Wharton Dean Erika James talks corporate governance in second ‘Beyond Business’ lecture

Wharton Dean Erika James hosted the second lecture of the Wharton’s Beyond Business lecture series on Tuesday, discussing how corporate governance has changed in the face of the climate crisis, social injustice, and the COVID-19 pandemic.

The Nov. 16 event — titled “Redefining Corporate Governance: Establishing Essentials for the New Business Era” — featured 1998 Wharton graduate and CEO of Diligent Corporation Brian Stafford, associate professor of Management Mary-Hunter McDonnell, and associate professor of Finance Luke Taylor. Over 7,000 people tuned in to the event on LinkedIn Live. 

The theme of this year’s Beyond Business lecture series is examining business and corporations through the lens of environmental, social, and governance — or ESG — concerns. The third and final lecture in the Beyond Business series, "Humanizing ESG," will air on Dec. 7.

“As companies look to establish and amplify their roles as global corporate citizens, it’s important to consult the data as we coalesce around a shared set of foundational criteria to measure impact,” James said.

McDonnell began the conversation by explaining the impact of crises on board composition. Firms responded to the 2001 Enron scandal and the 2002 WorldCom scandal by hiring directors with greater financial experience and skills. Both scandals involved the companies either hiding debt or inflating their earnings to maintain their stock price, and upon being exposed, the companies declared bankruptcy and dissolved.

Crises such as the pandemic and political unrest have also “shook up the boardroom,” with new cohorts of directors displaying more experience in social responsibility, human resources, and technology, McDonnell said.

“This shift is equipping boards to better understand and guide firms through the more turbulent social and political environments that firms are navigating today,” she said. 

Stafford said that the resiliency of firms during crises is dependent on their ability to communicate with their stakeholders, including their management, other firms, and the industry. 

“Companies who responded fast and the boards who helped management are the ones that were the most resilient and upheld their reputation in what's been a difficult two years for many companies,” Stafford said.  

Taylor and McDonnell also shared their take on the purpose of corporations, agreeing that corporations should not necessarily prioritize maximizing shareholder value and profit. Instead they should be optimizing shareholder welfare, as well as considering the interests of a broader range of stakeholders.

From there, the conversation moved to discussing board compensation and pay inequities within firms. Stafford suggested that pay policies are becoming more complicated as firms consider prioritizing compensation targets like diversity and sustainability instead of financial performance.

McDonnell explained how disparities in pay at different levels of a company can lead to lower worker morale, output, and attendance as top executives are rewarded for higher company performance and the average worker's wages remain constant. 

She also emphasized the importance of diversity and inclusion in the quality and accuracy of team decision-making and performance. 

“When you walk into a room where everyone has a different background, you know that you might have to do some convincing and so you prepare more before the meeting,” McDonnell said. “You deliberate more during the meeting, and because of that deeper deliberation, factual inaccuracies are more likely to surface and potential pitfalls are more likely to be discussed.” 

According to Taylor, there are two main reasons that should motivate ESG investing in the coming years. His research found that ESG-friendly companies see increased stock prices as well as a lower cost of capital for environmentally sustainable companies.

“The end result here is actually great news for society and for the environment,” Taylor said.