“I intended an Ode, And it turned to a Sonnet.” Henry Austin Dobson
As the financial world reels with daily news of banking and financial failures, debate over the use of environmental, social and governance (“ESG”) factors in investment decisions remains front and center. Whether pointed to as a weakening factor contributing to the financial collapse of Silicon Valley Bank (SVB), or noted as the reason for the President’s first veto, ESG remains in the headlines.
While “environmental” and “social” have been driving much of the debate, recent events in the banking industry have thrust “governance” into the spotlight. Focused on the rules, risks, and processes that determine how an organization is managed, the “G” of ESG has been around for some time and should be beyond politics or debate. Good governance will always be needed; whether a company has it, heeded.
The Strophe
Although it is easy to blame the Federal Reserve, rising interest rates, or a specific Administration for cascading bank failures, factors surrounding current financial challenges are far more complex. Statements that this time would be different than the mortgage crisis now seem almost wishful – as if rising rates would not trigger increased risk to markets. Financial markets regularly meltdown in response to large, upward shifts in interest rates, which then puts pressure on businesses that rely on credit and credit lines to operate. Subsequent lay-offs reduce consumer spending, which further hinders banks and businesses from recovering quickly. Good governance hardens businesses’ resilience and shortens period of crisis, allowing companies to persevere despite adverse conditions. Government intervention often occurs when internal governance has failed.
The Antistrophe
Governance remains a powerful arbiter of which companies survive or even thrive, especially during downturns. Understanding how a company governs itself and manages its risks is crucial during both lean times as well as when the illusion of unlimited growth can lull even the most focused managers into complacency. The inclusion of governance in ESG raises pertinent questions regarding whether a company’s risks are properly identified, assessed and reported, and whether corporate controls are properly represented. These issues are central to the analysis of what causes multi-billion dollar corporations to fail. The need for their disclosure to assess risk seems obvious.
Epode
No matter how big the company, nor how volatile the industry, corporate longevity requires good governance. Risk management, controls surrounding fraud prevention, and a corporate structure with checks and balances tied to independent oversight may sound basic, even old-fashioned. Yet the current situation is a stark reminder that basic tenets are necessary for any business, whether new or old, high-tech or low-tech, digital or analog. Both business and economics propel companies that incorporate controls into their operations, and eventually exert a gravitational pull downward on companies who do not. If you do not know where your company stands, take the time to find out before the market tells you. The reason for the “G” in ESG is to prevent the collapse we now see.
If you would like to discuss any of the issues raised in this article please reach out to Tanya Bodell.
