Category: Leadership

What Boards Should Know About the Paris Agreement

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The twenty-first session of the Conference of Parties (COP) convened in Paris Nov. 30-Dec. 11 last year to negotiate a legally binding international agreement on mitigating the effects of climate change. Known as both COP21 and the 2015 Paris Climate Conference, this historic meeting of parties to the United Nations Framework Convention on Climate Change (UNFCCC) resulted in the first-ever unanimous accord, with 187 countries pledging collective action to cut carbon emissions. Despite a U.S. Supreme Court setback to environmental regulations on February 10, this deal will have significant consequences for business worldwide—consequences that will unfold as governments establish regulations that enact their support for and compliance with the Paris agreement.

The Sustainable Innovation Forum 2015

(Photo: Climate Action/The Sustainable Innovation Forum 2015)

What are the key elements of the agreement?

The COP21 accord seeks to accomplish specific major goals:

  • To restrict the increase of global temperatures to “well below” 2.0°C beyond those of the pre-industrial era, and to endeavor to limit their rise to a maximum of 1.5°C above pre-industrial averages.
  • Curtailing the amount of greenhouse gases (GHGs) generated by human activity to levels that trees, soil, and oceans can absorb naturally by sometime within the latter half of this century.
  • To review each country’s contribution to emissions reduction every five years so they can scale up to the challenge.
  • For wealthy countries to provide “climate financing” that will enable poorer countries to adapt to climate change and switch from fossil fuels to renewable energy sources.

How can countries understand and manage their own emissions?

Like any business goal, understanding and managing emissions requires three basic steps: measurement—determining where you are and where you need to go; management—determining opportunities, challenges and actions; and reporting—monitoring and disclosing performance over time.

Among the most significant outcomes of COP21 are action plans for the ten largest CO2 emitters by country.  These countries include (in order of the size of their emissions) China, the United States, the European Union (28 member states), India, Russia, Japan, South Korea, Canada, Iran, and Saudi Arabia.  The major global economic sectors emitting the highest amounts of GHGs are establishing mitigation objectives (i.e., emission reduction targets) referred to as Intended Nationally Determined Contributions (INDCs).  For instance, the European Union has set a target of at least a 40% reduction by 2030, and the United States is aiming for a 26%–28% reduction by 2025.

Such a global effort will have credibility only if these INDCs are made publicly available. The five-page United States INDC published on the UNFCCC site outlines how the country is planning to measure, manage, and report its performance; it also references existing U.S. laws and standards and draws on the EPA’s Greenhouse Gas Inventory Report: 1990–2013.  This report breaks down responsibility for sources of GHG emissions over time and by major industry sector.

A significant amount of research went into the target of a 26%–28% reduction by 2025.  The U.S. federal government is already taking steps to reduce emissions, and public-private collaborations have developed that will enable these sectors to leverage high-efficiency, low-missions solutions and incentivize market and technology innovations in response to the challenge.

This drive is creating a global wave of new business and investment opportunities and is no longer regarded as a fringe activity. Goldman Sachs produces regular equity research, such as The Low Carbon Economy—GS Sustain equity investor’s guide to a low carbon world, 2015–25 and Standard & Poor’s has an entire team dedicated to analyzing sovereign ratings, corporate credit risk, and carbon efficient indices.

What kind of impact will climate change and the Paris Agreement have on a company’s valuation?

In an update to the Annual Study of Intangible Asset Market Value, Ocean Tomo LLC reveals that the intangible asset value of the S&P 500 grew to an average of 84% by January 1, 2015, which represents an increase of four percentage points over 10 years.  As management of intangible assets has become increasingly critical to a company’s valuation, expectations for transparency about how these ‘intangible’ risks are managed have risen.  These risks now extend to climate change and the costs and benefits of reducing GHG emissions.

Companies can show that they are actively managing climate-change risks and reducing their GHG emissions through research surveys like the CDP (formerly known as the Carbon Disclosure Project).  The CDP was founded in 2000 in order to collect data related to carbon emissions and distribute it to interested investors.  What began as a small group of activists has grown to include more than 800 institutional investors representing assets in excess of US $95 trillion.

