Envisioning a sustainability-oriented future for corporate governance

Fairfax Campus

The “G” in “ESG”, which stands for governance, comes last, but not least. In fact, corporate governance may become the most important member of the trio, as mounting ESG awareness continues to enlarge the current conception of risk management. Soon, directors of publicly traded companies may be held increasingly responsible for heading off business risks related to the “E” and the “S”, such as the societal ramifications of carbon emissions and human capital flight due to less-than-living wages.

Cases in point: Boards of directors of Facebook and other high-profile companies have been sued by shareholders for breach of DEI pledges. The Securities and Exchange Commission (SEC) has broadened its regulatory agenda to include climate change, cyber risk governance, board diversity and human capital.

Given this context of change, it was an appropriate moment for the Business for a Better World Center (B4BW) to convene an in-person Stakeholder Roundtable on the subject of Corporate Governance. The half-day event took place at Point of View International Retreat & Research Center at Mason Neck in Lorton, VA on October 21.

Previous Stakeholder Roundtable events were held virtually with the stated mission of “engag[ing] tri-sector leadership, our faculty and students to ensure forward progress is made on business meeting the values and expectations of society as well as its various stakeholders and to drive stakeholder capitalism further into the mainstream.”

After encouraging opening remarks from Dean Ajay Vinzé, a keynote speech was given by Michael Sion, a partner at Bain & Company who also sits on B4BW’s Advisory Board. In his talk, Sion laid out four main stumbling blocks preventing corporate boards from pivoting from the doctrine of shareholder primacy to a more stakeholder-oriented view. Lack of information means that directors are often ill-equipped to understand trade-offs between stakeholder and business outcomes. Lack of representation results in board composition that is misaligned with the demographics – and thus the concerns – of the broader society. Lack of incentives lessens the motivation for directors to rethink how they make decisions, unless they are pressured to do so for core business reasons. Lack of transparency hinders corporate accountability for decisions incurring environmental and/or social risks.

B4BW Executive-in-Residence Rashed Hasan then described a solution that would address the aforementioned challenges. Currently in development, the Stakeholder Value Index uses a wealth of corporate data to quantify the value firms bring to their employees, communities, customer and suppliers as well as the planet, shareholders and the company itself.

Narrowing the focus to one key stakeholder – employees – Tannia Talento, regional director from the office of U.S. Senator Mark Warner (D-VA), spoke of the Senator’s efforts to advance legislation that would incentivize corporations to invest in worker training by offering a business-related tax credit. Warner also co-authored a letter to the SEC urging the agency to require labour-related corporate disclosures, including the percentage of workers classified as “independent contractors” and thus exempted from many protections.

The following speaker was Cambria Allen-Ratzlaff, managing director and head of investor strategies for JUST Capital, an independent non-profit whose rankings and indices are designed to “drive capital toward good corporate citizens.” Allen-Ratzlaff explained that JUST Capital derives its priorities by polling the American public on their priorities. Consistently, paying a fair and living wage and job creation in the U.S. come in first and second in the polls. In addition, she presented a data-driven case that fair and equitable human capital management was completely in line with business objectives. Better corporate citizens, she argued, are also better managers and can deliver higher shareholder returns on average.

Usman Ahmed, head of global public affairs and strategic research for PayPal, described how the digital-payments giant launched the Worker Financial Wellness Initiative. The purpose of the initiative was to increase workers’ Net Disposable Income (i.e. the amount left over after taxes and necessary expenses) from as low as four percent in some regions to 20 percent across the board. To achieve this, PayPal extended equity eligibility to all employees, reduced healthcare costs, reviewed and raised wages, and provided financial consulting services. Consequently, the minimum global NDI for PayPal employees reached an estimated 16 percent in 2021.

However, corporations must balance the feel-good factor and social mission of stakeholder capitalism against potential legal limitations, especially in our age of rising shareholder activism. Donald Kochan, a professor at George Mason University’s Scalia School of Law and deputy executive director of the Law & Economics Center, cautioned the group that shareholder value maximization has been enshrined in the U.S. legal framework for corporate oversight. He zeroed in on the distinction between a “corporation”, which is owned by shareholders and holds a unique legal status, and a “business”, an entity with no prescribed ownership structure that has wider decision-making latitude. For corporations, shareholder value is the sole legally acknowledged criterion for measuring managerial performance. Adding other decision-making criteria – beneficial as they may be for society – would give shareholders actionable cause for complaint. Therefore, Kochan argued, boards of directors need to develop ways of driving business growth (and, by extension, shareholder returns) that also, as a secondary effect, benefit other stakeholders.

Other than the above-named speakers, attendees at the Roundtable included B4BW staff, Mason School of Business faculty, MBA students and law students. Rounding out the proceedings, participants engaged in breakout sessions on corporate information transparency and how boards can advocate on behalf of employees. 

Rashed Hasan, who leads the Stakeholder Roundtable Series, observed at the end of the day, “This is very exciting to see everyone is opening up to meet in person and now we are able to convene a small group of tri-sector leaders, our faculty and our students to engage in open and frank discussion on some of the challenging issues facing business and society.”  The next Roundtable is being planned for the later part of spring 2023.