ESG (Environmental, Social, Governance) investing has grown to a $20 trillion business, but the investing community still lacks a clear definition of exactly what ESG means. In particular, many investors don’t appreciate the importance of the “G”, corporate governance.
One of the most, if not the most, important factors in corporate governance is executive compensation because it determines executives’ performance incentives. In our opinion, tying executive pay to return on invested capital (ROIC) is essential for any ESG strategy to have credibility with investors. ROIC is crucial to both maximizing shareholder value and building a business that is sustainable over the long-term. Nevertheless, just 30% of U.S. companies tie executive compensation to ROIC.
Sometimes poor corporate governance make companies potential targets for activist investors. This week, we’re highlighting two companies with poor corporate governance that would be better off selling themselves entirely.
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