As shareholders and stakeholders focus more on sustainability, board members increasingly are taking responsibility for the long-term sustainability of their companies. In this BoardVision interview, NACD’s publisher and director of partner relations, Christopher Y. Clark, moderates a discussion between Kellie Huennekens, from EY’s Center for Board Matters, and Brendan LeBlanc, partner at EY’s Americas Climate Change and Sustainability Services, on why directors should prioritize sustainability in the boardroom:
Sustainability is no longer being viewed as a “soft issue” for board members. Rather, it’s an issue that is tied to oversight of corporate strategy.
Shareholders are becoming more concerned about how environmental and social issues are affecting companies.
There are so-called quick wins for management and boards who realize their companies should address sustainability issues.
Brendan LeBlanc, partner at EY’s Americas Climate Change and Sustainability Services (left), and Kellie Huennekens, from EY’s Center for Board Matters.
Here are some highlights from the discussions.
Christopher Y. Clark: [Has] there been increased activity and interest by directors in the governance and oversight of sustainability?
Brendan LeBlanc: I would suggest that governance and oversight of sustainability is simply governance and oversight of the corporate strategy. Companies execute their business models in the context of planetary limits and societal expectations. Sustainability is a word that goes by a lot of other synonyms: citizenship, stewardship, responsible growth, resiliency, profitability, [and] in perpetuity. All of these concepts get at the essence of sustainability, and the idea of how a company’s strategy is executed has always been a board issue.
Kellie Huennekens: It’s all about shareholders, at least from my perspective. The EY Center for Board Matters has ongoing engagement with a full range of institutional investors. We track proxy voting of the 3,000 largest companies in the U.S., and what we’re seeing and hearing from them is that sustainability topics, [like] environmental and social issues, are key concerns…gaining traction among a broader range of investors. Basically, what investors are searching for is a better understanding of how nontraditional, nonfinancial developments are impacting the companies in their portfolio, and accordingly, they want to know more about board oversight of these issues.
Clark: The perception is that this was a soft issue, and I want to hear more about EY’s work with boards on not forcing it but enhancing it so it’s no longer viewed as a soft issue.
Huennekens: There are a number of companies that appear to be redefining how boards should be looking at sustainability topics. These companies are the leaders in the space, and they’re constantly communicating with one another [and] with investors to explore how to approach sustainability topics. It’s a very difficult area, partly because it’s new and partly because the topics covered are very broad and very challenging.
LeBlanc: Boards are meant to safeguard the assets of the companies they serve. And one of the trickier but more important assets is your social license to operate, [with] an engaged workforce that comes to work…[not only for a paycheck but also] because they’re doing something that they believe in. And how companies actually understand, report, and capture this information [is] a business issue. Today, that whole process is maturing, and as boards get more engaged on what we think our social license-to-operate issues are, [we’re asking], “What are the things that really matter to our business? What do we depend on for natural resources? What are society’s expectations of us? And how are we meeting that responsibility?”
Clark: I read the appendices of NACD’s handbook, Oversight of Corporate Sustainability, and one tip that stood out to me…was: get quick wins. I was hoping that you could flesh that out for me.
LeBlanc: Quick wins for the management of the company [have] historically [included being] good at cost savings. If you do well by managing energy, [and] reduce costs, that’s fine. If you do well by managing a safe workplace, and you reduce cost and increase morale, that’s fine. The company manages risks very well if they are [also] engaging stakeholders, those who might be impacted by getting them in the tent with them early and understanding what their expectations are of the business. Those are all good, quick wins in producing a report from the company that explains the progress that they’re making….On quick wins for the board, I would strongly suggest taking a look at the [handbook’s] appendix, where we’ve put a model charter [that helps with] understanding the board. Who’s responsible for what? What’s the governance around the nonfinancial commitments that you’ve either explicitly made or are expected of you from your stakeholders?
Huennekens: As an indication of investors’ interest on sustainability topics, more specifically environmental and social issues, we’ve been seeing in recent years that shareholder-sponsored proposals to management on environmental and social topics now make up one of the largest shareholder proposal categories. It’s now about half of all the shareholder proposal topics submitted. While some boards may ask [whether or not this is] really a big deal [considering the amount of stock the shareholder who filed the proposal holds], what we’re seeing is that the broader base of investors is supporting a number of these key topics. [These topics include] greenhouse gas emissions reduction, whether to produce a sustainability report on an annual basis…, a human rights assessment, [and] supply chain management issues. [These issues] are increasingly becoming more prominent in terms of the broad range of topics boards cover, and we’re seeing average support for these proposals increase as well.
One of my favorite comments from an attendee at last year’s Global Board Leaders’ Summit went something like this: “I was expecting to be informed; I wasn’t expecting to be inspired.” For a team that works year-round scouring the globe to discover and deliver to you voices that are shaping the future, that’s about as good as it gets.
