ESG Governance Drives Hypergrowth
Environmental, social, and governance (ESG) criteria is increasingly used by potential employees in workplace decisions, by consumers during product selection, and by socially conscious investors. For many in the private sector, focus on these standards is not new, but the investment thesis has shifted to increased value creation aligned with ESG. Private companies have often been recognized as environmental stewards as well as the community’s backbone. Financial returns have been shared through social contributions with trusted ecosystem relationships built from customers to employees to suppliers… all within an ethical governance framework. All three ESG elements are critical focus areas that should be balanced, prioritized, and integrated into operations, strategy, and the company culture. However, for private company boards, the power of governance and proper business conduct is increasingly seen as a sign of corporate resiliency. Good governance drives hypergrowth as new markets and opportunities are identified. Governance disclosures—such as diversified leadership, internal controls, antibribery and anticorruption policies, audits, executive compensation, ownership structure, and transparency—are considered among the “rights” of shareholders and investors. In some cases, a cultural reset is requested after scandals.
Expectations of public companies to disclose and report have set the bar for private companies. Many private equity asset managers and heads of investment risk now assert that private markets (versus public) might be a better place for investors to apply ESG principles with the determinant based on industry, resource usage, and sustainability impact.
SEC and Ecosystem Decision Makers Weigh In
The importance of ESG disclosures and misconduct reporting has been reinforced by multiple entities. As an example, the US Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force on March 4, 2021. Further, BlackRock’s CEO, Larry Fink, stated that BlackRock may use the power of institutional “votes” against public board of directors not aligned with ESG imperatives. However, for private companies, the ownership level may influence the action path forward, so solid board governance and oversight become even more critical. ESG progress and especially governance best practices require commitment, education, evaluation, and communication. Good governance may help “futureproof” operations with benefits such as more competitive loan rates, materials and resource pricing, insurance renewals, and improved workforce productivity and retention.
Furthermore, many private companies in private equity portfolios have seen portfolios built around ESG, frequently referred to as impact investing. According to KPMG, this is a “fast-growing subset of private equity that has attracted over $502 billion globally from foundations, endowments, family offices, and sovereign wealth funds looking to be even more explicit with the social or environmental outcomes tied to their capital.” Hence, private companies can play a key ESG role and also improve performance.
According to the 2020 NACD Private Company Governance Survey, 51 percent of private companies focused on ESG (primarily the “S” and “E”) in the last 12 months compared to 80 percent of public company boards. However, more private companies are taking a leadership role especially on “G” governance issues. For others starting their journey, there are multiple general resources to facilitate ESG sustainability, disclosure reporting, and standards. As an example, these include the United Nations 17-point Sustainability Development Goals, the Global Reporting Initiative, and the Value Reporting Foundation (SASB and IIRC).
In summary, ESG should be a key business imperative requiring board oversight and strong governance with board-level discussions. Specifically, the “G” or governance in the ESG equation may be a key determinant of a private company’s transformation from surviving to thriving to hypergrowth. Its governing policies, distribution of roles and responsibilities, and overall corporate purpose are critical drivers of overall financial success.
Cheemin Bo-Linn, EdD, is CEO of Peritus Partners and former IBM Corp. vice president and has more than 15 years of board governance experience at private and public companies based in the United States, Canada, Europe, and Australia. As a C-suite officer, she leads enterprise-wide digital transformation for innovative multibillion-dollar businesses.