In the ongoing debate about the relationship between ESG and investment performance, it is sometimes argued that these variables serve as a proxy for management quality. In other words, if companies are managing their environmental and social risks well, and if they have governance structures designed to hold executives accountable, they are probably generally well-organized and good at anticipating whatever may affect their business. Over the long term, the argument goes, such companies will likely be better at protecting shareholders’ interests. This week’s news from Massey Energy may lend support to this thesis.
After the tragic accident that killed at least 25 miners at one of the company’s operations this week, there has been widespread press coverage of Massey’s record of safety and environmental violations. A look at the company’s governance also reveals a pattern of serious issues. The Corporate Library has registered high concern about CEO compensation at the company for some time, due to repeated cash retention bonuses (with no performance triggers), extensive stock and option awards, and the downward adjustment of performance targets for the annual incentive program in 2008 after 2007’s proved hard to meet. The board has additional problems: three members received over 10% withhold votes at their last election, which is unusually high. One of them, James B. Crawford, received over a quarter of votes withheld, and another, Lady Barbara Thomas Judge, received a majority of votes withheld. (Because of the company’s plurality voting standard, she was not required to resign.) The board’s committee structure is also unusual, with several very large committees of six or seven members each (including the Environmental, Health and Safety Committee, whose members might expect to see some more withhold votes this year, given recent events). Given these large committees, a number of directors serve on several committees at once. Typically, boards limit committees to three or four seats so that a few directors can focus their attention on a given area, and develop some expertise that can help guide the board as a whole. Massey’s directors are likely to be too scattered to adequately oversee the specific issues they are charged with. Massey's complete corporate governance report is available for purchase on The Corporate Library's website.
In sum, by multiple ESG measures, this seems to be a company that does not have its affairs in order. The consequences for some employees have already been devastating; investors may also be at serious risk.
For more information on the link between ESG factors and investment performance, download our free report, "The Corporate Library's Governance Ratings and Equity Returns."
Kimberly Gladman - Director of Research and Risk Analytics