This year’s Global Board Leaders’ Summit is on track to be our biggest ever, and one big feature of the Summit remains the same: a diverse array of thought leaders will share paradigm-shifting insights that will challenge the way you think about leadership, give you new tools to approach your directorship practice, and perhaps inspire you in surprising ways.
Here’s a sampling of some of the most exciting sessions at Summit this year:
Michelle Crosby’s start-up Wevorce is not only shaking up Silicon Valley, it’s turning the historic, antagonistic model of divorce on its head. The company’s mission is to “help couples ensure their divorce is less damaging to themselves, their finances, and the people they love.” Crosby was named one of the American Bar Association’s Legal Rebels in 2014, a distinction reserved for “lawyers who are breaking new ground using technology.” “Every institution is subject to change, and the more entrepreneurs who learn to work in the system to create that change, the further we’re going to get,” Crosby said in an interview with USA Today. In an intimate fireside chat, Crosby will discuss innovation, entrepreneurship, disruption, and how the company applies the Wevorce model to talent management inside the company.
Howard Ross, one of the most highly rated thought leaders at last year’s Summit, is back again to share insights from his groundbreaking work on unconscious bias, diversity, leadership, and organizational change. The question directors should ask themselves, says Ross, is not “Is there bias?” Rather, directors should ask one another, “What biases do we have that keep us from making choices counter to the values that we say we believe in?” Ross will open the Diversity Symposium on Saturday and will lead an in-depth workshop on Monday focusing on board dynamics.
The United Nations estimates that by 2025, two-thirds of the world’s population may face fresh water shortages, a critical concern for business and society. Whitewater rafting guide turned CEO Pat Crowley is betting that the solution to that crisis might literally be in our backyards. Crowley’s passion for the outdoors led him to work as a water resource planner, which drew his curiosity to crickets, of all things. “I heard about insects as a more environmentally friendly form of nutrition. From a water perspective, it was clearly a game-changer,” he said. Crowley founded Chapul, a company that makes cricket-based energy bars, in 2012, “to leap over this psychological hurdle of eating insects in the United States.” With explosive growth— 500 percent annually for the past two years alone—Crowley is on track to break through those barriers. On the summit mainstage on Monday, Crowley will discuss what it means to be part of building a new industry that is challenging societal norms, reshaping the competitive landscape, and may just help save the planet.
Phil Gilbert has been working with start-ups for the past 30 years, the most recent of which was acquired by IBM in 2010. Now Gilbert leads IBM’s design team with a focus on an empathy-centered workforce. Bringing a start-up mentality to 100-year-old company can be a challenge and almost immediately Gilbert was forced to confront a disconcerting question: “Is the entire way we’re working an anachronism?” Embracing that hard truth has been nothing short of transformational. Gilbert comes to the Summit mainstage to discuss lessons learned in this transformation. “We’re at an interesting crossroads in business. I think the way business is done and businesses work inside themselves has got to fundamentally change in the twenty-first century,” he said.
As managing director of famed Silicon Valley venture capital firm Andreessen Horowitz, Scott Kupor has been part of building brands like Airbnb, Buzzfeed, Facebook, Foursquare, Lyft, Pinterest, and Skype—companies that have become synonymous with disruption. “Things that are fringe today might become mainstream over time,” Kupor explained on Fox News back in June, describing the philosophy that underpins Andreessen Horowitz’s approach to finding the next disruptive trend. In a mainstage fireside chat Tuesday, Kupor will discuss this philosophy in context with everything from M&A activity and shareholder activism, to IPO trends and the next big innovations he sees poised to disrupt the business landscape.
When Chelsea Grayson took on the role of general counsel at American Apparel, she faced a daunting task: to help turn around a company that was operating in an increasingly competitive industry and was coming off of a tumultuous series of events, including high-profile sexual harassment allegations, layoffs, bankruptcy, and protests. In February, Grayson told the legal blog Above the Law, “I have been in-house for over a year now, and I have encountered just about every legal issue a general counsel might experience in an entire career.” Next month, Grayson will share her insights on governing complexity, a subject she has become adept at navigating during her tenure at American Apparel.
These are just a few snapshots of the incredible line-up of thought leaders who will join us in September. Want to learn more? View the full list of speakers and sessions at www.NACDonline.org/summit.
The sustainability information in CSR reports is not, from our perspective, “investment-grade;” that is, it is not necessarily material, not industry specific, not comparable, and not auditable.
Business news headlines on any given day highlight the importance of sustainability issues such as resource scarcity, climate change, population growth, globalization, and transformative technologies. In today’s world, management of these and other sustainability risks and opportunities influences corporate success. Thus, understandably, investors are increasingly requesting information on how companies are managing these factors.
