Sustainability in the Boardroom

by Lynn S. Paine

A BOARD MEMBER WAS EXCHANGING a few words with the CEO of a fast-growing athletic apparel maker before the annual shareholders’ meeting when the two caught sight of a group of labor activists at the back of the hall. The group was known for protesting labor conditions in the Asian contract factories where the company’s products were made. The CEO turned to the director and, without prior warning, said that he planned to ask her to take charge of the meeting if any disruption occurred. When the activists marched to the front of the auditorium partway through the meeting, that’s exactly what he did.

Although corporate directors are often faced with difficult questions about the conduct of the companies they serve, rarely are they confronted in such a public fashion. But that’s what happened to Jill Ker Conway at Nike’s 1996 annual meeting. A former president of Smith College and a self-proclaimed jock, Conway had been recruited to Nike’s board by the chairman and then-CEO, Phil Knight, in 1987 for her expertise on women’s issues and her understanding of the student perspective.

Fortunately, Conway was not taken wholly unawares when Knight called on her to chair the proceedings. A few months earlier she had told him that she expected labor issues in the contract factories to come up at the meeting and felt that at least one director should be able to speak about them firsthand. During that conversation she had offered to visit some of Nike’s contract factories in Southeast Asia as part of a trip she was about to take to her native Australia. With Knight’s blessing, she had made the first in what would become an extensive series of visits over the next few years. So she was well equipped to preside when a heated exchange broke out between the labor group’s leader and the assembled shareholders and, later, to advise on a formal research effort that would shape many of Nike’s early corporate responsibility initiatives.

Much has been written about Nike’s extensive corporate responsibility efforts and how they have transformed the company from an organization whose name was synonymous (as Phil Knight said in 1998) with “slave wages, forced overtime, and arbitrary abuse” to a pioneer in using social and environmental issues as catalysts for innovation. Far less attention has been paid to the board’s role in these efforts or to Nike’s creation of a board-level corporate responsibility committee to institutionalize the company’s commitment to responsible performance.

That’s not surprising. Those engaged in the mainstream corporate governance discussion have been largely silent on the subject of the board’s role in overseeing corporate responsibility and sustainability. Why that’s so is not entirely clear, especially with the increasing pressures on (and opportunities for) companies to help address serious economic, social, and environmental problems around the globe. It may result in part from the intense focus over the past decade on financial reporting, executive compensation, and board leadership in the wake of the Sarbanes-Oxley Act, the 2008 financial crisis, and the Dodd-Frank Act. Although that focus has been mainly to the good, one unfortunate side effect has been the relative neglect of other aspects of governance.

In view of growing concern about business and sustainability, and given the importance of corporate responsibility for ongoing value creation, directors should be asking whether their board’s oversight in those areas is sufficient. Recent surveys suggest that no more than 10% of U.S. public company boards have a committee dedicated solely to corporate responsibility or sustainability. Nike’s experience indicates that such a committee could be a useful addition to many if not most boards in at least five ways: as a source of knowledge and expertise, as a sounding board and constructive critic, as a driver of accountability, as a stimulus for innovation, and as a resource for the full board. A look at how Nike’s corporate responsibility committee has served each of these functions will show why.

A Source of Knowledge and Expertise

Chief executives often seek directors who have expertise and relationships that could help the company, but rarely with corporate responsibility or sustainability issues in mind. Yet domain-specific knowledge and relationships are as relevant for those areas as for any others.

When protests over labor practices abroad broke out on U.S. college campuses in the mid-1990s, Nike was fortunate to have in Conway a director with extensive knowledge of the student population and expertise in the societal effects of industrialization. That was not entirely by chance. Conway had been recruited as part of Knight’s efforts to bring fresh thinking and experience to the boardroom at a time when the company was struggling to regain the momentum of its first decade. With the notable exception of one director who was an expert on innovation and creativity, the board had consisted mainly of friends and family of Nike’s founding group.

As it happened, in adding Conway, the board got geographic, gender, experience, network, and knowledge diversity all at once. So when the activists took to the floor at the 1996 shareholders’ meeting, Conway recognized the complexity of the situation. She knew that the protests would only escalate and that improving factory conditions would take time.

Conway is an authority on women’s entry into the paid workforce in 19th-century Britain and the United States. Her knowledge of the impact of industrialization on the lives of women and girls made her an especially well-informed observer during her visits to factories in countries that were undergoing industrialization. After Nike hired Maria Eitel as its first vice president of corporate responsibility, in 1998, Conway and Eitel brokered a partnership with the International Youth Foundation to create a nonprofit that would study the largely young female workforce in the factories. Staffers of the nonprofit thus created—the Global Alliance for Workers and Communities—interviewed 67,000 workers in their native languages at off-site locations where the workers could speak fully and freely. Without Conway’s ability to tap a global network of women’s organizations and university faculty members, Nike would have found it difficult to gain access to those communities in view of the company’s reputation at the time.

