ESG And Diversity Are Small-Cap Considerations, Too

Categories

Join The CEO Center for Exclusive Buy-Side Insights

Better governed companies make more money.

First

Gain Access to Boardrooms in the News

See why 1000s of global execs read Adam’s bi-weekly commentary about topical boardroom-related news stories.

Environmental, social, and governance (ESG) policies and boardroom diversity have historically been concerns for mid- and large-cap institutional investors. But small-caps should consider embracing both, because this type of investor focus is coming to the small-cap ecosystem, and it also happens to be good business.

esg and diversity - stay ahead of the curve

ESG Is About Scale

ESG factors are essentially a continuum of non-financial performance issues that are weighed alongside traditional financial metrics in the decision-making process of an increasing number of institutional and retail investors globally.

  • Some examples of environmental considerations may include: climate change, water usage/impact, renewable energy, emissions, management of hazardous materials, and green building practices.
  • Some examples of social considerations may include: human rights, community relations, labor standards, customer privacy, data security, and product liability.
  • Some examples of governance considerations may include: risk management, corporate culture, business ethics, materials sourcing, corporate compensation, board composition and political donations.

While the ESG nomenclature might be somewhat new, sophisticated investors have long analyzed non-financial risk elements that they view as complementary to more traditional key performance indicators. Supporters of incorporating ESG aspects into their investment considerations have undertaken research that depicts that companies that are more ESG-focused often outperform their peers with respect to return on invested capital, and have less volatile stocks. Put perhaps a bit differently, there are increasing data to support the conclusion that companies with more fulsome risk apertures – represented by ESG factors – are more likely to scale over time with greater aplomb.

More Diverse Companies…Make More Money

Public companies in the United States are predominantly operated and governed by a comparatively homogenous group – older, white men. And that group statistically errs on the side of hiring people with similar attributes. In 2017, a large executive search firm published data depicting that nearly 70 percent of the 421 board seats filled by Fortune 500 companies in 2016 were sitting or retired CEOs and CFOs – a group that is largely older, white men.

To be sure, the buy-side is predominantly fine with sitting and retired CEOs and CFOs serving on corporate boards, and the continuing consideration of them for future board seats. But savvy investors are increasingly not fine with candidate pools for prospective directors that are substantially limited just to CEOs and CFOs.

According to research conducted by a number of large consulting firms, companies with greater thought diversity outperform less diverse peers. As Larry Fink, CEO of BlackRock, admonished in his 2018 letter to shareholders, “[Diverse boards] are better able to identify opportunities that promote long-term growth.”

 

Two concluding takeaways for small-cap officers and directors: (1) focus on ESG and boardroom thought diversity is not fleeting; and (2) shareholders can likely benefit from both.

A version of this post was originally published by Nasdaq MarketInsite.

________________

Tagged Under

Share this Post

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on facebook
Share on twitter
Share on linkedin
Share on email

ADAM J. EPSTEIN

A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

Thousands of global execs read Adam’s bi-weekly leadership commentary

First
This field is for validation purposes and should be left unchanged.