Wharton Dean Erika James moderated the second lecture in Wharton’s Beyond Business lecture series on Tuesday, discussing the evolution of corporate governance in the face of climate crisis, social injustice and the COVID-19 pandemic .
The November 16 event – titled “Redefining Corporate Governance: Laying the Groundwork for the New Era of Business” – brought together Brian Stafford, Wharton graduate and CEO of Diligent Corporation in 1998, Mary-Hunter McDonnell, associate professor of Management, and Luke Taylor, Associate Professor of Finance. Over 7,000 people followed the event on LinkedIn Live.
The theme of this year’s Beyond Business lecture series is to examine businesses and enterprises through the lens of environmental, social and governance – or ESG – concerns. The third and final conference in the Beyond Business series, “Humanizing ESG”, will air on December 7th.
“As businesses seek to establish and amplify their role as global corporate citizens, it’s important to look at the data as we come together around a common set of core criteria for measuring impact,” said James said.
McDonnell started the conversation by explaining the impact of crises on board composition. Companies responded to the Enron scandal in 2001 and the WorldCom scandal in 2002 by hiring managers with greater financial experience and skills. Both scandals involved companies hiding debt or inflating profits to maintain their stock price, and after being exposed, the companies filed for bankruptcy and dissolved.
Crises such as the pandemic and political unrest have also “rocked the boardroom,” with new cohorts of directors showing more experience in social responsibility, human resources and technology, McDonnell said.
“This change allows boards to better understand and guide businesses through the more turbulent social and political environments in which businesses operate today,” she said.
Stafford said that businesses’ resilience during crises depends on their ability to communicate with their stakeholders, including management, other businesses and industry.
“The companies that reacted quickly and the boards of directors that helped management are the ones that have been the most resilient and have maintained their reputations during these difficult two years for many companies,” said Stafford.
Taylor and McDonnell also shared their perspective on corporate purpose, agreeing that corporations should not necessarily prioritize maximizing shareholder value and profits. Instead, they should optimize shareholder welfare and take into account the interests of a wider range of stakeholders.
From there, the conversation turned to discussing board compensation and pay inequalities within companies. Stafford suggested that compensation policies become increasingly complicated as companies consider prioritizing compensation goals such as diversity and sustainability over financial performance.
McDonnell explained how the pay gap at different levels of a company can lead to lower worker morale, performance and attendance, as senior managers are rewarded for superior company performance and the average worker salary remains constant.
She also stressed the importance of diversity and inclusion in the quality and accuracy of decision-making and team performance.
“When you walk into a room where everyone has different backgrounds, you know you might need to convince and prepare more before the meeting,” McDonnell said. “You deliberate more during the meeting, and because of that deeper deliberation factual inaccuracies are more likely to surface and potential pitfalls are more likely to be discussed. ”
According to Taylor, two main reasons should motivate ESG investments in the years to come. His research found that ESG-friendly companies see rising stock prices as well as a lower cost of capital for environmentally-friendly companies.
“The end result here is actually great news for the company and for the environment,” Taylor said.