In 2001 Conway proposed the creation of a board-level corporate responsibility committee. She wanted to engage the board not just in the labor issues that were threatening Nike’s reputation among its core consumers but also in a range of other topics that were not being raised to the board. Chief among them were health and environmental issues, which were beginning to command attention both inside and outside the company. Knight endorsed the idea and asked Conway to serve as chair. She accepted on the condition that Knight attend every meeting—her way of making sure that the committee would not be marginalized. “Everybody wanted to come before that committee,” Conway recalls; people knew that doing so would put them squarely in front of Knight.

The close alignment between Conway’s diverse talents and the corporate responsibility issues Nike faced in the 1990s may have been fortuitous, but boards need not leave the matter of fit to chance. Mapping out the company’s principal responsibilities and identifying key issues the firm is likely to confront can reveal the areas of knowledge and experience that would be particularly valuable to have represented on the committee. Members should have an understanding of stakeholders’ expectations and the company’s governing standards, but imagination, openness to new ideas, and an interest in innovation are also crucial.

The expertise currently gathered in Nike’s corporate responsibility committee, for instance, reflects both the company’s perennial labor issues and its recent focus on sustainability and innovation. The group includes a university chancellor with a background in biological science and environmental education, a former university basketball coach, a chief executive in an industry whose lifeblood is innovation, a retired media company executive and university trustee, and a former trial lawyer with four decades of service on the Nike board.

A Sounding Board and Constructive Critic

A labor incident in the supply chain. A controversial disclosure. A shift in sustainability strategy. A change in organizational structure. A proposal to invest in a new environmental technology. The range of corporate responsibility issues that Nike (or any company) might face is complex and varied. By asking insightful questions, making suggestions, offering perspectives, raising counterpoints, and proposing alternatives, the committee enriches and challenges management’s thinking.

Take what happened in 2009, when the committee was considering a thorny situation involving two subcontractors in Honduras who had closed their doors and dismissed 1,800 employees without notice and without paying the roughly $2 million in severance that the employees were owed under local law. Nike had no legal responsibility for the severance payments and had stated publicly that it would not cover them. But pressure mounted from universities and student groups across the United States for Nike to make good on the subcontractors’ obligations.

The discussion, led by Conway, was intense. The committee brainstormed ways to help the workers without setting a precedent for Nike’s paying out whenever a subcontractor defaulted on obligations to its employees. After the meeting the management team decided to rethink Nike’s position. The result was an innovative arrangement whereby the Honduran government made the severance payments while Nike created a $1.5 million workers’ relief fund and provided support for vocational training and health coverage for the laid-off workers.

Even when committee discussions ultimately reinforce a direction that has been proposed, the process can highlight strengths and weaknesses in management’s thinking and point to critical communication and execution challenges. That was the case in 2011 and 2012, when Nike was developing its next-generation sustainability targets. For nearly a decade the company had from time to time announced targets and reported progress in areas such as labor conditions in the contract factories, the use of environmentally preferred materials, and reducing greenhouse gas emissions, waste, and toxic substances in the supply chain—issues that by 2006 were being discussed under the mantle of “sustainability." By 2011 the previous targets had largely been achieved. The management team wanted to link the company’s new sustainability targets more tightly with its growth strategy and day-today operations by providing specific sustainability goals for business and functional units across the organization.

That was a massive undertaking. For more than six months a dedicated team worked with managers and experts throughout the company to identify potential target areas and define measurable objectives for each. At various points the team advised the committee of its progress and shared its methodology, eventually floating preliminary proposals for targets. The committee had several responses. It questioned whether the targets were ambitious enough—and realistic enough. Some directors asked whether there were too many metrics and whether broader goals would be preferable to specific targets in certain areas. Others wanted to know more about what factors had been taken into account and how the pros and cons had been weighed. In the end, the committee’s stress test did not change the team’s approach. But the scrutiny lent assurance that the thinking was robust, and it provided a useful preview of likely reactions to the proposed targets from managers and others who had not yet been involved. And, of course, the prospect of review by a dedicated board-level committee gave the team an added incentive to proceed with rigor throughout the process.

