Search in book...
Toggle Font Controls
Create new playlist

Name your new playlist

Playlist description (optional)
Sign In

Email address

Password

Forgot Password?

or

Continue with Facebook

Continue with Google
Sign Up

Full Name

Email address

Confirm Email Address

Password

or

Continue with Facebook

Continue with Google

Chapter 13
Board of Directors Leadership

The third element of the Governance and Leadership section of the Scorecard is leadership from the board of directors. The term “board” can actually be confusing.7 In this book and the Scorecard, the term “board” refers only to the board of directors—charged with fiduciary oversight responsibilities. For privately held companies, this would be the equivalent of individuals representing the owners. In some cases, those are the owners.

One of the most powerful examples of board leadership comes from Sims Metal Management—the world’s largest metal recycling company. Headquartered in New York City—but traded on both the Australian and U.S. exchanges, Sims has a truly engaged board. In 2015, the chairman of the board’s Safety, Health, Environment, Community, and Sustainability (SHECS) Committee asked Ken Tierney, group vice president of SHECS to prepare a draft board sustainability commitment. The full board of directors later signed that commitment—putting their personal stamp on the company’s commitment to sustainability and the circular economy. The Sims Metal Management example highlights the key question every company should ask:

Key Question: What oversight structure, processes, and systems support our board of directors’ commitment and engagement with ESG?

To help answer this key question, the Scorecard analyzes how companies manage and perform in three areas:

–The structure and resources of the board (full board or board committee) to provide oversight of sustainability

–The assurance processes in place to report to the board key risks and opportunities

–The board of directors’ commitment of time to learning about sustainability issues, best practices, and trends

Within each of these areas, executives evaluate their company performance on several key sustainability indicators (KSIs).

Board of Directors Sustainability Structure and Resources

The Scorecard addresses board structure and resources with four KSIs that address the board’s oversight role, its stated commitment to sustainability, its sustainability expertise, and its use of external advisors.

KSI 3.1: Board Responsibility for Oversight of Sustainability. In the United States, the National Association of Corporate Directors (NACD) conducts an annual survey of board members to gauge the importance of environmental, social, and governance (ESG) and the key trends, issues, concerns, etc. The 2017–2018 NACD Public Company Governance Survey reinforces the need for board action:

–A strong majority of respondents in every industry sector ascribed importance to improving ESG strategy over the next twelve months, only a small minority saying that improving ESG was “not at all important.”

–Responses varied by industry; improving board oversight of ESG is viewed as being most important in materials, utilities, energy, and healthcare—and least critical in information technology.

A recent report titled “Systems Rule: How Board Governance Can Drive Sustainability Performance” examined 475 publicly held companies listed on the Forbes Global 2000 to determine the impact board governance systems have on sustainability performance. The study found that while most large companies state that they oversee sustainability at the board level, only a minority of companies evaluated had formal mandates and demonstrate board-management engagement on sustainability.i

The range of activity on board oversight of sustainability is as follows.

Several examples of leading practices in the area of board oversight of sustainability follow:

–Sims Metal Management: As the world’s largest metal recycling company, Sims is a global leader when it comes to board of directors’ sustainability oversight. A board of directors—SHECS Committee has been in place since 1991. The SHECS Committee charter was revised and updated in 2015 to reflect an even greater focus on sustainability. The SHECS Committee meets at least four times each year; the meetings are often multiday events including plant operations tours and safety reviews.ii

–Iberdrola: An international energy leader, the company stands out for its commitment to help decarbonize the economy. It is the leading renewable energy company. The actively engaged board reviews policies and external reports, evaluates stakeholder relations and oversees the company’s activity with international sustainability rating indices.iii

–Nike: The Corporate Responsibility and Sustainability Committee of Nike’s board of directors is mandated to work with management on integrating sustainability into Nike’s businesses.iv

–Unilever (Netherlands): The company has two board committees providing independent oversight: Board Corporate Responsibility Committee to oversee Unilever’s conduct as a responsible business and the Board Audit Committee reviews the company’s overall approach to risk management.v

KSI 3.2: Board’s Sustainability Commitment. Earlier in this chapter we provided the example of the commitment to ESG made by the board of directors of Sims Metal Management. Sims would be Stage 4 on the scale below.

Other examples of how companies have addressed board commitment to sustainability are:

–Ford Motor Company: The company’s sustainability committee needs to “assist management in the formulation and implementation of policies, principles and practices to permit the company to respond to evolving public sentiment and government regulation in the area of motor vehicle and stationary source emissions, especially in the area of greenhouse gas emissions and fuel economy and CO2 regulation.”vi

–Intel: The company agreed with a shareholder resolution in 2010 and created a board-level sustainability committee.vii

–Sims Metal Management: During 2015, the company’s board of directors took the unique and powerful step to codify in writing their personal commitment to SHECS excellence.viii

KSI 3.3: Board’s Sustainability Expertise. It is difficult to define or capture board sustainability expertise, and for this reason, the Scorecard criteria in the table below are deliberately a bit vague. One commonly used metric related to board composition is gender diversity. This metric is not a proxy for sustainability expertise; however, more diverse boards in general are more likely to have a balanced view of global ESG issues.

