A CEO’s behaviour can move a company’s market capitalization by as much as 6%!

While attending the Responsible Business Summit last week in New York, I came across this interesting weekly publication called Agenda (http://www.agendaweek.com) which ran a very intersting article on why the CEO’s personal conduct is a board matter.

The article highlights the work of Jonathan Low from Predictive Consulting (which specializes in measuring the financial impact of intangibles such as reputation) which has conducted research that suggests that a CEO’s reputation accounts for about 40% of a company’s overall reputation value.

The article is written by Nir Kossovky, CEO and director of Steel City Re, the reputation insurance intermediary.  He highlights that they have “applied an actuarial reputation-at-risk formula to Low’s results and found that the CEO’s behavior can move a company’s market capitization by a much as 6%.  That impact explains why two thirds of corporate directors in a recent survey from the accounting firm EisnerAmper stated that reputational risk is the second-most impotant risk to them after financial risk.”

I would suggest that most financial analysts would agree with the above noted, however until now, we’ve had very little tools and research to confirm these reseach results.  It also confirms the growing need for financial analysts to look beyond just financial risks and opportunities!

Posted in Governance, Social and Governance (ESG), Sustainability, Sustainable Investing | Leave a comment

Potash Corp. dropped from the NASDAQ OMX CRD Global Sustainability Index

Effective May 21, 2012, there’s an important change in NASDAQ OMX CRD Global Sustainability Index (NDAQ) for we Canadians.

For those of you who are unfamiliar with the index, it is an equally weighted equity index that serves as a benchmark for stocks of companies that are taking a leadership role in sustainability performance reporting and are traded on a major US stock exchange.  The index is made up of companies that have taken a leadership role in disclosing their carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition and community investing. These are companies that are voluntarily disclosing their current environmental, social and governance risks as well as their revenue opportunities and how it will affect future performance.

Some investors follow this index as an indication of those Canadian-listed companies who are leaders in the field of sustainability.  The major change in the review is that Potash Corp has dropped out of  the index and Telus Corp. has been added.

This begs to ask the question if fundamentally there is something wrong at Potash Corp.  It’s been a leader in many of the governance rankings within Canada for the past few years.  Has something fundamentally changed?  Has the company lost sight of the importance of these issues?  Or, is this part of the impact that is the after-effect of the potential take-over of the company?   All valid questions that an investor should be asking.

Other Canadian companies that remain in the index are:

  • Bank of Montreal
  • Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • Royal Bank of Canada
  • Suncor Energy
  • Telus Corp
  • Toronto Dominion Bank
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Water Scarcity – Even the US Government sees the threat

As we look at the long-term issues that sustainability brings forth, resource depletion and scarcity are top of mind.  We’ve written about water a variety of times at this blog, but this past week brings a whole new confirmation of the scarcity that we face.

Last week, Bloomberg reported that the Director of National Intelligence released a report saying that competition for scarce water over the next decade will fuel instability in regions such as South Asia and the Middle East, all of which are important to the U.S. national security.

Although the report doesn’t suggest that we are looking at an all out war over water (in the next 10 years), they do highlight that they expect nations to start using water as a bargaining chip with each other.  They also go on to suggest that the adoption of water as a weapon by states or terrorists will become more likely after 10 years.  It highlights that the US intelligence community has a growing interest in understanding how environmental issues such as water shortages, natural disasters and climate change may affect U.S. security issues.  They go on to highlight that annual global water requirements will be 40% more than current sustainable water supplies by 2030.

So as an investor, is this not something that we need to start thinking about now?  Yes, we’re talking 10 years out, but as I recall, in terms of the feasibility process for new mines for resource companies, 10 years out is tomorrow.  So are we looking at risks that need to be considered in approvals for new mine sites?  Will resource companies not only have to work with the communities in which they hope to extract resources, but will the geo-political issues of our times not become even more concerning?  Are we asking these types of questions of companies in the resource sector?  Probably not at this point as most financial analysts won’t put any value on those operations into their financial models for some period of time.  The questions I have are: Will the risk be worth the effort?  What will this do to commodity prices?  Will we see more public-private partnerships on the water front?