The committee’s value as a sounding board depends as much on its distinctive outlook as on the specific knowledge and experience that its members bring to the discussion. Four of the five members of Nike’s committee are independent directors, which means that they combine a third-party perspective with the loyalty, care, and confidentiality required of fiduciaries. At once outsiders and insiders, they are uniquely positioned to be the constructive skeptics every good management team needs, especially when dealing with issues that affect the public interest.

A Driver of Accountability

One of the newly established committee’s initial tasks was to oversee the publication of Nike’s first stand-alone corporate responsibility report. The committee continues to oversee public reporting on corporate responsibility and sustainability, but it also fosters accountability through a range of other activities. It spends the first half of each regular two- hour meeting (held five times a year, in conjunction with the full board’s regular meetings) reviewing the company’s progress toward its sustainability targets along with the contract factories’ performance against Nike’s health, safety, environmental, and other standards. The factory discussions focus on trends in performance rather than on compliance audits (those are conducted by a group within the corporate audit function that reports to the CFO and to the audit committee of the board).

To assess and track performance, the committee relies on data generated by the management team using Nike’s factory-rating system, which includes various measures of labor and environmental performance in addition to the traditional measures of product quality, cost, and delivery. At each meeting the committee examines current ratings, considers trends over time and across regions, addresses pressing issues, and tries to identify opportunities for improvement.

In conducting these oversight activities, the committee engages directly with key executives. True to Knight’s 2001 pledge to Conway, either Knight or the current CEO, Mark Parker, attends each meeting. The executive in charge of corporate responsibility (initially Eitel, now Hannah Jones) has also worked closely with the committee since its inception. In 2009, as part of an effort to embed sustainability principles more deeply in the business, a second senior executive was added as a liaison to the committee: Eric Sprunk, at the time the vice president of merchandising and products and now the COO. This change at the board level coincided with changes at the corporate level, including the introduction of dual-reporting lines between the corporate responsibility group and key business functions such as finance, innovation, and supply chain, and an expansion of the corporate responsibility group’s work from achieving day-to-day operational compliance to building a fundamentally more sustainable business model. The shift in orientation was reflected in the group’s adoption of a new name—“sustainable business and innovation”—and the creation of the SB&I lab, an in-house group that includes members with private equity and venture capital expertise and is charged with seeking external technologies and partnerships to advance the sustainability agenda.

Perhaps the most potent way in which the committee fosters accountability is through regular meetings with executives and managers from different business and functional areas. The second hour of committee meetings is typically devoted to a particular strategy or activity of the SB&I group and a particular strategy or activity of a business unit or function. Under the format put in place in 2009, heads of the business units or functions typically appear before the committee at least once every 18 months to explain how their strategies align with SB&I strategies and how that alignment is reflected in their group’s accountability metrics. CFO Don Blair says that the experience of presenting to the committee and having committee members sitting across the table asking questions “puts a little backbone into what the business leader is undertaking to do.”

A Stimulus for Innovation

One surprising role of Nike’s corporate responsibility committee is to provide support and encouragement for innovation, especially innovation aimed not just at improving operations incrementally but also at building a fundamentally more sustainable business model. For Nike that means a business model that can continue to deliver growth in the face of looming macro-environmental challenges such as resource scarcity, climate change, and demographic shifts, to name just a few.

When Conway and Eitel initiated the contract factory studies, they took a strategic approach to improving working conditions, recognizing that actors in addition to Nike would be crucial to continued success. Community groups, government authorities, and outside experts would have to be mobilized to tackle problems stemming as much from weaknesses in local institutions and infrastructure as from Nike’s practices. And because many of the factories made products for other companies as well, it would be necessary to engage other industry players.

Accordingly, when asked by the top leadership team in 2001 whether Nike should disclose the results of the worker interview project, the committee said yes, hoping that would foster the broader engagement needed for widespread improvements in labor conditions. Similarly, in 2005, when Jones proposed disclosing the names and locations of Nike’s contract factories—information that was typically treated as highly proprietary—the committee lent its support. Some feared that the move would put Nike at a disadvantage, enabling competitors to more easily poach its suppliers. But Jones reasoned that the benefits of disclosure would outweigh the risks. Transparency would let Nike’s critics see factory conditions for themselves. It would also allow Nike to work with other companies that used the same suppliers in order to coordinate inspections, share costs, and adopt common standards, thus improving labor conditions across the industry.

In its early years, the committee spent much of its time providing advice and, in Conway’s words, “putting out fires”—reacting to individual incidents, such as serious breaches of labor standards in the supply chain or major problems affecting health, safety, or the environment. As management began developing more-sophisticated systems to monitor factory compliance with Nike’s code of conduct, the committee became more focused on overseeing those systems. Once it was clear that some of the individual incidents the systems identified were part of a larger pattern, the committee’s work evolved again.

