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The big remake of board and CFO agenda in 2020

Wall Street leans in on diversity, sustainability and governance with new filters for investments; signals company boards across the globe.

January 30, 2020 / 01:49 PM IST

For long, in corporate law and conduct, the shareholder who offers risk capital to new businesses was king. As we step into the third decade of the 21st century, other players are making their mark on capitalism.

And, the starkest sign of this new age of capitalism comes from Wall Street icons Blackrock and Goldman Sachs in January as they espouse the causes of other stakeholders with tangible and time-bound signals for change to their clients.

While Goldman, one of the biggest investment banks on Wall Street, has chosen diversity as a precondition to going public for its clients, Blackrock, the world's largest asset manager, has chosen to focus on climate change.

Blackrock's Chairman & CEO, Larry Fink said in his letter to CEOs, "I believe we are on the edge of a fundamental reshaping of finance," while pitching harder for reporting and disclosures attuned to climate change as a means of better risk management.

For broader sustainability information, Fink pushed for the standards provided by the Sustainability Accounting Standards Board (SASB). And in evaluating and reporting climate-related risks, he pointed to Task Force on Climate-related Financial Disclosures (TCFD). He urged investee companies to start making these disclosures by the end of 2020.

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Fink's letter carried an explicit threat for the CEOs in bold too. "Given the groundwork we have already laid engaging in disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them," Fink said.

Given that Blackrock has close to $6.9 trillion assets under management, that is a really big stick that Fink has been unveiled. Likewise, at Goldman Sachs, one of the world's top investment banks, David Solomon, Chairman and CEO, hitched his bank's influence behind diversity on Boards.

In the US and Europe starting July, Goldman Sachs, therefore, is committing to taking public only those companies which can boast of a diverse Board i.e. at least one member who can be considered to add to the diversity. And, that requirement will go up to two such members the following year.

Solomon continues to believe his bank's primary duty is to deliver high returns to his shareholders. Yet, he is clear that those high returns in the medium to long term come from attention to all stakeholders. "This is the best advice for companies that want to drive premium returns for their shareholders," he said to television channel, CNBC at Davos last week.

While these moves from the biggest players on Wall Street are likely to be currently confined to the more mature markets, they have the potential to reshape the agenda globally as more and more players take these cues.

Boards will have to take note and act accordingly as new aspirational and market-based benchmarks kick in for governance. Climate change is likely to inch up to the top of the risk agenda. And with that will come new accounting norms for CFOs.

Company managements and CFOs looking to raise funds for their companies will find a hard governance premium or discount in the market in line firm's efforts at dealing with all kinds of stakeholders.
Moneycontrol News
first published: Jan 30, 2020 01:49 pm

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