Interested investors (asset owners and managers) have demonstrated their support of the CDP by becoming CDP signatories and being involved in a range of investment-related projects.  The list of CDP Signatories and Members includes some of the largest institutional investors, such as Bank of America, BlackRock, BNY Mellon, CalPERS & CalSTRS, Goldman Sachs, Morgan Stanley, Northern Trust, Oppenheimer Funds, State Street, TIAA-CREF, T. Rowe Price, and Wells Fargo.  The CDP is by far the most influential organization specializing in this area, and it maintains a comprehensive public collection of corporate performance information.

Data posted on the CDP website can be organized by country, index, industry, or company, and is also presented in reports such as the following:

These reports can be helpful to any company seeking to establish its own GHG emissions strategy.  Drawing from public sources also allows a company to see the commitments and disclosures of industry peers, what customers may expect, and how suppliers are improving their own efficiency.  In addition, GHG-specific data such as that reported through the CDP is now being integrated into specialized research tools, for example, analyses on Bloomberg’s Sustainable Business & Finance website.  Any company (or investor) with a Bloomberg subscription can quickly compare and contrast a range of GHG-related factors, ranging from policies (i.e., climate change policy, energy efficiency policy, environmental supply chain policy) to specific GHG metrics (i.e., energy consumption per revenue, total GHG emissions per revenue, percentage of renewable energy consumption).

Do corporate and institutional customers care?

Consider the manner in which new market demands ripple through supply chains: ISO 9000, Y2K, Dodd–Frank/Conflict Minerals, etc.  That same dynamic is playing out around GHG emissions.  Once an organization makes a commitment to understand its own GHG footprint, it soon recognizes the degree to which its purchasing decisions influence its overall GHG footprint.

In 2010, Wal­-Mart Stores Inc. announced its goal to eliminate 20 million metric tons of GHG emissions from its global supply chain by the end of 2015.  The company actually exceeded its commitment by eliminating 28.2 million metric tons, which is the equivalent of taking more than 5.9 million cars off the road for an entire year. Wal-Mart achieved this reduction by implementing innovative measures across both its global operations and those of its suppliers: enhancing energy efficiency, executing numerous renewable energy projects, and collaborating with suppliers on the Sustainability Index to track progress toward reducing products’ overall carbon footprint.  By 2017, Wal-Mart will buy 70% of the goods its sells in U.S. stores from suppliers that participate in this Index.

Then, of course, there is the world’s largest single procurement agency, the United States’ General Services Administration (GSA), which spends more than $600 billion annually.  The GSA and the U.S. Department of Defense (DoD) are both actively involved in the management of GHGs in their supply chains.  These and other federal agencies are working closely with the White House Council on Environmental Quality to understand the GHG footprint of the government’s purchasing decisions and to engage and educate suppliers on GHG reduction strategies.  The Federal Supplier Greenhouse Gas Management Scorecard lists the largest suppliers to the US government by spend and identifies whether the supplier discloses its emissions and whether it has set emissions targets.  This information is drawn from public sources, and, like the CDP, this scorecard creates added market pressure on public and private companies to measure, manage, and report on GHG-related activities.

Do consumers care?

In 2015, Cone Communications partnered with Ebiquity to field its third survey of global attitudes, perceptions, and behaviors around sustainability and corporate responsibility.  They conducted an online survey of more than 9,500 consumers in nine of the largest countries as measured by GDP: the United States, Canada, Brazil, the United Kingdom, Germany, France, China, India, and Japan.  The survey broadly described corporate social responsibility (CSR) to respondents as “companies changing their business practices and giving their support to help address the social and environmental issues the world faces today.” Respondents were then asked whether in the preceding 12 months they had:

Corporate Social Responsibility (CSR) graphic

 

What does the agreement mean for your business?

Awareness about fossil fuel use, carbon and GHG emissions, and climate change impact is proliferating in all segments of the economy—public and private companies; federal, state, and local governments; employees, customers, and shareholders; etc.  Today’s management teams and directors need to understand where their company stands on the risk/opportunity spectrum.  To begin or advance the boardroom conversation on climate-change risks and strategies for reducing GHG emissions, consider the following:

  • Look across the company’s value chain. Where is the company most vulnerable geographically?  Which facilities are purchasing power from the highest and lowest carbon emitting electric utilities? Are their GHG reduction opportunities through our electric utility or through other energy providers in our region?
  • Have we taken a public position on reducing GHG emissions? Have we set goals and targets?  If not, why not?  If so, how are we performing? Do we have quantifiable and verifiable information?
  • What positions have our largest customers taken on the issue of GHG emissions? What are their expectations of us as a supplier?
  • Is our industry sector a leader or a laggard? How is our organization doing in comparison with our peers?

