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Corporate governance issues are constantly in the headlines. But discussions of corporate governance invariably miss the real problem: most public companies have extensive governance procedures but no governing objective. First, corporate boards must select a clear governing objective.
If they do, as many CEOs believe, this is a serious indictment of current corporate governance arrangements and has important policy implications. It finds that companies that take a long-term view perform better on many metrics, such as employment growth and shareholder return. I am not sure what to believe in this area.
But one other big factor has been hiding in plain sight: The efforts of corporate-governance activists and proxy advisers, empowered by the “Say on Pay” votes mandated by Dodd-Frank reforms, to stress transparency and pay for performance. Eventually, the company’s share price nosedived.
We have a government with annual deficits of $1 trillion and with a lot more “off the books” because there are non-budget items. Tip to owners – one of the top three things you can do is have solid financial systems, accurate statements, good management reports, know your KPIs, and other metrics.
After all, “short-termism” does not correspond to any single quantifiable metric. And isn’t the focus on quarterly results a natural outgrowth of the rigorous corporate governance that keeps executives accountable? With this metric, the gap between long-term companies and the rest is even bigger.
The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cashflows and equity market valuation without any further reflection.
It is not just the purview of finance to interpret the numbers that govern profit and loss; it behooves every employee to understand how and why the company makes money, spends money, and measures financial performance. Cashflow. To understand how one metric affects another, understand some common scenarios.
Moreover, investors are now able to track the high performers on ESG (environmental, social and governance factors) and are correlating better financial performance with better ESG performance. In that year, these improvements resulted in 15,000 metric tons of CO2 emissions avoided and savings of nearly $11 million.
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