You are hereBasics of Responsible Investing: ESG Data: Governance

Basics of Responsible Investing: ESG Data: Governance


Corporate Governance is the third realm of interest and action in RESPONSIBLE INVESTING, where we look at how a company makes decisions, how it is managed, and how it implements policy such as hiring practices. When a company has a policy not to hire gays (Johnson & Johnson in the 1990s and others) it has a Corporate Governance problem. When a company issues predatory loans (many of the banks and mortgage companies) or borrows so much money that it's at risk of failing (most of the major New York investment banks), we say it has Corporate Governance problems. It's making bad decisions.

We say a company has Corporate Governance problems when we think the company is acting poorly or is abusive because of decisions and actions of management. Often shareholder action is the main solution if there are not regulations curbing the activity.

The SEC does not appear to have been fully in control of it's mandate in recent years, where companies such as bond rating agencies (both Moody's and S&P) failed to adequately grade the quality of bonds, often 'rubber stamping' high grades. Since the bond rating agencies are paid by the bond issuers, there is essentially a conflict of interest. This failure of Corporate Governance, both in the companies who acted poorly and at the SEC was a major contributing factor to the financial disaster.

One of the solutions to Corporate Governance problems is transparency. Transparency here means that a company should have a way for shareholders and the public to see into it's operations and decision making in order to assure that sound judgment is in control.