As part of the lead-up to COP21, the Science Based Targets (SBT) initiative was formed to actively engage companies in setting GHG emission reduction targets.  A collaboration among the CDP, the UN Global Compact, the World Resources Institute, and the World Wildlife Fund, the SBT initiative publishes the emission reduction targets set by more than 100 of the world’s largest companies.  Here are just a few examples:

  • Coca-Cola Enterprises has committed to a 50% reduction of absolute GHG emissions from their core business operations by 2020, using 2007 as the base year. Coca-Cola Enterprises also commits to a 33% reduction of the GHG emissions associated with manufacturing of their products by 2020, using 2007 as the base year.
  • General Mills has committed to reducing absolute emissions by 28% across their entire value chain from farm to fork to landfill by 2025, using a 2010 base-year. These reductions include total GHG emissions across all relevant categories, with a focus on purchased goods and services (dairy, row crops, and packaging) as well as delivery and distribution.
  • Procter & Gamble has committed to cutting emissions from operations by 30% from 2010 levels by 2020.
  • Sony has committed to reducing GHG emissions from its operations by 42% below fiscal year 2000 levels by fiscal year 2020. The company also has a long-term plan for reducing its environmental footprint to zero by 2050, requiring a 90% reduction in emissions over 2008 levels by 2050.

In October 2015, more than 80 major U.S. corporations signed the American Business Act on Climate Pledge, among them such companies as  Alcoa, American Express, Apple, AT&T, Berkshire Hathaway Energy, Dell, GE, General Motors, Goldman Sachs, Google, Johnson & Johnson, McDonald’s, Nike, Pepsi, Pacific Gas & Electric, Salesforce, Starbucks, UPS, etc.  A range of quantitative GHG-emission reduction goals and targets are available for public review on the SBT website.

In addition, entire industries—such as the fashion and hospitality industries—are working together to set their own targets.  These types of voluntary public commitments are setting precedents and thus expectations for others within and across industries and economic sectors.

Given the pending presidential election in the United States and the existing regulations referenced in the United States’ own INDC, it is unlikely that significant regulatory changes will impact business in 2016.  It is likely, however, that existing standards and Executive Orders will shape the conduct and actions of specific industries.

Growing interest in the federal government’s own footprint and those of its suppliers may constitute the most significant impetus for change. As the GSA and the DoD increasingly seek suppliers with the lowest GHG emissions, these suppliers (public and private) will be incentivized to measure, manage, disclose, and verify their GHG emissions.

The Sustainable Innovation Forum 2015

(Photo: Climate Action/The Sustainable Innovation Forum 2015)

What do directors need to do now?

  1. First and foremost, become familiar with your company’s carbon profile and sustainability image. You need to know the carbon footprint of your company, the company’s plans to reduce that footprint, and the company’s messaging about those plans.
  2. Whether your company is public or private, make sure that its customers know the company’s story. Business-to-business customers expect suppliers to measure, manage, and report on carbon emissions. Directors can ensure that a credible and compelling message is communicated to customers.
  3. Conversely, directors can ensure that the company exhibits GHG consciousness when choosing major suppliers. In a choice between two qualified vendors, why not pick the one that is also better for the sustainability of your business and the planet?
  4. If you serve on the board of a public company, look for the names of your largest investors on the list of CDP signatories, realizing that more and more of these investors are conducting due diligence on carbon emissions in their portfolio companies. Urge your CEO to announce carbon reductions in any communications with your company’s climate-oriented investors.
  5. Develop your business case for carbon reduction and other sustainability measures. Reducing carbon emissions means the reduction in the use of fossil fuels, which translates to cost savings. Diversifying the firm’s energy portfolio to include lower emission sources is also a strategic move in today’s market.  Seeking out and procuring lower-emissions goods and services has become commonplace.  Leverage your procurement spend to help reduce your overall GHG footprint.
  6. Urge management to reach out to sources knowledgeable about climate change in order to learn more from them or even to consider them as possible business partners. Wall Street firms, private equity investors, lenders, insurers, rating agencies, and stock exchanges are all becoming involved in climate issues and can be valuable partners in identifying future risks and opportunities, as well as crafting new strategies.
  7. Ensure your investors understand and appreciate the value of investments your company makes to reduce its carbon footprint and improve the sustainability of its operations.