With the announcement of the report also came the announcement of a new public-private U.S. Water Partnership that includes Coca-Cola Company, Proctor & Gamble and Ford Motor Company.  Sounds like some global companies are already thinking about these issues.  I think their shareholders should be too!

http://www.bloomberg.com/news/2012-03-21/u-s-intelligence-says-water-shortages-threaten-stability.html

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Is M&A starting to be driven by sustainability issues?

Recently I’ve been thinking more and more about sustainable business strategy and in particular, how eventually we’ll see large corporations buy smaller, more efficient and sustainable organizations for not just assets, but more so for their sustainability know-how.  Sustainability has it’s challenges for business leaders.  It tends to be difficult to articulate into hard numbers, which of course is what all of us in business and finance tend to look for.

This week has highlighted a very interesting transaction seeing UPS purchase TNT.  My guess is that TNT was an attractive target partially because it has been was a leader in sustainable business practices.  In 2010, TNT’s then President, Peter Bakker, received the Sustainability Leadership Award and in 2009, Mr. Bakker was also awarded the Clinton Global Citizen Award which recognizes corporate responsibility efforts of leaders.  However, when reading the press, there is absolutely no mention about this element of value within the transaction by either the media or financial analysts.

Should we be surprised if it were driven by sustainability?  I don’t think we should.  Last fall I heard the presentation by a UPS representative speak at the Commit Forum in NYC.  The speaker made it clear that as UPS started to measure and monitor key sustainability performance indicators,  it was recognizing that efficiencies would be a business driver going forward and ultimately, new business opportunities.  At the time, I read between the lines to mean acquisitions.  Therefore, I was not surprised at all to see the transaction come to fruition.  This leads to the question of whether we are seeing other transaction also being driven by the same motivation?

As I try to answer that question, I came across an article written by Kirsty Jenkinson at Ethical Corporation.  Ironically, it appears that there have been other deals being driven by sustainability related themes of resource scarcity.  To name a few that she mentions:

Shale Gas:

  • Chevron purchased Altas Energy
  • Statoil bought Brigham Exploration
  • Total purchased a stake in Chesapeak Energy

Although much controversy revolves around these resources, these acquisitions are still happening because of resource scarcity and energy security issues

Food & Science Industries

Dupont purchased Danisco – a producer of food ingredients, enzymes and bio-based solutions which appears to be driven by the need for sustainable food and fuel.

Ecolab purchsed Nalco – a water treatment and process company which is obviously being driven by water scarcity.

Perhaps overall it’s too early to make the call that sustainability will drive mergers and acquisitions, but from my view I think it certainly can be a major competetive issue.  Now the question remains, will the banking community eventually wake-up to this embedded value in corporations and subsequently desire to value it appropriately.   My guess is yes and this could clearly be our tipping point going forward.

Posted in Competitiveness, Corporate Responsibility, Social and Governance (ESG), Sustainability, Sustainable Investing | Leave a comment

Interesting Approach from Barrick Gold Corp

Just last week there was a very interesting announcement that came out from Barrick Gold Corporation (ABX) for which I believe the company deserves kudos.  They announced that they have put together a Corporate Social Responsibility Advisory Board which includes names like:

  • Aron Cramer – Business for Social Responsibility
  • Elizabeth Dowdeswell – Council of Canadian Academics and former Executive Director of the UN Environmental Program
  • Robert Fowler – dimplomat and senior foreign policy advisor
  • Ed Lieboxw – Director of Battelle Memorial Institute’s Seattle-based Center for Public Health Research and Evaluation
  • Gare Smith – senior partner at Foley Hoag LLP and former Principal Deputy Assistant Secretary in the US State Department’s Bureau of Democracy, Human Rights and Labor
  • John Ruggie – Author of the UN Guiding Principales on Business and Human Rigths, will also serve as a Special Consultant

In particular I find this very interesting and innovative on behalf of a global mining company.  Investors are increasingly understanding the importance of a variety of issues relating to  sustainability (in particular Environmental, Social and Governance) and more so, these issues can impact a company’s valuation.  Being innovative to bring together global leaders in sustainability to assist the company as it drives forward is leading edge.  Hopefully other global companies will understand the value of this kind of advisory board and that we will see other such advisory boards develop with a variety of players coming to the table to assist public corporations!

Kudos Barrick Gold for the leading the way!

