Corporate governance failures have lingering consequences

The Grifols scandal has once again put the “G” of the ESG acronym, which refers to environmental, social and governance factors, into a fluorescent light. The Spanish pharmaceutical company is under investigation by the CNMV following allegations brought by Gotham City Research, which accused it of misrepresenting its financial statements in an inflammatory report. This has led to a deep crisis in the stock market (the stock market has fallen by 32% since the report was published on January 9) and in the management of the Catalan company. Visit the dedicated portal elEconomista ESG.

Besides the fact that the company’s accounting practices may have been stretched to breaking point, corporate governance experts have criticized the company’s lack of transparency and the presence of several participants in the family saga not only on the board of directors, but also on the management committee, that is, in the day-to-day management of the company. They also point to the very high percentage of dissenting votes they received at their last meeting on some director renewals, as well as on their salaries.

“G” is the part of ESG that can cause the most harm to a company. The participants of the last event agreed with this idea. “ESG Meeting of”, monthly forum on sustainable investing., which included representatives from fund managers and banks, a sustainability consultant, a proxy advisor (voting consultant) and a rating agency. The consequences of getting the letter G wrong are “devastating,” he concludes. Miriam Fernandez, Head of ESG at Ibercaja Gestión. In recent years there has been an acceleration the rate at which control errors are transmitted to quotespoints out: “There is now more information, thanks to figures such as proxy consultants, so that the sales flow can be executed more in advance; It’s not that it’s more important now than before, but perhaps there’s more awareness of the damage it can cause,” he elaborates.

According to Alicia Prieto Angulo, corporate governance analyst Corporate Voting Consultants, “Investors such as Chris Hohn of Aena, or activist associations such as European Follow This, have already shown that G matters and that environmental and social improvements can be achieved with it.” Prieto Angulo recalls that the quorum at shareholder meetings has increased in recent years, indicating a growing interest in voting on issues “beyond financial matters or dividends.”

Senen Ferreiro, founding partner of the consulting company Valorasustainability specialist agrees: “The governing body decides whether the company puts more effort into E or S. G is not just another letter, but above it.”

Other governance crises

In Spain and around the world, we have already witnessed other profound crises of governance that have caused great damage. TO Jorge Gonzalez, director of fund analysis at Tressisthe case of Volkswagen (which tuned its diesel cars to pass emissions tests) had a profound impact on him. “I engraved it in fire, “I did suffer, even though we didn’t have that in the funds of funds, but it made me realize that I had to consider whether the products we were buying in the discretionary portfolios were doing their ESG analysis justice.” 9 years ago sustainability was not a major topic.

“Nobody was talking about sustainable investment, the most advanced were Swiss investors, and I remember that they, analyzing Volkswagen’s corporate governance, complained that the company put many obstacles in their way to visit its factories or communicate with people who are not part of the team investor relations,” Gonzalez recalls. With this crisis Not only did Volkswagen collapse on the stock market (more than 60%); brought down the entire sector.

From left to right and from top to bottom, participants of the “ESG Meeting”: A. Prieto (Corporance), A. Labigne (Sustainalytics), J. Gonzalez (Tressis), J. C. Mendes (EVO), S. Ferreiro (Valora), M. Fernandez (Ibercaja) and J. Prieto (Corporance).

“Let’s not forget the Lehman Brothers crisis caused by the bad behavior of the rating agencies,” he reminds. Juan Prieto, founder of Corporance Voting Advisors. “And just recently there was a case “Credit Suisse is another clear example of management failures”. Credit Suisse fell more than 60% on the stock market before it was bought by UBS.

Clearly, “the financial sector is one of the most indicative of the importance of good corporate governance,” he points out. José Carlos Mendez, director of EVO Banco. “This industry has demonstrated a number of failings at all levels, not only in terms of governance, but also in terms of accountability and accounting transparency.” At the same time, it created a “pendulum swing” that took banking from lack of regulation to overregulation, “enabling the financial sector to become the paradigm of best practice in IS G today.”

Doubts about ESG ratings

The Grifols case also raised doubts about the power of ESG ratings, because the agencies issuing these ratings did not foresee the company’s upcoming problems. S&P Global gives the Spanish company a poor governance score (62 out of 100) and Sustainalytics classifies it as “zero risk” in terms of governance. “I think in some cases it is necessary to be less soft,” warns Miriam Fernandez. In the specific case of Grifols, “I’m concerned about the fact that suppliers view shareholder structure, cross-interests, cross-shares so differently, because there is a strong dichotomy in aspects that should be less subjective. At the same time, it is very sad because it affects funding. company,” adds the head of ESG at Ibercaja Gestión. Also read: Agencies disagree on which bank is the best on ESG.

“The G pillar is probably the pillar that the financial industry has the most backwards approach to, but that doesn’t mean that methodologies can sometimes miss an event,” he notes. Anaïs Labine, Senior Client Partner, Morningstar-Sustainalytics, which adds that it is necessary to “assess risks on a broad, rather than individual, perimeter,” taking into account that the population covered by Sustainalytics “exceeds 20,000 companies.” In any case, given that the CNMV is investigating the company’s activities, Labigne considers it necessary to “step aside” and wait for what the regulator decides.

“Governance analysis models rely heavily on issues of form and regulation,” warns Senen Ferreiro (such as the percentage of women and independent board members), “and do not get to the heart of the matter.” In the case of Grifols, one of the issues that has attracted attention is that KPMG auditor has been working with them for over 20 yearsalthough it is recommended to stick to 10 years as a good practice.

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