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The Human Side of Governance
By Donna Hamlin, Ph.D.
For those of us serving on boards today, it is clear the definition of our duties of care are expanding. Boards are now accountable to address challenges that pose existential threats to not only our businesses, but also the environments in which we operate. The economics of our croweded planet makes us weigh and address issues of climate and ecosystems, ESG, famine, water, proverty, populations, conflict and power which can influence the sustainablity of our businesses.
Of these, a fast-broadening topic in the last year is the focus on social issues – the S in ESG -- including human right and human capital management.
Human Capital Mangement
Last fall, the SEC announced new human capital management disclosure rules. Companies must now expand their disclosure about human capital management, with a principles-base approach. Since the rules are not prescriptive, companies have flexibility in how they shape their disclosure. This latitude will likely pose the same difficulties people had in the early days of Sarbanes-Oxley reporting. Boards will struggle with how to determine what to include and what level of details should be in the filing.
Income inequality is under a hot light as well. Shareholders understand companies need to incentivize and recruit the right people to drive long-term value. Yet, author of How Boards Work, Dambisa Moyo, cites that CEO pay in the US has grown 940% in real terms since 1978, while the pay of a typical worker has growtn by 12%. Per the United Nations Principles for Responsible Investment , income inquality potentially “negatively impact institutional investors’ portfolios as a whole and damages output, reduces growth and contributes to populism and protectionism.
The backing of larger index managers like BlackRock, State Street Global Advisors and Vangaurd are raising the support for social proposals. In the Q1 2021 Investment Stewardship Report, BlackRock states it supported 75% of shareholder-led sociall and environmental proposals. The MSCI analysts reports a growing emphasis on social inequality. It notes: “COVID-19 has put its thumb on the top 1% side of the wealth scale, undoing decades of progress toward greater equality. Engaging with individual companies might not be enough to move the needle back. In 2021, we see investors taking steps toward more creative, systemic approaches, with those in the vanguard willing to risk a few failures in pursuit of solutions.”
Moreover, social bond issuances have grown in 2020, jumping from 4% in 2019 to 16% in 2020. Many focus on mitigating negative impacts of the pandemic.
In Japan, the Financial Service Agency and Tokyo Stock Exchange have set a new standard related to human rights. The financial regulators are revising the corporate governance code this month to include a provision requiring listed companies to “respect human rights,” as part of the section addressing sustainability.
The move for this comes from pressure on Japanese companies to respond to China’s allegations of human rights abuse againt the Uyghur Muslim minority in its western Xingiang region. In January,2021, the US Customs authorities at the Port of Los Angeles suspended the import of Uniqlo men’s shirts due to suspicions they violated a U.S. import ban on items manufactured using forced labor in China’s Xinjiang Uyghur Autonomous Region.
The suspicion is that cotton produced by the Xinjiang Production and Construction Corps, a group under the direct control of the Chinese Communist Party, has been used as raw material for Uniqlo products. The U.S. government banned the import of cotton products having any connection with this group at the end of 2020.
Since western governments, such as the US, have imposed sanctions on China regarding allegations of forced labor, any such violations by companies are under the hot lights of scrutiny by investors.
The intent of the new governance code is to have boards consider human rights as a significant management issue to proactively address. The code revision aims to promote board independence, gender diversity, an increased focus on sustainability and ESG, enhanced climate-related disclosures, and measures to address conflicts of interest.
Listed companies will be required to explain any non-compliance with the code’s provisions. Authorities will be pushing companies to act voluntarily to root out potential forced labor and human trafficking abuses in their supply chains. The change is said to be aimed at helping Japanese corporates get out in front of risks related to consumer boycotts and difficulties raising capital overseas.
Yes, duties in governance are stretching. Still, this focus on the human dimension has great potential on so many levels. It is worth our stretch!
IPE, Rising Tide of Corporate Governance Liam Kennedy
The Japan Times Business/Economy Japan’s Regulators Raise Bar on Human Rights
In today’s workplace, diversity is a fact. Inclusion is the competency we must develop to take full advantage of its value. The return for companies who master this are significant. Directors have the duty to ensure and monitor these benefits: access to a broader pool of potential employees, ability to attract a more skilled workforce talented individuals prefer a diverse workplace, richer and more creative solutions, improved effective communication among diverse groups of customers, higher innovation and increased retention of the best workers.