Investors are on to a definite theme these days—and Kinder Morgan and Anadarko Petroleum Corp. are the latest companies to experience it.
Earlier this month, investors in the energy infrastructure giant backed shareholder resolutions calling for more transparency and reporting on how Kinder Morgan is addressing the impacts of climate change and mitigating the risks. A similar resolution at Anadarko also received a majority vote this month.
As I wrote in a recent NACD blog, one consequence of this growing focus on climate risks is that investors, led by major money managers such as BlackRock and State Street, are increasingly emphasizing the role of corporate boards in driving company responses.
And now Systems Rule, a new report from Ceres, shows that investors are right to push for strong governance systems for sustainability.
Our analysis of board governance practices and performance data of large global companies found that businesses that integrate sustainability priorities such as climate change into board mandates, director expertise, and executive compensation also demonstrate strong performance on sustainability issues.
The report provides important insights for boards to pay attention to as they consider how to oversee climate-change-related risks and strategy.
But here’s the issue: Most large companies aren’t among these performers because they still have fragmented systems of board governance, especially when it comes to sustainability oversight.
This is partially true because many directors and company leaders still do not understand the material impacts associated with environmental and social issues, like climate change. In fact, Systems Rule noted that only 17 percent of corporate directors have demonstrated expertise in sustainability issues.
For companies to get moving and establish governance systems that can deliver commitments and performance on climate change, the whole board needs to start by establishing some baseline fluency that will help them understand when these issues could in fact be material.
Developed specifically to increase board fluency in climate change, the report provides an overview of the different ways that climate change can impact an enterprise and how boards can integrate climate change oversight into their responsibilities in the boardroom.
It’s designed to be a valuable tool for corporate directors who want to educate themselves on what this issue means to their business and what they can do about it.
So how practically can directors build climate competency into their board?
Formally include oversight of climate-change-related issues in the board structure. Formalizing climate change’s importance to business by including it in board committees’ mandates ensures the topic is regularly discussed. Citigroup, Ford Motor Co., and Nike are just a few of the companies that do this.
Recruit climate-competent directors. Committees should cast a wide net through the nominating process so they can consider candidates with diverse backgrounds and expertise in addressing climate change.
Integrate climate change into strategic planning and risk oversight. Directors should ensure that management takes the business impacts of climate change into account at every level of the company. Businesses including BHP Billiton and Shell conduct scenario analyses to assess the impacts of climate change on their portfolio of assets and business policies.
Tie executive compensation to actions that mitigate climate change. To encourage action, executive compensation can be tied to a company’s progress on addressing and opportunities, such as cutting greenhouse gas emissions. Xcel Energy links 30 percent of its executive compensation to carbon emission reduction goals.
Promote climate change disclosure. Without robust disclosure, investors cannot accurately analyze how a company is responding to climate change. Companies including Aviva, Unilever, and Zurich Insurance committed to updating their disclosures based on new Task Force on Climate-related Financial Disclosure (TCFD) guidelines.
The takeaway from our research is clear. It pays for companies and boards to adopt strong board oversight systems for climate change. But as a first step, boards should first develop climate fluency to understand the material risks their company may face. Fluency with the issues and strong, holistic governance systems will lead to the performance impacts that investors and other stakeholders want to see.
Veena Ramani is program director of capital market systems programs at Ceres.
Board members own the sustainability agenda; it requires taking the long view. Yet, directors continue to struggle with the subject, often referring to sustainability issues under the umbrella of environmental, social, and governance (ESG) matters. This is especially true today.
Consider the auto sector—undergoing more change in the current five-year period than the last 100 years combined. The century-long run of churning out cars and trucks (the linear economy model) is giving way to various forms of sustainable mobility (e.g., electric vehicles, autonomous vehicles, ride sharing, etc.).
It’s not just the auto sector. Every industry is undergoing transformation. Sustainability is not always the main driver, but ESG factors are indeed at play. Sharing economy companies such as Airbnb, Uber Technologies, and Lyft are great circular economy stories—with the increased utilization of assets, lower carbon emissions, and more.
“How do we stack up?” That’s the question I have been asked in over 50 board meetings over the past 25 years. In virtually every case, the directors wanted to know: Where does our company stand today, vis-à-vis sustainability, compared with competitors, peers, and best practices? Are we top quartile?
It’s a good question, and it deserves an answer. That’s why in 1997, after two Fortune 200 company board meetings where we discussed ESG, I began developing the Corporate Sustainability Scorecard—a board and C-suite rating tool applied one company at a time. The scorecard is a web-based tool created by industry for industry that maps a company’s posture and performance along a four-stage maturity path.
Fast forward 20 years: in early 2018, 60 blue chip companies completed the scorecard as a cohort. The results—the first of their kind for board-relevant sustainability data—suggest that many companies may not be “future ready.”
So what are directors to do? I distilled years of boardroom experience into a short book titled Sustainability—A Guide for Boards and C-Suites. The book has three key messages for board members:
1. Think of ESG within the scope of strategy, not just risk. The challenge for directors is to help your CEO think through how to profit from ESG trends, not just how to stay out of trouble. Ask strategic questions, such as:
How can we leverage ESG trends for growth?
What new market opportunities might we be missing out on?