For more practical guidance on board oversight of this important issue, please use NACD’s Oversight of Corporate Sustainability Activities Handbook.

About BrownFlynn (www.brownflynn.com) and the authors:

BrownFlynn is a corporate sustainability and governance consulting firm with 20 years of experience supporting public and private corporations in the development and implementation of strategic corporate responsibility and sustainability programs.  www.brownflynn.com

Barb Brown, co-founder and principal, has led the firm since 1996, when it was established to address the growing demand from shareholders on intangible issues such as corporate responsibility; sustainability; environmental, social, and governance topics.  Recognized as a pioneer in the industry, Brown is a sought-after speaker, author, and thought leader and has contributed her expertise to a range of professional and industry groups, as well as numerous multinational corporations.

Mike Wallace is managing director at BrownFlynn. An NACD member, he has been a regular contributor to NACD programs and publications.  He has worked in the field of corporate responsibility/sustainability for more than 20 years and has presented on these topics to audiences at NACD Master Classes, the NACD Global Board Leaders’ Summit, and meetings of the Society of Corporate Secretaries, and the National Investor Relations Institute.  He advises public and private companies as well as boards and board committees on these issues.

Understanding the Cyber Dialogue

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Cybersecurity is more than a technological issue—it’s a business issue. In a BoardVision video moderated by Judy Warner—editor-in-chief of NACD Directorship magazine—Mary Ann Cloyd, former leader of PwC’s Center for Board Governance, and Zan M. Vautrinot, former commander of the Air Forces Cyber Command and current director of Symantec, Ecolab, and Parsons Corp., discuss effective cyber-risk oversight, addressing the following questions:

  • How can boards communicate with management about cyber risk?
  • How does cyber risk fit into discussions about risk appetite?

Cyber Dialogue

Here are some highlights from that conversation.

Judy Warner: For directors, I think one of the greatest challenges around the issue of cyber is how to engage in an informed conversation with management. And how do they become informed about their oversight roles as they relate to cyber?

Zan Vautrinot: One of the things that was absolutely clear about the private sector and corporate leadership is that they understood how to have a discussion about risks and strategy. The only thing different with cyber is that some of the technology and some of the solution sets are slightly different, but the conversation is the same. It is a discussion about a particular kind of risk and how it relates to the kind of business you are [in].

Warner: Mary Ann, from your perspective, how does that conversation take place, or start to take place, at the board level? And is it a conversation for the full board or a specific committee?

Mary Ann Cloyd: I guess I always say it depends. I never want to be so prescriptive as to tell somebody what they need to do because every board and every committee is different. However, I do think that, given the magnitude of how this affects so many businesses, it’s not a technology issue. It’s a business issue. So, with that, where would you oversee any other business issue at your board? And I’m guessing that a lot of it would belong at the full board, with parts of it delegated down to a committee.

Warner: The NACD recently published a handbook on cyber-risk oversight, and one of the discussions is around risk appetite and where does cyber fit into that equation today. And I know, Mary Ann, you have said we need to think of cyber as any other risk.

Cloyd: I think you bring up two interesting things. [I]n fact, we did a small publication [at PwC’s Board Leadership Center] earlier this year, and we called it “Defining Risk Appetite in Plain English.” What prompted it was I had a director come to me and he said, “Mary, we’re doing our off-site strategy session and we always talk about risk appetite. Do you have a good pre-read that I could give to the board so that they can understand what risk appetite means?” So we did this to really put in plain English, in four pages or less, what the dialog is between management and the board, and how you develop and define your risk appetite. And, to me now—as you have so beautifully put this, Suzanne—cyber is just another part of that risk discussion and how it fits into your overall strategy.

