The final element of ESG is G for governance. Historically, governance of the tension between shareholders financial interests and managerial self-interest, has been an important focus of research in accounting and management. That body of work is represented within the G of ESG. But the definition of governance is also expanded to focus as much or more on the governance of relations with a broader set of external stakeholders, including governmental and non-governmental organizations. Beginning with more traditional governance topics, the question of pay equity, not just among employees, but in particular of top management, is a prime topic of interest. CEO pay in the US has risen from about 25 times that of the average worker in 1970 to 50 times average worker pay by 1990 to between 200 and 400 times from the peak of the 1997 stock market to the present. Such inequality in pay, and in particular of focus by executives on short-term stock price performance, which has driven much of the gains and their compensation, can lead to self-interested behavior by senior executives. Examples include focusing on share buybacks, matching or exceeding short-term earnings guidance, and other short-term goals that are not actually in the company's long-term financial interests. Such behaviors can directly undermine long-term performance through underinvestment in R&D and other long-term investments, but also have indirect effects by de-motivating the workforce. Another set of traditional governance factors focuses on the interests of shareholders and the ease with which they can express their collective opinion on mergers, especially hostile takeovers, compensation, corporate bylaws or corporate charter changes. Well, a focus of much research by scholars in law economics and management in the 80s and 90s, within the ESG movement today, there's a debate as to whether these protections of minority shareholder interests, may have reinforced the short-term focus of senior leadership at the expense of the voice and long-term interests of other stakeholders. The board of a company is meant to be an important source of advice to the senior management, as well as provide oversight of that management on behalf of shareholders. How competent is that board? How much information are they given, and how much voice do they have in practice? Are committees on compensation, risk, and nominations staffed by board members with relevant capabilities? Do they work independently of management? How many board members are independent of management, and what roles do they play on those committees? How interconnected are board members, and how focused are they on this company as opposed to others? Are they compensated in a way that incents them appropriately without generating conflicts of interest? A more recent extension of the governance literature, has been to examine the enterprise risk management practices of a company beyond the risk committee of the board. Does the company have a risk register with data on the potential magnitude and likelihood of a range of material risks? Is the process of generating that risk register cross-functional and participatory within the organization? Does it rely on both internal and external data in it's assessment of probabilities and potential harm? What is the process to identify and assess the efficacy of various mitigation mechanisms for those risks? Who's responsible for risks and their mitigation, and on what basis are their requests for resources assessed? Recent research by Wharton faculty members, Carolyn Deller and Chris Ittner, show that such systems and processes enhance performance on other material ESG issues. Expanding the scope of traditional governance to focus on societal relations more broadly, reveals several additional governance challenges. As economic resources are becoming increasingly concentrated in a smaller number of companies, policymakers and citizens are once again expressing growing concerns around anti-competitive behavior by companies in their mergers or their pricing strategies, which may forestall the emergence of competitors. Market concentration has risen steadily since the 1980s, with a striking acceleration in the last 20 years, particularly outside of the manufacturing sector. Within the tech sector, consider Facebook's acquisition of Instagram and WhatsApp, or Apples longstanding dispute over licensing terms with Qualcomm, and Amazon's treatment of independent sellers on it's platform. Employee shares of gross value-added have declined dramatically in those last 20 years, while after tax corporate profits have soared. More disturbingly, returning to the question of short versus long term interests, net investment as a percentage of operating surplus, has also fallen, calling into question the sustainability of current corporate performance. Concentration is increased notably across the tech sector, but also in pharmaceuticals, wireless telecommunications, cable and satellite TV, financial services, retail, agribusiness, and more. Firms in each of these sectors are at risk, should the United States, the European Union, and Japanese governments reinvigorate anti-trust enforcement actions. Beyond the legal and competitive implications of such anti-competitive behavior, customer and citizen trust and firms and capitalism itself is influenced by the growing inequities in the distribution of profits or economic surplus, both in frontier markets but also here in the United States. Corruption or the illegal trading of financial or other resources with government officials for some private benefit, is another governance challenge. Enforcement of the Foreign Corrupt Practices Act continues to expand with over two billion dollars of penalties assessed in both 2019 and 2020. The first time more than five billion dollars were levied in a two-year period. Companies resolving their claims with the largest damages include Airbus paying $3.9 billion for bribery and covered by a British whistleblower in it's sales to Sri Lanka, Malaysia, Indonesia, Taiwan, and Ghana. Goldman Sachs is another example. They paid $2.9 billion for bribes paid in Malaysia to win government business. Once again, beyond the legal costs of such bribery resolutions, the reputation and trust that stakeholders have in these organizations is undermined. While not a violation of law the web of campaign finance contributions from companies, their foundations and industry associations, through political action committees, other foundations, and other conduits to politicians, think tanks, and academics espousing positions and policies that favor the donor, also undermine trust in companies by their stakeholders, particularly where they hold divergent political and social opinions. ExxonMobil's well-documented denial of climate risk, even when it's own internal analysis supported the underlying science, is the modern day equivalent of the tobacco companies undermining regulation that their internal analyses showed, would have saved lives. Finally, a budding issue as we emerge from the debt deficits spending needed to avoid a global depression during the COVID pandemic is how much more will corporations pay in taxes to help pare down accumulated debt. A global agreement was reached to establish a minimum floor of a 15 percent corporate tax rate. To the extent that we believe companies have a responsibility to address environmental and social harms that they create, we should also consider the taxes that they pay to the communities in which they operate, and the states in which they do business. Because those communities and states are the ones that often bear the cost of those harms. While tax exemptions and holidays can be spurs for new construction and jobs, the competition by different jurisdictions to provide such tax breaks, quickly becomes a zero sub-game. Corporations from Archer Daniels Midland and agribusiness, to FedEx and logistics, to Nike and apparel, to Salesforce and business services, to AMD and computers, to Charter Communications, all paid zero taxes in 2020. While paying taxes like paying wages seems like it must be a zero sub-game from a shareholder perspective. To the extent that such non-payment erodes political and broader stakeholder support, undermines health and educational outcomes in the cities in which these companies do business, and increases political polarization and conflict, the medium to long-term consequences of tax avoidance are more complex to model. That concludes the survey of the three ESG factors, environmental, social, and governance, and how, why, and when they might be financially material
