Working Report, 2/2005 – Environmental Shareholder Value – 14 Setting the three elements in motion

Environmental Shareholder Value

14 Setting the three elements in motion

The environment, Shareholder Value and Corporate Governance. How are these things connected?

Shareholder Value and the environment alike represent business goals. Furthermore, as illustrated by the report there is a correlation between the two goals. This correlation is sometimes positive and sometimes negative. However, the two concepts seldom stand alone.

At present, only few companies are equipped for measuring and managing these correlations. The implementation of Corporate Governance principles aiming at both Shareholder Value and environmental objectives is the managerial approach to setting the correlations in motion.

Chapter 12 contained a number of questions for mapping the correlations between the environment and Shareholder Value in the company. Similarly, questions could be posed as to the specific challenges of the company's Corporate Governance and its correlation to Shareholder Value and the environment. The questions were built up around the items in the Nørby Committee's report, which was introduced in chapter 5. They may thus be used for determining whether the basic conditions for good management of Shareholder Value and the environment are met by the company.

The role of the shareholders and their interaction with the management of the company

Shareholders have an interest in having good access to company information. They are thus given good opportunities to exercise influence in an informed manner at general meetings. Shareholders may not immediately request environmental information if they do not see the financial relevance of such information. The company can, however, illustrate this through a correlation of Shareholder Value and the environment.

The role of the stakeholders and their importance to the company

Another aspect of good Corporate Governance is that the company maintains good relations with anyone affected by the company's activities. For example, this may be employees, neighbours, customers, or interest organisations. Specific initiatives include drafting an environmental policy as well as regular dialogue with stakeholders.

This environmental policy should provide the overall guidelines for environmental work. The policy must be realistic and reflect the level of the company's environmental work. Thus, the environmental policy will show the actual state of environmental work, and it may be supplemented by a vision for the company's environmental conditions in the longer term.

Environmental policy may also be seen as an area where the company formulates and accepts a responsibility to society. This responsibility should, preferably, tally with the expectations of investors/owners and society in general.

Does the environmental policy tally with the expectations of owners and stakeholders?
Does the board of management support the environmental policy?
Does the board of directors support the environmental policy?
Does the board of management know whether the environmental policy reflects the actual environmental work?
Does the board of directors know whether the environmental policy reflects the actual environmental work?
Does the environmental policy reflect the actual environmental work?
Does the company know its stakeholders?
Does the company communicate with its stakeholders? What is this dialogue used for?

Openness and transparency

Reporting is a pivotal element in "openness", which is one of the key ideas of Corporate Governance. It should be possible for the outside world to keep informed of whether the company meets its social responsibilities - both ethically, financially and legally. Moreover, openness and transparency are preconditions for qualified feedback from the company's stakeholders - including shareholders.

Does the company report on the environmental conditions of interest to the investors?
Does the company report on the environmental conditions that its stakeholders generally are interested in?
Does the reporting illustrate the relationship between the environment and Shareholder Value?

The tasks and responsibilities of the board of directors

In many companies, the environmental activities have mainly been placed with a management support function at operational level in the company instead of with the company's top management.

If the board of directors does not know the environmental risks and opportunities, decisions could be made on the wrong basis. This environmental knowledge does not necessarily mean that a decision would turn out differently. However, it does mean that the board of directors and the board of management have made the decision on an informed basis.

Does the board of directors know the company's environmental risks and opportunities?
How is knowledge sharing effected in the organisation with regard to the environment?
Is the environment included as a parameter in internal management reporting?
Are there key figures for the environment and environmental economics?
Are environmental risks and opportunities being mapped systematically when major decisions are taken?

The composition of the board

If the board of directors is to be able to consider the environmental risks and opportunities, it must have members with appropriate competences.

Is knowledge about the environment included as a criterion when the board of directors is constituted?
What are the environmental competences of the existing board of directors?

Remuneration of the board of directors and the board of management

Is the environment included as a parameter in performance pay of the board of directors and the board of management?

Risk management

How does management ensure that the company complies with environmental legislation - now and in the future?
Does management know the company's environmental risks?
Is the environment being included in assessments when buying and selling divisions or other companies?
Does the company know the environmental profile of its market?

The framework exists for making correlations between the environment and Shareholder Value and thus improving the company's basis for making decisions and seeing the value of environmental work.

At the level of the board of directors and the board of management, the tools lie in the principles of Corporate Governance and in a comparison of the environment and Shareholder Value in selected key figures. At the level of the board of management and in the daily management of production, the tool lies in the integration of the environment and operating economics in Environmental Management Accounting (EMA).

Since the environment affects companies differently, the mapping of the significance of the environment for the individual company is primarily a management task required for the company to know its risks and opportunities.

Figure 7: Tools for the company's environmental economics

Figure 7: Tools for the company's environmental economics

The tools exist for combining the environment and financial aspects. It is a question of breaking down professional boundaries and deciding to use them.