Scorecard data suggest the boardroom conversation is still mostly about risk. Only 20 percent of companies rate themselves three or higher (on a scale of one to four) for growing revenue from more sustainable products and services. Nearly half of the 60 companies (47%) do not see ESG attributes as a revenue driver.
2. Build robust sustainability governance. Without getting governance right, it is hard to get anything else right. This is true in creating robust brands and delivering consistent and strong financial results. It is also true in showing how your company plans to capture value from leveraging ESG trends for growth.
Scorecard data suggests some big gaps here: only 11 percent of companies say their board is actively engaged on ESG issues between board meetings, and only 10 percent say they have planned ESG learning as part of board meetings.
3. Measure your company against your peers. By encouraging your company’s senior management to fill out a survey like the scorecard mentioned above, you will be doing them and yourselves the favor of getting an overview of your company’s comparative weaknesses and strengths in sustainability.
Knowing how your company stacks up on ESG is more important than ever. This statement was reinforced by BlackRock CEO Larry Fink in his January 16, 2018 letter to CEOs:
“Society is demanding that companies, both public and private, serve a social purpose…To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Without a sense of purpose, no company, either public or private, can achieve its full potential.”
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 12 months, with only a small minority saying that improving ESG was “not at all important.” However, 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.
Every industry has its version of what “sustainable mobility” is doing to the auto sector. ESG factors will increasingly impact how companies choose new businesses to buy, old businesses to reshape or shed, new offerings to create, and suppliers with which to partner. Those decisions will be made in the boardroom.
Gib Hedstrom runs his own advisory firm, working with mostly large companies on oversight of ESG issues. He also runs three executive councils for The Conference Board. His latest book is available on Amazon or at www.hedstromassociates.com. Thoughts expressed here are his own.
Some claim that seven million jobs will be lost, and more than half of jobs will be replaced. Others claim that 2.3 million jobs will be created, exceeding the 1.8 million that it will removed. These are just some of the forecasts pundits are making about the impact artificial intelligence (AI), automation, robotics, and more will have on jobs and the changing nature of work in the United States.
When taken together with many other forecasts, there is really only one conclusion. We really don’t know what the impact will be. What we do know is this: change is happening and it’s happening fast. And beware, we humans tend to underestimate the amount of change that will happen in the next 5 years. Don’t get caught. One of the single biggest questions the board needs to be asking of their CEOs is, “Is our workforce strategy built for the future of work?”
Despite all of the rhetoric about advanced and emerging technologies creating massive job losses, our economy will continue to function as the “human operating system” that will power organizations of all sizes. The most adept leaders will recognize advanced technologies as opportunities to unlock the full potential of humans rather than considering those technologies as simply a way to replace jobs and reduce costs. Our capacity for curiosity, customer devotion, empathy, problem-solving, relationship building, and more will be difficult to replace.
Technology, automation, robotics, AI, side-by-side with the human operating system, is the new currency in a workforce prepared for the future of work. Importantly, 62 percent of organizations rate themselves as ineffective at this type of workforce planning.
Board members in companies of all sizes should be asking, therefore, the following questions of the C-Suite.
What should our workforce look like in five and 10 years, and what is our plan to achieve that end state? So far, only one in five human resources leaders have begun implementing strategies to develop their workforce for tomorrow. While this figure is surprisingly low given the urgency with which company leaders need to act, it’s these leaders who are positioning their companies ahead of the curve and widening their competitive moat against those who choose to delay or take no action at all.
What are the external trends defining the future of work that we are harnessing for success? Which ones could prevent us from delivering on our goals? Mercer’s 2018 Global Talent Trends report is a good starting point to learn more.
Is the leadership team and workforce ready for the speed of change required to win? Only 18 percent of C-Suite leaders describe their organization as agile enough today to succeed through change.
Should we be measuring the long-term health of our company differently than just earnings or stock price given the changing nature of work? What are we doing to develop and retain talent? Does our mission statement reflect the need for customer devotion and a purpose-driven culture? How are we measuring whether or not we are delivering on our mission?
What are we doing to upskill and reskill our workforce to improve their digital literacy? Only 15 percent of company leaders consider themselves leaders a digital organization, with 53 percent reporting they have not yet begun their journey or have a long way to go. That makes it even more surprising that only 15 percent of C-Suite leaders believe that upskilling and reskilling employees for new and changed roles, driven by digital and technology, will make a sizable difference to business performance.
Today’s board members and leaders can’t afford to wait any longer. The technology innovation curve is a hockey stick and many believe we are about to hit the elbow as AI and other technology capabilities begin to approach and surpass human intelligence. Those leaders who embrace the pace with urgency will set themselves up for accelerating growth while those who don’t will find that the notion of being able to catch up has vanished.
No business is immune, and how the workforce will morph and adjust needs to be at the center of gravity in all board room discussions. Think about these facts from the World Economic Forum:
35 percent of the core skills of today could change by 2020
65 percent of the jobs our own children in elementary school will be doing in the future do not yet exist
These are just a couple of data points that capture the significant change ahead. Are you ready? If you believe your C-Suite is behind in developing a workforce strategy to compete in the digital age, now is the time to leap forward. If you believe they are ahead, it’s time to invest in accelerating their march.
Brian Baker is a Partner in Mercer’s New York office and the US Digital Workforce Leader. He is focused on helping business leaders determine and build their Workforce for the Future strategy and execution plans.