In the United States, boardrooms are showing a gradual increase in the share of women on the board. During the first five months of 2018, 31 percent of new board directors at the country’s 3,000 largest publicly traded companies were women, according to an analysis by ISS Analytics, the data arm of Institutional Shareholder Services. This puts 2018 on track to be a record year for new female board members.ix

In some cases, board expertise is very clear. An example is where a company invites a leading environmental or socially responsible voice to be on its board. Several examples follow:

–Ashland: The chemical and materials company had a leading environmentalist on its board starting in 1991; Patrick Noonan served from 1991–2007 and John Turner served from 2007 to 2015.x

–DuPont: Bill Reilly, former administrator of the U.S. Environmental Protection Agency, was on its board starting in 1993. Following Reilly’s tenure, another EPA Administrator, Lee Thomas, served on the board.xi

–International Paper: Patrick Noonan, renowned NGO leader, served on the board from 1993–2004.xii

–Nike: Jill Ker Conway served on the board from 1987–2011.xiii

KSI 3.4: Board’s External Sustainability Advisors. It is common for board members to either request their own external advisors or to suggest to management that it might be a good idea to hear from someone outside the company. Normally, the former situation (engaging directly with board advisors) comes when the board is concerned about something. The latter situation is more common when the directors just want to learn more.

In my personal experience, I have had the privilege of meeting with outside board members as their external sustainability advisor on over 60 occasions. Roughly one third of the time, I met with the full board of directors; the other two thirds were meetings with the board committee overseeing ESG issues. Outside directors always want to know how their company compares with competitors and peers; what issues are on the horizon; and whether goals, systems and performance are top quartile.

Outside directors also want to know how the CEO and management team is doing. Often, the last question from the directors was “Is there anything else we need to know that has not come up during the meeting?”

Some examples of ways boards have enhanced their knowledge and expertise in ESG issues:

–Dow Chemical: The company’s Sustainability External Advisory Council (SEAC), founded in 1992, is composed of thought-leaders from around the world and is chaired by a Dow SVP.xiv

–Ingersoll-Rand: As a world leader creating safe, comfortable, and efficient environments in commercial, residential, and industrial markets, the company created an external Advisory Council on Sustainability in 2010.xv

–Kimberly Clark: The company’s Sustainability Advisory Board (SAB) was formed in 2007 to provide insight on sustainability issues and best practices to our Global Strategic Leadership Team.xvi

Board of Directors’ Assurance Processes

Boards rely on independent audit and assurance processes to a significant degree. The independent role of the external financial auditor is well-established. In addition, many boards ask for and receive independent advisors on enterprise risk management and other key business matters.

When it comes to sustainability (and specifically the subset of sustainability related to core environment, health and safety function), audit results have been reported to boards for over three decades. In fact, many of the author’s early meetings with boards of directors of Fortune 500 companies were when functioning as the “partner in charge” of the consulting engagement providing independent environmental, health, and safety (EHS) auditing oversight.

The Scorecard addresses board of directors’ assurance processes with three KSIs: board review of key business decisions, reporting to the board of the most material ESG issues; and an assurance letter process or equivalent.

KSI 3.5: Board’s ESG Review of Key Business Decisions (KBDs). In Chapter 10 we introduced the concept of key business decisions as an indicator of the extent to which a company ties major investment decisions to core values around sustainability. In that chapter (KSI 1.6), we defined key business decisions as the handful of major decisions the CEO and board make each year—typically involving mergers and acquisitions (M&A) or divestitures; large capital expenditures; new product launches; major research and development expenditures, etc.

In this KSI, we specifically examine the board of directors’ role in factoring ESG considerations into those key business decisions.

Some examples of companies that have publicly discussed their board’s review of key business decisions:

–Ikea: The company’s board approved $1 billion for sustainable materials investments and pledged to invest €1bn (£850m) in recycling companies and forests.xvii

–AkzoNobel: The Dutch coatings company factors sustainability into financial decision-making: “Capital budget requests that exceed $5 million must now be routed through both the Controller and the CSO.”xviii

–KKR and TXU: Together with Environmental Defense Fund, the two companies decided to cut investment in new coal power plants from eleven to three. The Texas utility agreed to deal valued at record $45 billion with debt; agrees to scrap permits for eight planned coal power plants.xix

–Ingersoll Rand: The industrial company committed $500M for R&D to reduce long-term GHG emissions.xx

KSI 3.6: Reporting to Board of Most Material ESG Issues. The process and content of how companies report the most significant risks, issues, and concerns to its board of directors is obviously highly confidential. The typical range of approaches companies take is:

Best practices include having enough time on board agendas for review of this and a robust process (or processes) in place to assemble and report that information. The assurance letter process described below is a key one.

KSI 3.7: Assurance Letter/Annual Risk Review Signed by Business Leaders. In my experience, the “assurance letter process” is one of the most powerful, least expensive, and least practiced assurance tools available to companies. We define an “assurance letter process” as an annual signed statement from business executives (normally business presidents) to the CEO stating that operations comply; risks and significant issues are identified and being managed; and processes are in place to ensure consistent implementation of company policies and values.

