Weighing ESG—the Social Component and Company Value


The social component of environmental, social, and governance (ESG) reporting relates to the ways in which a company manages relationships with its employees, suppliers, customers, and the communities where it operates. It includes criteria such as diversity ratios, human capital development, corporate citizenship, and occupational health and safety.

Why Does Diversity Matter?

diversity

After the election of Shinzo Abe, Japan started to encourage women to join the workforce in recognition that its economy couldn't move forward with half of its population sitting out of the workplace. The creation of an active role for women is an important element of the “third arrow” of Abenomics within Japan’s Revitalization Strategy.

Studies have shown that a correlation exists between gender and ethnic diversity in corporate leadership and financial returns. The correlation implies that when companies commit themselves to a diverse leadership, they are more financially successful. “The companies in the top quartile for gender diversity were 15 percent more likely to have financial returns that were above their national industry median, and the companies in the top quartile for racial/ethnic diversity were 35 percent more likely to have financial returns above their national industry median,” Mckinsey research shows. Mckinsey believes that more diverse companies are able to generate higher financial returns because those companies are better able to win top talent and improve their customer diversity, employee satisfaction, and decision making. 

Although there is still a long way to go before gender parity is reached, women are making inroads into company boardrooms worldwide. According to a Bloomberg Intelligence report, women now hold a median 22 percent of boardroom seats in the S&P Global 1200 index. The report also states that companies that report on and achieve grade and pay parity may better attract and retain diverse talent. 

Companies have implemented programs to improve diversity within their ranks. However, recently, the accounting firm Deloitte has decided to move beyond employee diversity groups. The company said its women’s initiative (WIN), which began in 1993 to improve retention and advancement of women, will end. Additionally, “Over the next 18 months the company will also phase out Globe, which supports gay employees, and groups focused solely on veterans or minority employees.” Deloitte has decided to phase-out these groups because it believes that millennial employees don’t like “demographic pigeonholes” and will instead create “inclusion councils” that will bring together a variety of viewpoints to work on diversity issues. Only time will tell how this change will affect Deloitte’s future diversity.  

Why Does Employee Satisfaction Matter?

The “best companies to work for” are also the best investment for the long-term according to Adam Edmans, a professor of finance at the London Business School. In a paper published in the Academy of Management Perspectives, he described how high employee satisfaction won’t necessarily improve a company’s short-term returns, but will generate higher long-term stock value.

Companies with high employee satisfaction outperform their peers by 2.3% to 3.8% per year in long-run stock returns—89% to 184% cumulative, according to the 28 years of data the paper examined. Professor Edmonds also stated that “the results suggest that it is employee satisfaction that causes good performance, rather than good performance allowing a firm to invest in employee satisfaction.”

Why Is Corporate Philanthropy Important? 

giv

There is a connection between the way employees feel about their company’s community involvement and their personal commitment to work, according to research conducted by Fortune magazine and Great Place to Work.

Salesforce, which landed on the top the list of “The 50 Best Workplaces for Giving Back,” made a total philanthropic donation of $137 million. Its employees said that the company is “an extraordinarily special place that really cares about its employees, customers, and community. The thing that most separates [Salesforce] from other companies is the focus on giving back. Personally, it provides me with a greater sense of purpose when I come in each day."

Rely on expert practitioners for practical guidance and real-world approaches to complex accounting issues with Bloomberg BNA’s Financial Accounting Resource CenterTake a free trial today.

Continue the discussion at  Bloomberg BNA Accounting LinkedIn.