This research was commissioned by the Laudes Foundation. The views expressed in this document are those of Scrutiny Hub and do not necessarily reflect the views of the Laudes Foundation.
The research included 40 interviews covering investors (sustainability and fund managers), data providers, proxy advisors, academics, and industry associations. Amongst the varied views, there were two areas of agreement – people and pay.
People over structure: When analysts (investment and sustainability) have time they analyse the backgrounds of board members rather than the structures that can be turned into a metric. Similarly, all agreed that action on sustainability comes down to the belief of board members. Consequently, governance assessments need to place more focus on people rather than structures, and more support should be provided to non-executive directors so they have the knowledge to effectively discuss sustainability in the boardroom.
Pay: Many companies have included generic ESG metrics with easy to meet targets. There is an opportunity to push for a more robust alignment of pay, strategy and sustainability. This should cover the choice of financial targets, time horizons, as well as ESG metrics.
The challenge is that both topics require a shift from the normal formulaic governance frameworks and metrics to in-depth company-specific analysis. This will require rethinking where there is the analytical capacity to assess company governance, which is reviewed in the report.
The catalyst for this change is the long-running frustrations with the box-ticking approach to governance, weak evidence for it, and the unavoidable challenges from the rise of passive investment. This creates an opportunity to redefine what is meant by shareholder-centric governance, rather than going back to circular debates on shareholders vs stakeholders.