Ashland has had an environment, health, safety, security, and sustainability “assurance letter process” in place since the late 1990s. At the time the process was initiated, Ashland was quite a different company (see Chapter 6: Strategy and Execution). Ashland’s assurance letter process was initiated at the suggestion of the board of directors, the process provides an attestation letter, signed by company presidents and the VP EHS, built on a “bottom-up” view of risks.

Board of Directors’ Commitment of Time to Sustainability

Perhaps the most precious allocation of time each year for any company is that allocated on the agendas of board meetings (or equivalent for private companies).

The Scorecard addresses the board’s time commitment to sustainability in two ways: the actual time spent in board (full board or board committee) meetings and the time spent on learning about the subject outside of board meetings.

KSI 3.8: Time Spent on Sustainability in Board Meetings. This KSI addresses time spent either in one of the various board committees—or the full board. The range of hours in the table below are based on the author’s personal knowledge from working with many companies and participating in many board meetings. The rating criteria are reinforced by surveys taken at meetings of chief sustainability officers (or equivalent) that I run for The Conference Board.

In a survey of fifty-nine public companies at a Conference Board meeting the author ran in February 2018, we asked the question: “How many times each year do the Sustainability/EHS functions meet with/present to the board of directors (committee or full board)?” The answers were: never (22 percent); once a year (36 percent; twice a year (12 percent); three time a year (5 percent); more than three times each year (25 percent). Note the bimodal distribution!

KSI 3.9: Board of Directors’ Sources of Sustainability Learning. Here is one of the ironies related to board learning:

–“We want more.” Board members tell me they want to have background reading and information on subjects—especially concise, thought-provoking, fact-based, business articles. They love a several-page McKinsey piece or similar thought pieces authored by respectable sources such as The Conference Board or NACD.

–“Don’t send anything.” The “rule of thumb” in most companies—often driven by the general counsel and corporate secretary is: only send board members copies of the slides you will present and nothing more.

Board members read extensively and do attend periodic training courses. The NACD, a leading organization of board directors, offers many short training courses for directors, including ones on ESG. The organizations’ journal, NACD Directorship, often includes articles on ESG.

One of the ways boards of directors learn about sustainability is through shareholder resolutions. When the company they oversee or any peer company is subject to a shareholder resolution on ESG matters, they pay attention.

As mentioned in Chapter 9 (The New ESG Regulators), in 2018, more than 400 shareholder resolutions were filed on ESG issues. Resolutions demanding that companies address climate risk rated highest (tied with political activity spending) with eighty resolutions; there were seventy resolutions about equal treatment for women.xxi

The mainstream business press is full of articles about ESG, and this has been growing steadily over the past decade. The clear majority of these articles are about companies taking ESG seriously, investing in clean technology, renewable energy, investors paying more attention to ESG issues.

Several short books or articles aimed at the boardroom include:

–Sustainability: A Guide for Boards and C-Suites (book)

–“Seven Pillars of Sustainability Leadership”—a 2014 Conference Board publication.

–“Navigating the Sustainability Transformation”—a 2015 Conference Board publication.

How Do Companies Stack Up?

Assessing data from the first sixty companies completing the Scorecard, the data suggest some big gaps.

A good indicator of board involvement on ESG issues is with KSI 3.5: Board ESG Review of Key Business Decisions. The data from the first sixty companies completing the Scorecard is about what the author expected; however, the involvement of the board is notably low, as depicted in Figure 13.1.

Figure 13.1: Scorecard Data from Sixty Companies on KSI 3.5: Board Review of Key Business Decisions

Several other data points from these Scorecard results:

–Only 11 percent of companies say their board is actively engaged on ESG issues between board meetings

–Only 10 percent say they have planned ESG learning as part of board meetings

Suffice it to say, the Scorecard data soundly reinforces what board members themselves said in the NACD 2017–2018 survey mentioned earlier in this chapter. In that survey, a strong majority of respondents in every industry sector ascribed importance to improving ESG strategy over the next twelve months.

i https://www.ceres.org/news-center/press-releases/ceres-new-analysis-large-global-companies-links-sustainability

ii https://simsmetalmanagementlimited.gcs-web.com/static-files/94983c52-add1-483f-a503-11028895c60b

iii https://www.ceres.org/systemsrule

iv https://www.ceres.org/systemsrule

v https://www.unilever.com/investor-relations/agm-and-corporate-governance/board-and-management-committees/

vi https://irrcinstitute.org/wp-content/uploads/2015/09/final_2014_si2_irrci_report_on_board_oversight_of_sustainability_issues_public1.pdf

vii http://www.socialfunds.com/news/article.cgi/2921.html

viii https://s3.amazonaws.com/sims-us-media/SMM+Corporate+2015/Sims-Sustainability-Report-2015-Final_.pdf

ix https://www.wsj.com/articles/women-on-track-to-gain-record-number-of-board-seats-1529573401

x https://www.bloomberg.com/research/stocks/people/person.asp?personId=23033355&privcapId=252339

xi http://www.nndb.com/people/955/000128571/

xii http://www.nndb.com/people/586/000053427/