Posted in Competitiveness, Corporate Responsibility, Environmental, Governance, Social and Governance (ESG), Sustainability, Sustainable Investing | Leave a comment

A compelling new study shows sustainability practices DO pay off

Earlier this week I had the opportunity to hear about a compelling new study that shows that sustainability practices DO, in fact, pay off for business.  This study is the same one that was recently recapped by a colleague of mine, Louise Macdonald (www.louisemacdonald.ca), for the Toronto Sustainability Speakers Series.  What follows is Louise’s recap of the working paper.

The working paper is called “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”, by Robert G. Eccles and George Serafeim of the Harvard Business School, and Ioannis Ioannou of the London Business School. It is not exactly light bedtime reading, especially if you get into the elements of scientific inquiry that are detailed throughout, but it is compelling in that it provides evidence that creating a culture of sustainability leads to improved corporate financial performance in the long-term. Perhaps those of us who are passionate about sustainability knew that already, but here is a study spanning 18 years and involving 180 companies that clinches it, or at least provides more food for discussion about the cost-benefit equation of shifting the corporate mindset.

The authors took a matched sample of 180 companies in 1993, which means they found two sets of 90 companies in 29 different industry sectors with similarities along 5 different financial dimensions: Total assets, Return on Assets, Return on Equity, and their definitions of Leverage and Turnover, and Market price-to-Book value ratio of the shares. The first group of 90 companies were selected because they were considered by the authors to be High Sustainability companies, who had adopted environmental and social policies and integrated them into their culture long before the sustainability movement had taken off, and the other 90 were chosen because they were traditional or Low Sustainability companies, who had adopted almost none of these policies over the period studied. The researchers wanted to chart differences in behaviour and performance over time between the two types of companies.

The article highlights major differences between the two sets of 90 companies in 4 areas:  governance structure, the extent of stakeholder engagement, the extent of long-term orientation and the measurement and disclosure of non-financial information and metrics. They found that the high sustainability companies were more likely to assign board responsibility to issues of sustainability, and to make executive compensation a function of stakeholder perceptions along environmental and social metrics. The needs, perceptions and level of engagement of key stakeholder groups in these firms were integrated into strategic thinking and measurement of performance. The authors also analyzed corporate and investor communications to identify words associated with long-term orientation for both sets of companies, and they found that the high sustainability companies were more likely to use words demonstrating their commitment to creating value over time; they were also more likely to measure and disclose performance along non-financial metrics, representing their commitment to a culture of sustainability.

Most interestingly, the authors also tracked corporate performance over 18 years in terms of both stock market and accounting measures of return, and found that the sustainable firms outperformed the traditional firms on all measures. Their concluding comments reflect their enthusiasm for more research in this area, while acknowledging that more and more firms will adopt a culture of sustainability because of changing societal expectations, and that tradeoffs and choices will be made in favour of sustainability that will build the value of these corporations over the long-term.

This study confirms for me that for corporations today, the question is no longer whether to make the shift toward creating a high sustainability culture, but when and where to start. To my mind, the focus in this study on building strong relationships over time with all stakeholders is a fundamental place to start. How can we best involve them in the future of our organization? What do we as leaders need to learn about creating a company that provides for a sustainable future for customers, employees, suppliers, communities, suppliers and partners as well as investors? And most critically, how does the way we are leading now unwittingly send a different message?

A copy of the working paper can be found at  www.ecoopportunity.net

Louise Macdonald, is a transformational Leadership Consultant who works at the level of assumptions and mindsets to help her clients create engagement toward a Sustainability strategy, among other change opportunities affecting their business.

 

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Are we at the tipping point for the adoption of Sustainable Business practices?

Recently I posted a blog about my perception that we are getting closer and closer to a tipping point with regards to the understanding and adoption of sustainable business practices.  To continue in that vein, I’d like to share a short interview with Noreena Hertz, Professor of Globalization, Sustainability and Finance at Duisenberg School of Finance following her presentation at the Responsible Investor Conference in Amsterdam in October 2011.

In this interview, Professor Hertz shares her view that business is indeed embracing sustainability because it leads to profit and that we are indeed at a tipping point.  She gives a great example of Walmart Canada’s efforts and rewards.  In addition she address the fact that in the past we’ve lived in a system where finance and economics were viewed to be separate and apart from sustainability and responsibility.  The recent financial crisis is highlighting that the perhaps these issues should indeed be more integrated.

Please find the interview at:

http://www.responsible-investor.com/tv/9/

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