An 18-month-long task force formed by management in 2005 to study the recurring problem of excessive overtime found that the root cause lay not only in factory deficiencies but also in sudden changes Nike made to materials or volume requirements in response to fluctuations in demand. This insight had profound ramifications: Management and the committee realized that they had reached the limits of what monitoring could accomplish. Better policing would not resolve the labor issue; what was needed were innovative ways to make manufacturing processes inherently safer and more sustainable. As Jones put it, “You can either solve a workers’ rights issue by monitoring every single factory 24 hours a day for whether they’re wearing protective equipment, or you can innovate a new glue that removes all the toxics so that you don’t have to have the personal protective equipment.”

So today, although the committee remains engaged in monitoring, oversight, problem solving, and even firefighting on occasion, it spends considerable time advising on Nike’s innovation efforts. For example, in 2012 it weighed in on a proposed strategic investment in DyeCoo Textile Systems, a small Netherlands-based start-up that had developed a waterless process for dyeing polyester using recycled CO2 (hence the name DyeCoo). In addition to saving the 12 to 18 gallons of water per pound of fabric used in traditional dyeing methods, the new technology eliminates chemical discharges into the water supply. Moreover, not having to heat water for dyeing saves energy and cuts dyeing times in half—and a higher-quality product results. But the process was not yet cost-competitive with traditional methods. Management sought the committee’s views on a proposal to take a minority stake in DyeCoo with the aim of helping the Dutch company develop and commercialize the technology for use in textile mills and dye houses in the global apparel supply chain. The committee supported the proposal, and Nike made the investment. In late 2013 a Nike contract manufacturer in Taiwan opened a facility that uses DyeCoo’s technology.

The extent of the corporate responsibility committee’s focus on innovation came as a surprise to the current chair, Phyllis Wise, when she joined the committee in 2009, shortly after being elected to the board. At the time, Wise was the interim president of the University of Washington, where she had overseen the creation of its College of the Environment. She expected that the committee would focus mainly on monitoring labor conditions in the contract factories—still a hot topic on university campuses. But she found that it also spent a great deal of time on innovation processes, product development, new materials, and other forward-looking initiatives. As the top leadership team pursues its quest for game-changing innovations that can drive sustainable growth and profitability, the committee is likely to become even more engaged in the innovation discussion.

A Resource for the Full Board

Perhaps the most important function of Nike’s corporate responsibility committee is to serve as a custodian of the long view—a counterweight to the myopia that can result from the pressure of short-term objectives and the relentless flow of matters demanding immediate attention. Of the wide spectrum of topics that come before the committee, a significant number involve future conditions or parties who do not currently have a direct market relationship with the company but whose actions could have a powerful effect on its future health and functioning. This group includes factory workers in the supply chain and the millions of ordinary citizens affected by Nike’s activities. It also extends to future generations of Nike managers, who may face shortages of critical resources; future generations of consumers and athletes who use Nike products; and beneficiaries of the company’s community investment activities, who may one day become influential members or leaders of their communities and countries.

Many companies say that such issues are the responsibility of the full board, and that is certainly true. Yet how many boards actually take up these issues on a regular basis? The evidence suggests that the answer is very few. A review of the annual director surveys conducted by the National Association of Corporate Directors over the past decade indicates that corporate responsibility issues are consistently ranked at the bottom of some two dozen possible board priorities. Nike executives say that board-level discussions of labor issues in the supply chain gained traction only after the corporate responsibility committee was formed.

Creating a corporate responsibility committee does not absolve the full board of its obligation to oversee this aspect of the company’s performance. But such a committee can help the board fulfill this obligation through its focus, expertise, and sustained attention. From focus and sustained attention come deeper understanding, better processes, and more-refined instincts. A regular report from the committee to the full board, comparable to reports from other standing committees, can help raise the board’s level of understanding and ensure that critical issues receive the scrutiny they require.

Given the litany of economic, social, and environmental problems plaguing societies around the globe, issues of corporate responsibility and sustainability are likely to become ever more salient. Many companies will face difficult questions of resource allocation, and some may find their business models under attack. Strategically, companies will have to decide whether (and how) to go on the offense and invest in innovation or to bulk up on defense and strengthen their compliance and risk management functions—or both. Individual directors will increasingly be expected to speak to those issues. The time has come for business leaders, boards, and governance experts to start talking about the role of boards and board committees in addressing these questions and to consider whether a corporate responsibility committee should be part of the answer.

Originally published in July–August 2014. Reprint R1407G