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Competent boards can no longer afford to put ESG—environment, social, and corporate governance—issues on the back burner. Companies need to learn from the mistakes of others and should ignore these at their own peril.
Sustainability. Corporate responsibility. Business purpose. Social responsibility. Call it what you like; competent boards can no longer afford to put ESG—environment, social, and corporate governance—issues on the back burner.
Not long ago, these subjects—ranging from freak weather events to demands for a higher minimum wage and the diversity of board members—were widely considered to have no place on a board agenda. Now, however, directors ignore them at their peril.
Don’t believe it? Any board member tempted to disregard this movement would be well advised to read the proxy voting guidelines drawn up by major asset managers, or just Larry Fink’s annual letter to BlackRock shareholders1 from just one year ago.
Fink, BlackRock’s founder, chair, and CEO, announced in 2020 that in the future, his firm, the world’s largest asset manager, would consider sustainability as a core goal in its investment decisions. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Fink wrote. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
BlackRock’s announcement came only a few months after 180 members of the powerful US Business Roundtable broke with tradition by pledging to serve not only their owners but also workers, customers, suppliers, and communities2. The roundtable’s original 1997 mission statement declared: “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” The interests of other stakeholders, like employees or local communities, were only “relevant as a derivative of the duty to stockholders.” But from now on, it asserted: “Each of our stakeholders is essential.”
Investors and activists are watching company practices
All this is happening at the same time as modern technology is disrupting existing business models, enabling outsiders, whether investors or activists, to shine a brighter light on a company’s practices and its transparency in dealing with ESG issues.
Georg Kell, founding director of the United Nations Global Compact3, notes that with help from social media and other technology, formal authority is eroding, empowering ordinary people around the world in a way that was never possible before.
As a result, it has become more difficult for established authorities, including business leaders, to filter their messages or hide information they would prefer outsiders not to know about. Kell sees these developments as “No longer a question of communications or CEO nice talk, or just saying the right thing, but it has become a material, substantive issue for survival and growth.”
A company’s word must match its actions
Too often, in the past, a company’s strong words on ESG issues have not been matched by its actions, and calls have grown for a greater measure of accountability.
In this respect, Larry Fink’s letter should be a wake-up call for boards to ensure they have the insight and information needed for proactive oversight of sustainability risks, opportunities, and disclosures. Fink’s letter included this paragraph:
Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork, we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.
A board must ask these four questions
As a first step toward bringing investors like BlackRock onside, boards should seek answers from management to four simple questions:
Outside advisory bodies can assist with ESG obligations
Many boards, especially of larger companies, have found that an outside advisory body can be a valuable resource in helping them come to grips with their ESG obligations. The best advisory groups typically comprise experts in various fields, not necessarily directly related to the company’s business. For example, Volkswagen’s ‘sustainability council’, established in 2016, includes the co-director of Potsdam Institute for Climate Impact Research; the CEO of Systembolaget, a Swedish chain of liquor stores; a former president of the European Green faction in the European Parliament; a former EU commissioner for climate action; the founding director of UN Global Compact; a public policy expert at Hong Kong University of Science and Technology; and the co-chair of the WHO/World Bank Global Preparedness Monitoring Board.
Advisory boards, however, are only useful when the directors and senior management are willing to make a serious commitment in time and engagement with its members. The best ones have a direct link to the company’s formal governance structure so that the board of directors has a defined way to receive external input on matters beyond its own members’ expertise.
Even so, ultimate responsibility must lie with the directors themselves. Is your board ready for this challenge?
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