Time for company directors to get serious about ESG

A BlackRock unit, BlackRock Institutional Trust Co, is the tenth biggest shareholder in Top Glove, holding 1.07% of its shares.

THE role of independent non-executive directors (INEDs) came to light recently when BlackRock Inc – the world’s biggest asset manager with US$7.81 trillion in assets under management – queried Top Glove Corp Bhd’s handling of a Covid-19 outbreak while voting against the re-election of six independent directors at its recent AGM.

A BlackRock unit, BlackRock Institutional Trust Co, is the tenth biggest shareholder in Top Glove, holding 1.07% of its shares.

The asset manager cited workers’ accounts of working and living conditions, the firing of a whistle blower and the virus cluster in its condemnation of the board and said it would vote against the re-election of other directors at future meetings.

In a reply to my query posted at the recent AGM of Top Glove, its senior independent director clarified that the INEDs have checked with Top Glove’s management on the issue of the sacking of the whistle blower as reported in the social media in addition to conducting its own independent investigation into the matter.

The INEDs of Top Glove concurred with the action taken by management as the worker had violated the company’s disciplinary guidelines for workers misconduct for not highlighting the issue to his superior or via the company’s whistle-blowing and grievance channels but instead chose to share the photos with external parties.

By so doing, the worker in question lost the protection under the company’s whistle-blowing policy.

In all fairness, the management of Top Glove has stated in a media statement reaffirming their commitment to take remedial actions to protect their workers’ rights as well as taken steps to provide better and more conducive living conditions for their workers.

In its statement made available to Reuters, the world’s largest glove maker further highlighted that its independent directors – all of whom were ultimately re-elected at the company’s AGM on Jan 6 – have served an average of six years and that the board meets regularly to discuss the pandemic and other governance matters.

Nevertheless, BlackRock’s action laid bare one stark reality – that INEDs have to be proactive in fulfilling their policing role as the ears, eyes (and probably noses) of shareholders who duly pay their fees.

In fact, INEDs should be accountable to shareholders as opposed to being mere figure heads, mouthpiece or yes-men; they are expected to be both vocal and firm to challenge major shareholders on issues that may jeapordise the best interest of the company, thus resulting in huge negative perception.

On the same note, local institutional investors should be more vocal in playing their stewardship role.

The voting against the appointment of Top Glove’s INEDs by Blackrock is an eye opener that our local institutional investors should ensure that companies do not take ESG (an acronym for environmental, social and governance) matters lightly as they focus on the bottom line.

The same applies for every major shareholder and stakeholder to embed every ESG risk consideration into their business operations and investment decisions.

ESG literacy a must

With sustainable or socially responsible investing becoming the thrust of modern day investing, INEDs must ascertain that the company they represent partake issues pertaining to climate change, workforce welfare and corporate governance close to heart.

This is because the Covid-19 pandemic has intensified discussions about the inter-connectedness of sustainability and the financial system

With ESG investing accelerating in demand, there is a rising number of investors who consider it important to incorporate such values and concerns into investment portfolios as opposed to simply considering the potential profitability and/or risk presented by an investment opportunity.

Back to the aforementioned issue of workforce welfare, BlackRock does have a valid point by taking Top Glove’s INEDs to task for failure to ensure compliance of standard operating procedures (SOPs) or overseeing the health and well-being of workers despite the company having raked in record-breaking profits.

The same values apply to all other economic sectors which entail labour-intensive operating environment, whether they are manufacturing, plantation or construction/property development sectors.

Bank and oil & gas (O&G)-based INEDs, on the other hand, should familiarise themselves with repercussions from climate change that presents both risks and opportunities for financial institutions and the O&G industry.

Banks lend to many industries that are physically affected by extreme weather events caused by climate change. Rising sea levels, changing weather patterns and severe flooding can destroy infrastructure, disrupt supply chains, and affect the ability of borrowers to repay loans.

Likewise, the O&G industry is facing a critical challenge as the world increasingly shifts towards clean energy transitions. Fossil fuels drive the companies’ near-term returns, but failure to address growing calls to reduce greenhouse gas emissions could threaten their long-term social acceptability and profitability.

Onus on INEDs

A strong signal must be sent to independent directors that they have to play a more proactive role to provide check and balance instead of being perceived as overly friendly or merely act as a rubber stamp for the major shareholders.

What is important is that companies should not just publish well-crafted ESG policies on their website but should also ensure effective implementation of those policies

One of the pertinent issues to take cognisance of is probably to take whistle-blowing practices seriously. Companies must bear in mind that having spelt out good policies does not equate to good implementation, thus they must gain the trust of their employees and at the same time, have faith in them for speaking up against what is perceived to be unjust treatment or poor working conditions.

As communities and economies struggle with the Covid-19 pandemic and with ESG principles increasingly apparent across regions, a “wait-and-see” approach could heighten the risk of not developing comprehensive and robust strategies to strengthen business resilience.

With many businesses now struggling with uncertainties following the re-imposition of the movement control order (MCO 2.0) – and the grim prospect of an indefinite extension – boards have to be extra vigilant in reviewing and monitoring strategies implemented by company management.

Foremost in the execution of what is deemed as their fiduciary duty should be an oversight role in ensuring that the safety and welfare/well-being of employees are not in any way compromised at the expense of profitability.

Lya Rahman is the adviser to the Institutional Investors Council of Malaysia and is the former general manager of the Minority Shareholders Watch Group. Views expressed here are the writer’s own.

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