A concept release from the Securities and Exchange Commission (SEC) on disclosure effectiveness includes a lengthy discussion of sustainability disclosure. In the release, the SEC states that it is “interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions.” We hope that the SEC’s request for input on sustainability issues signals an understanding that the information investors consider “material”—much like the world around it—is changing. As a result, corporate disclosures should also evolve to provide investors with the information they need to make informed investment and voting decisions.
Sustainability issues are increasingly important to a company’s financial condition and operating performance, and thus merit the attention of its board. At more than 55 percent of S&P 500 companies, the board oversees sustainability, according to the Investor Responsibility Research Center Institute. Such boards are to be applauded for taking a more holistic view of risk oversight, and for getting out in front of global challenges.
This shift in focus by investors and the business community is driven by a growing recognition that sustainability issues are business issues, not only born of social or political concerns. One recent study found that when companies focus their efforts on managing material sustainability factors—namely, those critically linked to their core business—they outperform their peers with significantly higher return on sales, sales growth, return on assets, and return on equity. They also show significantly improved risk-adjusted shareholder returns.
Clearly, the board plays a key role in developing a company’s capacity to create long-term value and in safeguarding its assets. In this regard, a board’s careful consideration of information on material sustainability factors would help it to fulfill its oversight responsibilities, by assisting it in understanding, prioritizing, and monitoring business-related risks and opportunities.
For example, a board should regularly consider how its company measures, manages, and reports its material sustainability risks. A pharmaceuticals company might consider how it is addressing a $431 billion counterfeit drug market, where mitigation strategies in an increasingly complex, global supply chain could stem or reverse the loss of consumer confidence and company revenues, and prevent up to 100,000 deaths each year (see Roger Bate’s 2012 book Phake: The Deadly World of Falsified and Substandard Medicines). The plunging stock price and loss of goodwill suffered by Chipotle Mexican Grill after outbreaks of E. coli and norovirus at its restaurants demonstrate the way in which a failure to manage sustainability risk factors can seriously damage a company’s reputation and shareholder value.
Moreover, sustainability issues not only raise risks, but also present opportunities that can and should be taken into account by the board as it considers development and implementation of the company’s strategic goals.
Sustainability issues may have a material impact on a company’s ability to achieve such goals. For automakers, a strategy that incorporates fuel-efficient technologies and alternative fuels can help the company capitalize on legal and consumer trends regarding fuel economy and emissions in a market where car ownership is projected to triple by 2050.
Sustainability issues directly affect a company’s financial condition and operating performance. Therefore, it is not surprising that investors are increasingly demanding more effective and useful sustainability information. Many companies have made efforts to meet this demand through disclosures in corporate social responsibility (CSR) reports, by responding to questionnaires, or otherwise engaging with investors. The sustainability information in CSR reports is not, from our perspective, “investment-grade;” that is, it is not necessarily material, not industry specific, not comparable, and not auditable. To that point, a 2015 PwC study found that 82 percent of investors said they are dissatisfied with how risks and opportunities are identified and quantified in financial terms; 74 percent of the investors polled said they are dissatisfied with the comparability of sustainability reporting between companies in the same industry.
What the markets have lacked, until now, are standards that can guide companies in disclosing material sustainability information in a format that is decision-useful. These standards must be industry specific. Sustainability issues affect financial performance differently depending on the topic and the industry. Therefore, investors need guidance on which sustainability issues are material to which industries, and they need industry-specific metrics by which to evaluate and compare the performance of reporting companies.
The Sustainability Accounting Standards Board (SASB), an independent 501(c)(3) nonprofit, was created to address this market inefficiency. The mission of SASB is to develop and disseminate industry standards for sustainability disclosure that help public corporations provide material, decision-useful information to investors via MD&A and other relevant sections of SEC filings such as the Form 10-K and 20-F. SASB’s standards are formulated with broad market participation and draw upon metrics already used by the corporate community. They will continue to evolve, as our world, and thus material sustainability issues, change.
Investors want to place their funds in entities that have good prospects for the future. To do so, they evaluate the information that is material to a company’s prospects. Not all that information rests in the financial statements that reflect a company’s current financial condition. We believe that, in today’s world, risks and opportunities not yet reflected in a company’s financial statements influence its success. And, the information that is “material” to investors—much like the world around it—has changed.
To help companies disclose material sustainability information, the capital markets need standards for disclosure of sustainability information that are created by the market, specific to industry, and compatible with U.S. securities law.
The management and disclosure of sustainability issues merits the attention of directors. The public comment period for the SEC’s disclosure effectiveness concept release runs through July 21. This is an important opportunity for publicly held companies and their directors to be heard on these critical issues, and to stress the importance of a market standard that serves investors while not overburdening issuers.
Aulana Peters was an SEC Commissioner from 1984-1988. Elisse Walter was the 30th chair of the SEC. Peters and Walter serve on the SASB board of Directors.