to compliance, “there are very real payoffs for focusing on ESG issues. And those extend beyond the benefits companies might enjoy because of productivity increases due to higher employee engagement, or sales increases due to more loyal and satisfied customers.”

First, an ESG focus can help the corporate books by reducing capital costs and improving the firm’s valuation. Serafeim found this was because “investors look to put money into companies with stronger ESG performance, larger pools of capital will be available to those companies.” Furthermore, he found such a correlation in “not only in equity markets but also in loan markets, where some banks are linking interest rates on loans to ESG performance.”

The second related to the increased social awareness of corporate stakeholders as both “positive action and transparency on ESG matters can help companies protect their valuations as more global regulators and governments mandate ESG disclosures.” The third reason is that shareholders are demanding that companies and, more specifically, Boards work to ensure sustainable practice. Serafeim noted that “as more investors with more assets under management commit to ESG investing, they will have more voting power to effect changes” and this means that “management needs to be proactive about addressing ESG issues.”

The fourth reason, and once again one clearly complimentary to compliance, is that “ESG practices are part of long-term strategy, and every company needs investors who support management’s vision and plans for the future.”

Join me tomorrow where I look at Serafeim’s prescription for “how can companies get ahead of the trends and realize tangible financial benefits from their ESG programs”.

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© Thomas R. Fox, 2020