Private Companies Shouldn’t Neglect ESG

Environmental, social and governance issues aren’t just public company concerns.

By Carol Nolan Drake and Sally J. Curley

At Envigo, environmental, social and governance issues, known as ESG, is part of the business strategy.

The New Jersey-based private health care services company has focused on ESG to meet customer needs and also to fulfill the firm’s mission, says Paul Surdez, vice president, corporate affairs and investor relations at Envigo.

“Being in health care, our board and senior management has a high degree of focus on business integrity and strong corporate governance,” says Surdez. “And so ESG factors are key to achieving our vision of ‘working together to build a healthier and safer world.’”

Regardless of whether the company remains private or goes public, we suggest creating an infrastructure that embraces ESG with a goal of long-term value creation. To that end, here are six areas for consideration:

Being nominated to serve on the board, standing for election every year or in the case of a classified board, every three years. A company’s ESG profile may be a factor for private equity (PE) investors as they decide whether to support a current director or withhold their vote;
Service on a board committee as chair or a member, which could include the Audit, Nominating and Governance and/or Compensation Committees, as independent directors. These key committees will have some components of E, S, or G in their charters;
Meeting with investors, customers, employees and other stakeholders, and being prepared to present company perspectives and answer questions on ESG issues;
Accepting scrutiny for past career choices, other board service, and decisions made that may be need to be explained to PE investors, as they scrutinize a director’s background for ESG considerations;
Determining appropriate disclosure frameworks and materiality, including identification of risks both present and future; and
Understanding the requirements of ESG-related board and company disclosures, i.e., what is permitted and what is not.

For each of these considerations, to develop a solid understanding and appreciation for how ESG issues impact a company, boards can compare the company’s business model with the most utilized ESG terms. This depends on the industry, company, geographic location and culture.

Boards should avoid the temptation to “boil the ocean” and instead focus on areas that are relevant to their company. As part of an enterprise risk management process, hone in on the top 10-12 areas of greatest risk for the long-term health and well-being of the organization. That will provide private boards with a guide as to how to prepare for going public, if desired, and what should be disclosed in SEC filings.

While there is much written about ESG from a public company perspective, private companies are taking note of such greater-good ideals as they strive to create value.

Setting the private entity up as an attractive acquisition candidate, taking the company public, or striving to remain a private entity, requires serious consideration regarding the impact of many ESG factors on the company’s operations, the workforce, customers and investors.

Directors must be able to discern which factors are of utmost importance because ESG strategies can enhance a private company’s bottom line, just as it can for a public company.

There are numerous considerations and definitions for ESG, and some of that depends upon the individual company, industry, culture, geography and business model. Here are just a few of the timely issues that come under “E,” “S” and “G”:

Environmental. One-time plastics usage; water usage and conservation; wastewater treatment; fracking; palm oil deforestation; brown sites; long-term resource planning; climate risk; conflict minerals; solar and alternative energy.
Social. Corporate reputational risks; pay equity; advancement within the workplace; the #MeToo movement; investor avoidance screens; human capital management; animal welfare; good corporate citizenship; and LGBTQ issues related to corporate policies.
Governance. Cybersecurity; experienced, independent and diverse board members; separate chair/CEO; executive pay and compensation; compensation linked to long-term performance; director compensation and perks; succession planning; diversity initiatives; board education; ethics; accounting and business practices; knowledge of stewardship and governance codes adopted in U.S. (and globally if applicable); blockchain; artificial intelligence evolution; changing regulatory environments; and a long-term vs. short-term performance focus.

As it relates to private equity investors and private company boards, we offer the following observations:

The need for capital has become more intense and, with it, the requirements for private investors. It is critical to have the right guardrails in your organization in place from the onset: disclosure frameworks, board structure and governance, board member independence, enterprise risk management discussions and proper financial and corporate reputational frameworks.
Talent management should be a key focus for any growing organization, but particularly for private companies as they compete with public companies for the best employees. Private company boards and managements should focus on attracting and retaining talent with compensation systems that are appropriate for the company at that stage in its lifecycle. Having the proper policies and training in place to handle the “S” factors in ESG will make for a more attractive place to work. Remember, younger generations are interested in working for companies that “do good” so reputational management is key.
We’ve found that, from the onset, the smartest private companies create an governance infrastructure similar to that of a public company. Whether the exit strategy is to be acquired or go public, a private company is more attractive to a buyer or asset manager if it has a strong governance structure which includes ESG initiatives and disclosure and has been operating within that framework for some time.

Much of the increased focus on ESG is coming from investor pressure.

In early 2018, Curley Global IR, LLC surveyed heads of sustainability and leading governance professionals at investment firms representing more than $17 trillion in assets under management. Asset managers told us that they are increasingly focused on ESG because:

Their clients — the asset owners — are demanding it of them, including investments through private-equity investment strategies in private companies.
Millennials are saving more and investing less. When they are investing, they are doing so in “socially responsible investments.”
More than half of the assets under management today are passively managed. For active investment managers, offering ESG-focused funds is a key way to differentiate.

So, ESG matters to private companies for several reasons.

Some private companies aspire to go public or be acquired, and will be more attractive to investors and buyers if they address ESG issues.
,A private company will be even more appealing to private equity firms if the company has a strong ESG focus and infrastructure to mitigate risks. Adopting ESG principles will help a private company distinguish itself from the pack and show a high-functioning board is at the helm.
Customers are also driving the interest in ESG and compliance as well.

“As a critical component of the biopharmaceutical R&D supply chain, many of the same ESG issues that are important to our customers also are very important to us," explains Envigo’s Surdez. “In fact, some of our customers — which include large, global pharmaceutical companies — have auditing processes which include detailed discussions on a number of ESG topics, most notably occupational health, waste management, labor policies and practices, appropriate and ethical supply chain management, and community engagement.

“These are just some of the critical areas of focus for our investors, employees and customers,” he stresses.

Sally J. Curley is owner of Curley Global IR, LLC and a retired corporate executive with more than three decades of investor relations experience, as well as deep expertise tackling the social and governance aspects of ESG. Carol Nolan Drake is the President and CEO of Carlow Consulting, LLC, based in Columbus, Ohio, which provides corporate governance advisory services and federal advocacy for her clients.

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