Kaarel Ots, CEO, Nasdaq Tallinn

Illar Kaasik, Managing Partner, Prudentia Estonia

Is the world really doomed and business can no longer be done without the involvement of women, greens or minorities, one might ask, and probably some “national conservative” entrepreneurs did ask, whilst delving into the TOP101 ranking of Estonia's most valuable companies in 2020. After all, the price tag placed on the company was affected by "soft values" in addition to the "normal" volume, growth and profitability of assets. The answer is simple - you still can. However, in some countries, where the traditional partners and financiers of Estonian companies are also located, it makes doing business significantly more difficult.

Like it or not, to the casual observer, the world has “suddenly” and rapidly changed. Values categorised as ’soft’ until recently (equality, sustainability, environmental protection and social responsibility), have now acquired the status of hard currency. They have achieved such a strong position that those companies that do not meet these criteria will, over the next couple of years, be side-lined from the mainstream of international business.

The TOP101 of the most valuable Estonian companies compiled by Prudentia, a mergers and acquisitions consultancy, and Nasdaq Tallinn, differs from several other business rankings compiled in Estonia in that we take into account more than just turnover, profit and growth numbers. Businesses are also given clear feedback on how they are viewed and valued by society, the environment and financiers.

When compiling the ranking, Nasdaq Tallinn assesses the company's transparency through a Corporate Governance score, which affects the company's final value by up to 20%. We evaluate the following factors: gender equality in the company's management and supervisory board, the existence of independent members of the supervisory board and highlighting them in the annual report or on the website, publishing the previous work experience of management and members of the supervisory board on the website, publication of majority shareholders on the website, disclosure of the company's financial results, disclosure of risk management and key internal policies (e.g. conflict of interest, code of ethics), publication of corporate governance and sustainability reports on the website and information on the company's strategic goals.

2020 – a breakthrough in business in addition to remote working

The rise to the forefront of corporate governance in international business is perhaps the breakthrough that has not been given sufficient attention by both the Estonian public and business leaders this year. There are, however, many signs of a new era. Goldman Sachs, one of the world's leading investment banks, announced a simple but effective new policy this summer: it will no longer help the IPO of a company that does not have at least one member on the board that can be classified as a diverse. And from 2021 onwards, at least two members. Goldman Sachs is referring here to people who are chronically under-represented in the management of large companies - whether because of their gender, sexual orientation, race or nationality.

A major review published in the summer by Harvard Business Review found that the elite league had already undergone a transformation - a kind of record was set in 2019, as 59% of the directors appointed to the boards of the S&P 500, which brings together major US companies, were women or men belonging to ethnic minorities. In spring, this publication, considered the world's most authoritative business management magazine, published a study, spelling out when and why management diversity improves a company's performance.

According to Larry Fink, head of the world's largest investment fund BlackRock, in a few years' time, investors will take into account ESG (environment, social, governance) indicators when making investment decisions, i.e. they will evaluate the following:

1) what is the impact of the enterprise on the environment;

2) whether and how the enterprise contributes to the development of society at large through its activities; and

3) how transparent, ethical and responsible the management of the company is.

This is already becoming a reality - investment and values go hand in hand. For example, research has shown that almost 90% of the younger generation of investors take the company's ESG indicators into account when making their investment decisions. Large pension funds do not invest in companies that do not address climate and environmental issues, and so on.

To those unfamiliar with the matter, ESG may seem overly broad at first glance, but in reality, it is a specific list of indicators against which companies can be assessed. Using similar logic, we have also analysed the TOP101 companies, mainly whether and how they take these indicators into account in their operations.

If anyone thinks that ESG is a passing fad, then I do not see alternatives to achieving a cleaner natural environment. The trend towards a more responsible future is obvious, as we are already seeing an increase in investment in ESG-compliant companies today. More importantly, the world's largest ESG funds are “hitting” the market. A company that does not address these issues today will find it more difficult and expensive to finance its operations in the future. It is not a question of believing, but of the classical function of supply and demand.

As always – a company will either adapt or die!

In order to keep pace with the course of events and perhaps be one step ahead, this year we supplemented the principles of calculating the TOP101 corporate governance score compared to the previous year. For example, we introduced an assessment of the independence of the members of the supervisory board and gender equality in the company's management bodies. Due to these changes, the current year's score in the ranking is not directly comparable with the previous year's result. Looking at the facts, it must also be admitted that the average score of the 100 most valuable Estonian companies decreased significantly in this category compared to the previous year. So, there is plenty of room for development for companies that are otherwise the flagships of our business.

And action must be taken immediately! Not even to get a better place in next year's rankings, but to maintain and improve our position and competitiveness in the eyes of international business partners and financiers as well as young people who prioritise these values - future customers, employees and managers of our companies. The situation that opens up in front of Estonian companies and entrepreneurs is harsh, but fair. If we want to compete in the professional league and be among the winners, we will either adapt or die.