Corporate boards’ role in addressing environmental and social changes
- Business changes are forcing the evolution of the role of the corporation, and boards must be well positioned to address a variety of environmental, social, and governance (ESG) issues, including climate change, data privacy and cybersecurity, and the changing cultural demands of a more diverse and tech-savvy workforce.
- The National Association of Corporate Directors (NACD) leadership recognizes that successful corporate governance and board leadership must adapt to the rapidly changing operating environment and competitive landscape.
- A recent report by the NACD, summarized in this paper, provides guidance on how boards can address these pressing issues, highlighting the importance of how rigorous ESG research and engagement can identify those companies best positioned to grow sustainably over the long term.
In the fall of 2019, the NACD Blue Ribbon Commission completed a report, “Fit for the Future: An Urgent Imperative for Board Leadership.” Calvert CEO John Streur was one of the 31 commission members who contributed to the report. Other commission members hold posts at both publicly and privately traded companies in finance, health care, consulting, consumer products and others, as well as governmental agencies at the state and federal level, and educational institutions.
NACD is an independent, nonprofit based in Arlington, Virginia (not affiliated with Calvert), with more than 20 chapters across the country. The organization’s mission is to elevate board performance of its more than 20,000 members through world-class education, leading-edge research and an ever-growing network of directors, with the ultimate vision of creating a world where corporate directors are recognized by all stakeholders as trusted stewards of long-term value creation. As described on the NACD website, the organization has been setting the standard for responsible board leadership for more than 40 years.
The goal of this report was to identify megatrends impacting business, and offer up solutions to encourage best practices on the part of board members and the companies they represent. Emerging issues will require that organizations continue to innovate and address environmental and societal challenges. Boards “need to meet the demands of the future by fundamentally reshaping how the board thinks, operates, and interacts with the business.”1 The commission believes that this can be accomplished through a renewed focus on board structure, engagement, composition, culture and disclosure.
A number of challenges, including income inequality, threats to data privacy, crumbling infrastructure and global warming are discussed, along with anticipated disruptions like technological advancement and climate change. The implications of the changes are extensive, but the commission was able to boil them down to five key areas on which boards should focus.
Implication 1: Boards must engage more proactively, deeply and frequently on entirely new and fast-changing drivers of strategy and risk.
“The edges of the board stewardship box are expanding. Investors expect boards to focus on issues that fall under the ESG umbrella… given the connections with long-term sustainable performance. There has been a push for boards to engage with management on these issues that I don’t think will be reversed.”
This concept of increased responsibility and heightened expectations for board members flows through the report. The linkage to boards understanding the E, S and G issues relevant to a company’s financial success is also stressed. Understanding the operational and structural changes necessary to remain competitive, most notably amidst the digital transformation, will be critical for boards in the 21st century. Directors have cited this as a challenge, and “many directors don’t feel comfortable talking about emerging technologies, cybersecurity and other complex topics,” notes one commissioner. This lack of understanding may lead to less effective management of material ESG issues.
Additionally, an NACD director poll found that 86% of board respondents indicated they fully expect to deepen their engagement with management on new drivers of growth and risk in the next five years.”2 This active approach in identifying both potential challenges and opportunities will likely require high-quality information on the business and industry, along with external trends. This heightened focus will additionally cause a greater demand on board members’ time. The commission believes it is critical that board members are using their time effectively, from agenda setting, to process, to role evaluation.
“The board’s role is to exercise critical judgment on when to tap on the brake and when to accelerate through the curve.”
Implication 2: Boards must approach their own renewal through the lens of shifting strategic needs to ensure long-term competitive advantage.
The report highlights the pressing need for expertise across a variety of emerging environmental and social issues. In understanding the transformations mentioned previously, board members may look to different skill sets when board seats turn over. Specifically, 64% of respondents in a recent NACD survey on digital governance believe the next member recruited to their board should possess strong technology expertise.3
Implication 3: Boards must adopt a more dynamic operating model and structure.
The commission finds that time spent on procedural and compliance matters may be cutting into time that should be spent on other topics. Additionally, the report challenges the idea that six-to-eight meetings per year is the optimal cadence for board communications. Outside of general meetings, it is also important to consider the scope of the various committees, and whether these are keeping pace with the evolution of the company, industry and world in which they operate.
There are, of course, risks posed by the increasing demands on both time and proper prioritization and preparedness at both the board and committee level. A KPMG study determined that 39% of audit committee members find it increasingly difficult to both oversee the major risks on the audit committee’s agenda and carry out its core oversight responsibilities.5
To be successful, the commissioners recommend a “more fluid and flexible operating model, involving more regular offline conversations between lead director and CEO, regular CEO updates to directors, and premeeting conversations between the lead director of chair and other board members to maximize the effective use of formal meeting time.”
Implication 4: Boards must be much more transparent about how they govern.
With the proliferation of social media and real-time news, boards must be poised to address issues head-on, rather than defensively or reactionary. Transparency at the board level helps to demonstrate the board’s intentions and rationale for its behaviors, instilling confidence to shareholders and the general public.
Investors are demanding disclosure. This trend is evidenced by the growing number of companies creating sustainability reports, which has risen from just 20% in 2011 to 86% in 2018.6 Sustainability reports are not all-encompassing. Investors may also seek to better understand not only how the board operates, but how board members hold themselves accountable.
Implication 5: Boards must hold themselves more accountable for individual director and collective performance.
Complacency and inaction may lead to suboptimal board composition. In fact, 46% of respondents in a recent poll reported that their board leaders fail to remove directors who are no longer qualified to serve.7 This should serve as a reminder of the importance of both accountability and action. Determining accountability has been cited as something directors struggle with, with one commissioner noting that “this is one of the most critical responsibilities for board leaders, and one of the toughest to deal with.”
In addition to considering the inclusiveness of the board, the level of debate is also a critical factor in board effectiveness. A boardroom survey conducted by WomenCorporateDirectors found that 77% of directors (both male and female) said their boards would make better decisions if they were more open to debate.8
“What is needed is a degree of change that will have far-reaching effects on the purpose, mandate and operating model of boards.”
This new approach to board service will not always be easy to implement, particularly when it involves uncomfortable decisions about board members and management teams who may not be ready or willing to focus on these new challenges.
We hope that the observations, recommendations and tools found in the report will help elevate governance best practices and drive positive change.
1 "NACD Fit for the Future,” September 2019, Letter from cochairs, p6.
2 Data from an NACD director poll on the M&A governance and other topics, conducted in May 2019.
3 Data from an NACD director poll on board oversight and emerging technologies, conducted February 2019.
4 NACD, 2018-2019 NACD Public Company Governance Survey (Arlington, CA: NACD, 2018), p. 29.
5 KPMG’s Audit Committee Institute’s 2017 Global Audit Committee Pulse Survey: Is Everything Under Control? (KPMG International, 2017), p. 5.
6 Governance and Accountability Institute, “Flash Report: 86% of S&P 500 index companies publish sustainability reports in 2018”, May 16, 2019.
7 Data from an NACD director poll on the future of board leadership, conducted in April 2019.
8 Stuart Jackson, “Boards Must Be More Combative,” Harvard Business Review, January 27, 2017.
This sponsored content was not written by the editors of the newspaper, Pensions & Investments, and does not represent the views of the publication, or its parent company, Crain Communications.
RELATED WHITE PAPERS:
Evaluating the financial materiality
of gender diversity factors
Financial quality metrics & ESG factor
integrations in equity markets
The path to a strategic edge:
common vs. strategic ESG practices
1825 Connecticut Ave NW
Washington, DC 20009-5727