Monitoring material ESG issues can highlight bad governance and lack of transparency, according to Datamaran
LONDON, June 3, 2019 /PRNewswire/ -- Three recent aviation and automotive scandals that caused significant damage to global companies' reputations and stock prices could have been foreseen by monitoring disclosure on material ESG issues. According to a new analysis by Datamaran, the leading solution for non-financial risk management, many corporate scandals share a common cause: bad governance that results in a lack of transparency.
In the new analysis, Datamaran shows that by tracking transparency on issues that are material to the company, it's possible to see red flags before a scandal happens. For example, if product safety is important to a company, noticing that the company did not disclose information related to its governance and practices around product safety, especially if its competitors did, could be a cause for concern.
"Scandals are often the visible outcome of a governance failure, and both have material financial consequences, making transparency important for investors in particular to take notice of," said Donato Calace, Director of Accounts and Innovation at Datamaran. "If a company doesn't have a strong materiality process, with board oversight and ongoing monitoring, that could signal that they don't have the proper governance controls and procedures in place. This could be a red flag, signalling a potential scandal."
The analysis covers three recent corporate scandals, involving the largest aerospace company and two leading car manufacturers. Following two tragic plane crashes, the multinational corporation that designs, manufactures, and sells airplanes faced reputational damage and a fall in stock value. The German automaker faced public judgment when it was shown to have cheated on emissions testing. And most recently, the Japanese automobile manufacturer's scandal involving fraud committed by senior executives revealed a major governance failure.
In all three cases, the companies had failed to report material information related to the scandals in the preceding years. The aerospace company almost never refers to product and service safety when compared to its peers, the German car manufacturer lacked transparency around air emissions, and the Japanese automobile manufacturer had the lowest, or near lowest, transparency of all the major car manufacturers around governance issues.
A lack of transparency is therefore an indicator of a potential forthcoming scandal, and it can be used to a company's advantage by ensuring all relevant material topics have been highlighted through a materiality process – provided it's robust, data-driven, timely and regular.
A company that fails to identify its key material issues is more likely run into controversies and scandals, which can lead to adverse campaigns from NGOs and activists. And a reduction in trust can lead to the withdrawal of investors, and a drop in share prices.
Donato Calace added: "Our study has revealed that when it comes to materiality analysis, no news is definitely not good news. When a company directly refers to a particular concept regularly and discusses it in detail in its reporting, this is a clear sign that the issue is at the forefront of its corporate consciousness - and is far more likely to be taken seriously. When a company fails to disclose sufficient information on their governance and practices for a particular issue, they're either unaware of it or they're uninterested. Either way, that can be a serious danger for any business."
Conversely, a company with solid governance, as signalled through a robust and ongoing materiality determination process, is less risky; it has more stable cash flows, less stock price volatility and less exposure to governance failures and scandals.
The study is available here: https://www.datamaran.com/materiality-reputation-report/
Datamaran is the global leader in Software as a Service (SaaS) solutions for non-financial risk management. Datamaran enables a business process for continuous issues monitoring fully owned by the sustainability and risk teams. It harnesses technology to support decision-makers with an improved materiality analysis process – one that seamlessly integrates into Enterprise Risk Management (ERM) and corporate strategy.
Datamaran's global clientele of blue-chip companies have replaced the dated and expensive manual processes used for benchmarking, materiality, and non-financial risk analysis as well as issues monitoring. The insights Datamaran users gather are used across multiple business teams (governance, risk, compliance, sustainability) to identify and monitor risks and opportunities and to inform corporate strategy.
For more information:
Elina Yumasheva, Datamaran