Latest Studies: Stakeholder Capitalism and TQM; D&O Insurers Eye ESG, Fortune 50 Enhance Disclosures

Here’s a snapshot of research surveys, studies, and insights on Stakeholder Capitalism and its practical implementation published over the last few weeks.

The Link Between Total Quality Management and Stakeholder Capitalism
ESG Pressure Will Grow From D&O Insurers
JDSupra Report: Top 50 Firms Up Their Human Capital Disclosures to SEC

An article in Fortune by Peter Georgescu, a JUST Capital contributor, makes the point that total Stakeholder Capitalism is effectively the application of total quality management principles to people…A professor’s study indicates that providers of directors and officers insurance are now factoring ESG (environmental, social, and governance) issues into their appraisals…A JDSupra report finds that large companies are increasing the level of detail in their human capital Securities & Exchange Commission (SEC) 10-K filings.

The Link Between Total Quality Management and Stakeholder Capitalism

In a recent Forbes article, “How America Can Beat China,” Peter Georgescu, Chairman Emeritus of Young & Rubicam, profiles how Peter Stavros, as co-head of the division that oversees all of KKR’s American Private Equity holdings, is creating “a living case study of stakeholder capitalism and, in the process, proved how immensely profitable this model can be.” His team has “created that model in nearly thirty different companies, impacting more than 50,000 workers. He worked up from a sense of employee ownership to build an entirely new kind of culture within those companies, on principles of hard work, trust, respect, and fairness. Profit sharing is at the center of that culture, but it’s not just that; what drives success is giving employees a voice in the enterprise, with intense recognition and encouragement from management. It's not adversarial but rather cooperative.”

It turns out that “some of the program’s success is based on the Japanese principle of kaizen, which grew out of the Total Quality Management philosophy invented by W. Edwards Deming, an American statistician who transformed Japanese business after WWII. His principles of statistical measurement, used to pinpoint quality problems, became the basis of Japan’s rise as a global industrial power and was eventually adopted by American business, beginning at Ford Motor Co. TQM became a focus on satisfying customers through the managed improvement of processes based on measures of internal quality. It’s a top-down strategy: the C suite implements measures and improvements. Kaizen adopted the mission but turned it upside down. From the bottom up, it puts more power into workers' hands who become stewards of small, steady improvement. With kaizen, workers have far more responsibility and autonomy. It’s more cost-effective and much more motivating.”

ESG Pressure Will Grow From D&O Insurers

A professor asserts in a recent paper that insurers of directors and officers will put more pressure on management to address environmental, social, and governance issues.

Amelia Miazad, a Professor at the University of California Davis School of Law, writes that insurers of directors and officers are playing an active role in monitoring environmental, social, and governance (ESG) factors.

Her paper was featured in a recent edition of the Harvard Law School Forum for Corporate Governance e-newsletter.

“My paper, D&O Insurers as ESG Monitors, challenges this conventional view as it applies to ESG risks. I argue that ESG risks are distinct from traditional corporate governance risks in ways that are increasing both the incentives and ability of D&O insurers to monitor their insureds. Through qualitative interviews with experts in the D&O insurance industry, the paper offers the first descriptive account of how D&O insurers are incorporating ESG into their underwriting process, and thus evolving from passive to active monitors of their insured’s ESG risks.”

Her study finds that “D&O insurers are starting to gather more information about ESG risks than traditional corporate governance risks. Their methods for gathering this information are evolving too, as D&O insurers are creating their own proprietary ESG data analytics, as well as relying on increasingly sophisticated external ESG data providers. While this is a new and emerging practice, D&O insurers are also starting to use ESG information to make coverage decisions, from refusing to offer policies to offering premium discounts for companies with “good ESG.”

JDSupra Report: Top 50 Firms Up Their Human Capital Disclosures to SEC

“Ten Key Considerations for the 2023 Annual Reporting and Proxy Season’’ reviews the 2022 Form 10-Ks of Fortune 50 companies and finds that 41 companies increased the human capital management disclosures in their 10-Ks between 2021 and 2022. Further, 44 companies included disclosures on DEI (diversity, equity, including) in their 2022 Form 10-Ks, and overall (33) there was an increase in the use of quantitative human capital metrics, such as information on the percentage of employees who are women or people of color, information on corporate investments to improve gender and ethnic/racial diversity in their workforce, and employee turnover and retention rates.

The report says that “companies have covered a broad range of topics in their HCM (human capital management) disclosures, including employee engagement, employee health and wellness, flexible work arrangements, pay equity and diversity, equity, and inclusion (DEI).”

The article recommends that companies should assess: 1. Whether pending regulatory requirements or developments in the area of ESG or sustainability pose any material risks or challenges to their businesses; 2, whether any material risks related to their ESG goals and commitments are appropriately disclosed, and 3, whether any of the ESG information contained in their sustainability reports is or has become material and therefore required to be included in their Form 10-K.”

The report urges companies to monitor market trends in HCM disclosures, “which reflect investors' heightened focus on diversity disclosures.”

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