Vautrinot: Right. And if you have already had a discussion about your strategy and those things that are most important to you as a corporate entity, is it the data that is unique that you’ve collected—the information and the access to that information—that makes your corporation unique? Is it the technology or your research and development? Is it your insight into financial transaction or merger and acquisition? Is it [about] manufacturing processes or distribution processes?

Every board and every management team knows what is most important to them being successful as a corporation. It is likely that those things are the areas that [the board] would want to focus on with assessing cyber risk. If you look at that area and say this is what is most important to us as a corporation, and this is the technology that we depend on to do that activity, now I can say that is sufficient or it is insufficient relative to the amount of risk I am willing to accept in that area. There may be other areas that aren’t core to the business, and so you are willing to accept a different amount of risk or put different systems in place that kind of sandbox it—[systems] that put a fence around, or that separate or provide different controls to allow [the lower-risk] activity to run more openly, whereas [higher-risk areas are] much more controlled and much more precious.

Additional NACD resources

NACD’s Director’s Handbook Series: Cyber-Risk Oversight

NACD—Building a Relationship With the CISO

NACD—Assessing the Board’s Cybersecurity Culture

NACD—Cybersecurity Risk Oversight and Breach Response

D100 Directors Impart Their Best Advice

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We sometimes all wish we could go back in time to advise ourselves on how to approach a new challenge or community given the knowledge and experience we have today. For the 2015 NACD Directorship 100 (D100), each honoree was asked to do just that. D100 directors were asked to provide a short, written response to this question: “What is the best advice you would give to a first-time director?” The D100 editorial team received responses from most honorees and they ranged from pithy maxims to stories about the challenges of staying independent.

A portion of the responses from the Class of 2015 D100 directors follows. Profiles of D100 honorees can be found in the November/December issue of NACD Directorship magazine.


Gary AndersonGary E. Anderson

Chemical Financial Corp., Eastman Chemical Co.

“I found that the best way to [contribute] was to frame appropriate questions dealing with the topic at hand. It doesn’t matter what the issue is, whether on corporate strategy, short-term tactics, succession planning, compensation, or risk management. The use of appropriate questioning also can work at home with the family!”

 

 

Veronica BigginsVeronica Biggins

Avnet, Southwest Airlines

“I fully embrace the Southwest Airlines and Avnet way of doing business: treat your people well and they will be equipped and motivated to treat your customers extraordinarily well, and that will produce distinguished rewards for your shareholders. Everyone is important, in every nook and cranny of the business, and every decision at the board level should involve the question, ‘How will this affect our people, our principles, and our culture?’”

 

Paula H. J. Cholmondeley

Dentsply Intl., Nationwide Mutual Funds, Terex Corp.

  • “Know your shareholders. What are their expectations? Is the company meeting them?
  • “Know your colleagues. Diversity of views, backgrounds, and experience enriches the company bottom line. Learn where your colleague’s views differ from yours. Understand why. Have courage and join them in candid discussion.
  • “Know your management team. Do they live their values? Are they delivering results?
  • Be involved in NACD, as governance is a learned skill and doing it right keeps our private enterprise system strong.”

 

Betsy HoldenBetsy D. Holden

Diageo PLC, Time Inc., Western Union Co.

“The best advice that I received as a new director was, first of all, choose wisely. Select an industry and company that you are really interested in, a management team that you believe in, and a board where your skills and experiences are relevant and will add value.

“Secondly, what really differentiates the best directors is how they interact with management and the other directors. Good directors are confident and courageous, and challenge management in a positive, constructive way…They understand that chemistry is the intangible that drives board effectiveness and they really listen to and treat other directors with respect.”

 

Nancy KarchNancy J. Karch

Genworth Financial, Kate Spade & Co., Kimberly- Clark Corp., MasterCard

“Some of the best advice I received as a new director was to accept that this role is different than anything I had ever done, and to have patience to learn the ropes. [A director] is an advisor, a member of a peer team, a leader on governance matters, a decision maker on some matters—[it’s] a mix unlike anything else. Plus, as in any job change, one is entering a new culture, and in the case of a board, both a company and a board culture. So be patient.”

