Adapting to ESG: The metrics that matter when profit and growth aren’t enough
For those who question whether environment, social, and governance issues really are of rising importance in global boardrooms, and if companies need to adapt to this new reality, look no further than what happened at Exxon Mobil’s annual shareholder meeting. To the surprise of its senior management—and many analysts—activist investors forced a change in the $250 billion company’s board, installing three new members to place greater emphasis on the climate implications of the energy giant’s business.
As I have seen from the last six years running Diligent and working with nearly 20,000 boards, CEOs, CFOs, and audit committees, Exxon Mobil is far from being alone. No part of the economy is immune to this change as the focus on ESG extends beyond public company investors and regulators to include private markets (private equity, limited partnerships, and owned companies) and even nonprofit donors.
In this new era, C-suite and board leaders are being asked to show up in new ways—feeling new pressure from employees, customers, and investors who want to support more purposeful companies. As stakeholders demand accountability, leaders are being asked to demonstrate meaningful, quantifiable progress, quickly.
Gone are the days when certifying your financials and signing up for revenue and EPS targets were the only success criteria for companies. Success now requires more data, additional disclosure, and more active management of the new nonfinancial “health” metrics that companies will be reporting for the next decade and beyond: ESG, DEI, cyber, climate, third-party risk, and data privacy.
All of this requires new tools that connect governance, risk, and compliance (GRC) in a dynamic way to reach all corners of a company, no matter its size. Companies need a system to track risk, compliance, and ESG data over time in one place; establish ESG targets; and the governance structures to achieve them.
A modern approach to GRC will empower companies to respond to the mounting interest in stakeholder capitalism. They will be ready to disclose ESG statistics, navigate a rapidly evolving ratings environment (with new ESG rating systems coming from MSCI, Institutional Shareholder Services, Moody’s, and others), and respond to near-term regulatory changes and enforcement from governing bodies like the Securities and Exchange Commission. Modern GRC will enable them to track performance against targets, mitigate weaknesses that represent business or reputational risk, and hold themselves accountable for slow change. Finally, it will also allow companies to benchmark and set themselves apart from their peers.
The game-changing nature of business software is already obvious to anyone who has been looking. In the 2000s, enterprise resource planning revolutionized how corporations managed their financials. In the 2010s we used customer relationship management systems to supercharge growth. In this decade, we will use GRC systems to not just manage but fundamentally reassess our organizational health, compiling and reporting on not just financial data but stakeholder data.
Leaders will approach this new imperative in three ways—as true believers, pragmatists, or dinosaurs.
True believers will embrace a broader set of stakeholders and aspire to make our organizations and the world we live in better. In doing so, we will attract the best employees who want to work for a company with purpose. Customers will increasingly want to buy from companies who positively impact the world around them. This will, in turn, generate outsize returns for shareholders and stakeholders alike.
Pragmatists, who know they face a shifting regulatory and compliance landscape with additional demands for disclosures, will also adapt. They will chart their company on course accordingly and keep pace with this trend. Dinosaurs are rooted in the narrow capitalist mindset that the fiduciary duty of a board and management team is to their shareholders—and that is the only metric that matters.
But as stakeholder capitalism gains more ground, I believe most shareholders will also put more value on the nonfinancial metrics of their companies. Aligning the needs of stakeholders and shareholders is also a long-term game. You can’t be the leader in your market 10 years from now unless you focus on investing in your employees and communities.
The next 10 years will usher in a new way to assess and manage companies. Successful leaders will embrace this new wave of the future, a new set of metrics, and an augmented way to define and measure success. In this approach, there is an opportunity to inspire a next generation of talent, to win over new purpose-driven customers, and to do well by doing good.
Brian Stafford is CEO of Diligent Corp.
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