The National Association of Corporate Directors (NACD) recently released its sixth annual edition of Governance Challenges 2017: Board Oversight of ESG, produced in collaboration with NACD’s five strategic content partners: Heidrick & Struggles, the KPMG Board Leadership Center, Marsh & McLennan Companies, Pearl Meyer, and Sidley Austin LLP. Environmental, social, and governance (ESG) issues encompass a variety of areas in which shareholders have demonstrated an increasing interest: sustainability, diversity and inclusion, human rights, labor practices, executive compensation, employee relations, and board independence.
According to Institutional Shareholder Services, a record number of shareholder resolutions on climate change were filed in 2016, and the average shareholder support for environmental proposals in general has increased dramatically over the last decade—from receiving an average of 11 percent of the vote in 2006 to 21 percent of the vote by June 2016. Shareholder proposals for the 2017 proxy season are also expected to focus on social issues, as there will likely be a regulatory downshift in these areas under the Trump administration.
Drawing from NACD’s report, here are five ways boards can improve ESG oversight this year in response to growing expectations from investors and consumers in this area.
1. Integrate ESG initiatives into company strategy.
How companies consider ESG issues and link them to financial and operational performance demonstrates the company’s approach to creating sustainable, long-term value for investors. KPMG recommends boards set the context for the company’s discussion around ESG issues by asking how they are applicable to the company, customers, employees, and investors. Specifically determine how environmental sustainability can support the company’s financial future. What are the board’s expectations regarding ESG? Will the company broadly address environmental and social issues, or will the company only focus on areas that directly relate to its strategy and operations?
2. Ensure key functional leaders proactively apply ESG in business operations.
All leaders in the C-suite should understand the importance of ESG and how it impacts their functional responsibilities, according to Heidrick & Struggles. For example, does the CFO include ESG elements when conducting financial analysis? Does the CMO clearly demonstrate how the company is committed to ESG goals instead of resorting to greenwashing (i.e., dedicating more effort to claiming to be environmentally responsible than actually doing it)? The board may also consider adding director ESG expertise should the company be recovering from a company-caused environmental disaster or missed opportunities in the marketplace due to lack of attention to ESG.
3. Use executive compensation to support ESG goals.
While many public companies are already engaging on ESG issues, Pearl Meyer research indicates companies fall on a spectrum from conducting basic reporting on ESG to fully integrating ESG into company strategy, culture, and executive compensation plans.
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Alcoa and Exelon are two examples of companies that have linked ESG goals such as greenhouse gas (GHG) emission reduction to executive compensation. At Alcoa, “20 percent of executive cash compensation is tied to safety, environmental stewardship (including GHG reductions and energy efficiency), and diversity goals.” Exelon rewards executives for “meeting non-financial performance goals, including safety targets, GHG emissions reduction targets, and goals engaging stakeholders to help shape the company’s public policy positions.”
To link ESG to financial results, boards can consider the following questions regarding compensation:
Which components of ESG should we link to our business strategy?
How do these ESG factors affect our short-term earnings versus long-term value creation?
What are the leading and lagging metrics that matter, incorporating both financial and nonfinancial metrics?
4. Improve disclosure on the impact of climate change.
The Financial Stability Board’s (FSB) Task Force on Climate-related Disclosures (TCFD) is an organization initiated by the G20 Finance Ministers and Central Bank Governors that has produced recommendations for disclosing climate-related risks and opportunities. The task force recommends that directors consider the following, as summarized by Marsh & McLennan Companies, to promote better disclosure:
Processes and frequency by which the board and/or board committees (such as audit, risk, or other committees) are informed about climate-related issues
Whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk-management policies, annual budgets, and business plans, as well as when they are setting the organization’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures, acquisitions, and divestitures
How the board monitors and oversees progress against goals and targets for addressing climate-related issues
According to Sidley Austin LLP, it has now become the norm for investors to consider environmental and social issues when making investment and voting decisions. Boards should determine who from the board and management will engage investors on these issues. These representatives may vary based on the severity of the topic to be discussed and which shareholder the discussion is with. Tracking shareholder voting records, and analyzing which types of proposals are seeing increased traction over time, will also provide insight into the minds of investors.
If you joined the National Association of Corporate Directors (NACD) for its inaugural Dancing With the Start-Ups (DWTS) competition at the 2016 Global Board Leaders’ Summit, you heard from 12 cutting-edge start-ups in the financial, energy, and health care industries. Founders and CEOs from each start-up had four minutes to pitch their companies to a panel of expert judges. NACD recently caught up with the winning companies—Vital Vio, BoostUp, and Disease Diagnostic Group—to see what they have been up to in the past seven months.