 

Tim ManganelloTimothy Manganello

Bemis Co., Delphi Automotive

“The best advice I received was pertinent to me both as a director and as a chair/CEO. That is: ‘Tim, be yourself, remember that is what got you here.’ [That advice] caused me to think about hard work, integrity, ethics, and striving to make the proper decisions.

“It also reminded me that as my career evolved from working summer jobs in automotive plants to the boardroom of BorgWarner, I listened to, learned from, and developed relationships with people from all levels of society. This has become a valuable tool in the boardroom. Each time ‘a sticky issue’ is discussed, I remember to think back to my previous experiences and express what I think is the proper approach.”

 

Sarah RaissSarah E. Raiss

Canadian Oil Sands, Commercial Metals Co., Loblaw Cos., Vermillion Energy

“The best advice I received came from a very seasoned director. He said that I should find a person or two on the board that I could best relate to and either ask them to be my ‘board buddy’ or just make them my ‘board buddy’ without even asking. This person would help me understand current board dynamics, help me understand the history as necessary, and provide feedback on the value I brought to the board. I have used this technique on every board to which I am appointed, [and it] has allowed me to be more productive and a valuable contributor more quickly. I am most appreciative of my ‘buddies.’”

 

Ronna RomneyRonna Romney

Molina Healthcare, Park Ohio Holdings Corp.

“Three people gave me great advice when I decided to accept board positions at Molina Healthcare and Park Ohio. The first was Mary Molina, the company’s chair. It was simple but profound: ‘Remember the mission. It is the cornerstone of our corporate culture.’

“The second came from Ed Crawford, chair and CEO of Park Ohio. He said, ‘Act with integrity at all times and have the courage to do the right thing.’

“The third was from my husband, Bruce Kulp, former general counsel of Ford Europe. He counseled me to listen, get as much information as possible, trust in the power of common sense, and to always think strategically.

“Lastly, the people you deal with in management and the board are human. They have families. They have good days and bad days. Kindness is powerful, even in the boardroom.”

 

Olympia SnoweOlympia J. Snowe

Aetna, T. Rowe Price Group

“One of the key components of executing critical judgment is ensuring an ongoing evaluation of how the company’s short term goals enhance its strategy for creating long-term value. That requires early and extensive director engagement in the shaping of the strategy, greater understanding and knowledge of business operations, and constant assessment and management of the risk.

“In this era of deeper investor involvement, it is more essential than ever for boards to communicate to shareholders the extent to which the independent directors are vigorously exercising their due diligence towards maximizing the value of the enterprise.”

 

Ron SugarRonald D. Sugar

Air Lease Corp., Amgen, Apple, Chevron Corp.

“Select your boards carefully…You should be mindful of geography, meeting schedules, and be prepared to put in whatever time is necessary. And when trouble comes, you must be committed to see things through—whatever it takes.

“In well-run companies, board meetings enter a predictable rhythm, and are fairly routine. It has been said that in routine times, the quality of a board doesn’t really matter—until suddenly those moments when it matters enormously. Such ‘moments’ might include a significant market shift, a technology disruption, a planned (or unplanned) management succession, a serious regulatory or litigation threat, an environmental or safety crisis, a significant acquisition, a hedge fund activist campaign, or a hostile takeover attempt. In those moments, the board’s collective wisdom, perspective, and mature judgement can make—or break—a company.”

 

Dave WilsonDavid A. Wilson

Barnes & Noble Education, CoreSite Realty Corp.

“The best advice came from the counsel I engaged for [a] special committee. He noted the fiduciary duties of directors formed a foundation but not the entire structure. The greatest challenge I will ever confront as an independent director, he said, is ‘independence.’ He was speaking not of the independence necessary to meet SEC and NYSE thresholds. Rather, he spoke of the independence of mind, thought and action.

“What our attorney never told me was how challenging it may be to hold fast when you are in the minority, but how critical it is to our governance system that you do.

“Polonius may have been a pompous fool, but I still find value in these words: ‘This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.’—William Shakespeare, Hamlet, Act 1 Scene III.’”


Review the full list of D100 honorees at NACDonline.org/Magazine, and take a few moments to consider who you might nominate for inclusion in our tenth anniversary list. A call for nominees will be issued to all NACD members in early 2016.