Illuminating the War on Germs
Vital Vio created a lighting system that kills bacteria using its proprietary white light continuous disinfection technology. Their products currently are used in major hospital systems, pharmacies, public restrooms, athletic facilities, and—starting in 2017—even your home.
Vital Vio’s under-cabinet light illuminated in eco-mode.
Colleen Costello, president and cofounder of Vital Vio, explained that refining Vital Vio’s disinfecting technology to VioSafe, a single LED light, was a game changer for the company, allowing them to use the technology in the home. VioSafe lights continuously kill germs and, when used in combination with regular periodic cleaning, significantly reduce the number of germs on surfaces. “The individual LED is smaller than a thumbnail,” she noted. “This expanded the opportunities of where continuous disinfection lighting can be placed.” Some popular areas to place the light in the home are under cabinets in kitchens, bathrooms, and offices. These are some of the most-touched surfaces, which also make them the most likely to be covered with a multitude of bacteria.
Vital Vio began to take shape in 2012 when Costello’s grandmother contracted a MRSA infection during a routine hospital stay. Costello, who at the time was studying at Rensselaer Polytechnic Institute, did some research and found that one in 25 patients contract a health-care-related bacterial infection in hospitals. She and a team of researchers worked to develop a better way to control bacteria levels, and Vital Vio was born.
In 2017, Costello’s focus is not only on innovation, but on identifying potential new licensees. The company is working with several strategic partners to increase utilization of Vital Vio’s technology in their products. Vital Vio also was selected as a finalist for the Edison Awards, an annual competition that honors excellence in innovation, creativity, and ingenuity in the global economy.
While Vital Vio has broadened adoption of its products, it faces new challenges. “We’ve moved from the disruptor stage to focusing on further adoption in different markets,” Costello said. “We’d like our technology to be similar to a LEED certification, so it’s a standard practice for facilities.”
Saving Money Made Simpler
Most of us have saved for a major purchase, and we know that saving isn’t easy. BoostUp is an app that helps people establish a daily savings plan and crowdsource additional savings from friends and family, making saving for those big purchases more achievable. Users are further incentivized through special offers from partners. BoostUp founder and CEO John Morgan noted that the app has about 55,000 users who are typically aged between 18 to 34 years. The company also sees other opportunities to engage younger savers, potentially through a parent/child joint savings relationship.
One of the new features that the BoostUp app has added is RoundUp, which is a microsavings tool. Savers connect their most-used credit or debit cards to the app to pay for every-day purchases. RoundUp then automatically rounds up the purchase price to the nearest whole dollar and saves the spare change into the connected BoostUp account.
Morgan suggested that this extra money can be great for vacation funds. “It’s like finding that $20 bill in the pocket of those jeans that you haven’t worn in a few months,” Morgan said. “You set the account up, go about your daily life, and six months later you have extra money in your account. It’s another night out in Vegas, or an upgrade to first class on the plane.”
Morgan noted that BoostUp is partnering with some travel companies to identify related savings incentives. BoostUp is also working with some new partners—including Redfin—and has renewed a multiyear partnership with Hyundai. A new type of partner the company hopes to engage is auto lenders. “The lenders could help consumers who have auto loans through RoundUp,” Morgan explained. “It’s setting money aside passively and getting to a point where you can skip a monthly payment because your RoundUp had enough funds to cover it or you can make an extra loan payment.”
Curing Disease Through Technology
Left to right: Mark Lewandowski, Alphonse Harris, and Founder John Lewandowski.
Using only a laser pointer and refrigerator magnets, Disease Diagnostic Group is saving lives around the globe—in fewer than five seconds and for less than five cents per patient. Disease Diagnostic’s technology screens, tracks, and diagnoses infectious diseases through a portable, reusable device. The company has focused primarily on malaria but in the past few months has broadened the scope of the technology to address a wider platform of diseases, including dengue fever. “Zika is next on our radar,” CEO and Founder John Lewandowski said.
One additional challenge Disease Diagnostic faces is finding test groups. “These diseases are rare, and it’s hard to get in touch with the right samples and the right individuals,” Lewandowski explained. “You need to find the right authorities to help you on the path toward commercialization. Sometimes you outgrow whom you are working with, or your path and priorities change.”
Over the long term, Lewandowski said he hopes that the company will continue to expand the technology to test for even more diseases. To do this, Disease Diagnostic will continue to focus on finding the right strategic partners. “To pitch a new product, you’re fighting two battles,” Lewandowski said. “One, you’re in a new market and need to convince people [to invest], and two, to prove the effectiveness of the device. On top of that, you need to prove the technique of the device as well.”
The inner working of the simple device that diagnoses malaria.
Disease Diagnostic is prepared to work through these challenges. If successful, the company is poised to be a game changer for global health. Imagine a future where more diseases could be diagnosed less expensively and effective treatment could be administered immediately. Lewandowski said that while the company is only able to work on one to two diseases at a time, the more the company is able to prove the effectiveness of its diagnostic technology, the broader its impact could be. “If we prove the business case, then we can be licensing out to flu, TB, anything a particular partner has of interest, and develop specific applications,” he said. “The solution is potentially here, and you can put it in the hands of almost anybody.”
Join Us to See the Next Generation of Stars
Back by popular demand, NACD will host its second DWTS at this year’s Global Board Leaders’ Summit on October 1 in National Harbor, MD. Participating start-ups will be announced soon. Check our website for the most up-to-date information.
Take a moment to place yourself in this board’s shoes. The company has…
An enviable revenue stream, with approximately $120 million in sales per day and an average sales order of $2,000;
A strong balance sheet with very little debt;
A need to react to seismic shifts in customer needs;
An overweight of assets in Europe while sizable growth for your industry has been predicted in Asia; and
A market cap of roughly $2.6 billion.
What would your board do?
Would your board be comfortable acquiring a division of a competitor for $2.4 billion in cash and 2.785 million shares of your company’s common stock, representing an approximate seven percent ownership position?
In a “bet the market cap” move, Tech Data Corp. took these actions, acquiring Avnet’s Technology Solutions business in 2017. Technology Solutions partners with more than 40 of the world’s top information technology (IT) vendors to address the IT business needs of 20,000 customers in more than 80 countries, including the Asia Pacific region (a new market for Tech Data). This acquisition makes Tech Data the largest public company headquartered in Florida by revenue, and is expected to catapult the company to a position among the forthcoming 2017 Fortune 100.
David Walker, director of NACD’s Florida Chapter as well as Chico’s FAS, CoreLogic and CommVault Systems, moderated a conversation featuring Robert M. Dutkowsky, Tech Data CEO and incoming chair; Steven A. Raymund, retiring Tech Data chair; and Charles “Eddie” Adair, chair of the board’s Transaction Committee. The panelists discussed the acquisition at a recent NACD Florida Chapter event held at Tech Data headquarters in Clearwater, Florida.
The Importance of Strategic Planning
At the urging of the Tech Data board, Dutkowsky and the management team undertook a significant strategic planning process two years prior to the acquisition. Called “TDNext,” the project was an iterative one, with the board pushing back several times before a final plan was achieved. The board’s strategic planning process revealed a customer demand to accelerate growth in the “third platform.”
The third platform refers to the ability to leverage the cloud, mobility, big data, and other next-generation technologies for business, as businesses move beyond the first two platforms, mainframes, and client servers. The company recognized that Technology Solutions, which delivers technology services, software, hardware, and solutions across the data center, would be complementary to Tech Data’s diversified portfolio of offerings in moving customers to the third platform. Also, the plan’s revelation that Tech Data was overweighted in Europe was validated the day that Brexit was announced and the company’s stock dropped significantly.
M&A Experience and Unexpected Bumps
A perfect alignment occurred at Tech Data to move the acquisition forward. The management team was ready, and the balance sheet supported the deal. The highly experienced board had guided multiple acquisitions at the company and elsewhere; the culture of the board was one of trust with each other and with management; and a transaction committee comprised of three committee chairs, led by Adair, acted as a consultancy and cheerleader for management during the negotiations.
One unexpected bump did occur during the acquisition process. Rick Hamada, chief executive officer of Avnet, abruptly departed as the agreement was nearing completion. With Hamada as the primary point of contact for the deal until that time, Dutkowsky had to find common ground with a new CEO during final negotiations.
Integration, Integration, Integration
Despite the alignment of board and CEO at Tech Data, the road to a successful deal still lies ahead as Tech Data integrates Technology Solutions. According to Raymund, the board now wants to hear about execution, not strategy, for the next several months.
For his part, Dutkowsky praises the relationship he has with his board, saying he can always discuss challenges and hurdles without worrying about finger pointing. That said, when it comes to the work ahead, he adds, “Either I will hit the board’s objectives, or somebody else will…. And I’m fine with that.”
NACD Florida would like to thank the team at Tech Data for hosting the program and the panelists for sharing their experiences with attendees.
Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.