Category: Business Ethics

Sustainability and Social Responsibility: Considerations and Tools for Boards

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Ashley Marchand Orme

Learning how to implement sustainable business practices can be challenging for companies in any industry, and boards may wonder how to integrate sustainability issues into discussions with management. NACD has compiled a set of resources offering practical information to help boards discuss climate-related risks, as well as opportunities associated with environmentally- and socially-sustainable business practices.

The first step is to assess why sustainability and social responsibility are such hot topics for the boardroom. Two important factors to consider are the political environment and shareholder expectations.

Signals From the Current Administration

President Donald J. Trump in June announced that the United States would be withdrawing from the Paris climate agreement, an international deal in which 191 countries have pledged to work toward goals to restrict the increase in temperatures globally to less than 2.0°C and reduce the amount of greenhouse gases being created.

The president in April also signed an executive order aimed at “promoting energy independence and economic growth,” curtailing federal environmental regulations. The order instructs the Department of the Interior to lift former President Obama’s ban on coal leasing activities on federal land.

Watchdog group Environmental Integrity Project recently reported that this year, the Trump administration, when compared to the prior three presidential administrations in the same period, has collected approximately 60 percent less in fines from companies’ violations of pollution-control regulations.

Opposing Pressure From Shareholders

Despite strong signals from the current administration that enforcement of environmental-related regulations will decrease over time, shareholders are applying an opposing pressure on corporations.

More than half (56%) of shareholder proposals introduced this year on proxy ballots related to social, environmental, or policy issues, and Proxy Monitor reports that this proportion is the highest it has seen since it began tracking such data in 2006.

Shareholder proposals relating to environmental and social issues 10 years ago sought fairly basic changes such as increased clarity into companies’ environmental policies. The proposals now seek, for example, enhanced disclosures around what the company is doing to manage climate risks and how executive pay links to sustainability initiatives, the Wall Street Journal reports.

Proposals about environmental issues received a record breaking average of 27 percent support this year, according to Proxy Monitor. That percentage was 21 percent last year and fell in the teens before that.

Meanwhile, State Street Corp., a global financial services and investment management firm with $2.47 trillion in assets under management, published a report earlier this year in which they found that traditional obstacles (like the lack of quality data about ESG) to investing more heavily in companies that prioritize ESG initiative are diminishing.

“Over the long-term, environmental, social and corporate governance issues can have a material impact on a company’s ability to generate returns,” Ron O’Hanley, president and CEO of State Street Global Advisors, said in a press release.

NACD’s Responses

Given the increasing expectations of shareholders and NACD’s continued focus on long-term value creation—a focus that requires a sustainability-focused mindset—NACD has curated its Resource Center: Sustainability and Social Responsibility.

Resource centers are repositories for NACD content, services, and events related to top-of-mind issues for directors. In these resource centers, individuals can find practical guidance, tools, and analyses on subjects varying from board diversity to cyber-risk oversight. Below we have highlighted a sample of helpful materials from our new resource center on sustainability and social responsibility.

Thought Leadership & Research

The resource center features a handbook called Oversight of Corporate Sustainability Activities—part of the NACD Director’s Handbook Series—that offers guidance aimed at strengthening the board’s oversight of sustainability issues.

The handbook, produced in conjunction with EY, centers around four key recommendations:

  • Directors should understand the company’s definition of sustainability in the context of the company’s strategy and specific circumstances.
  • The board and management should align on the sustainability message and information the company chooses to report publicly.
  • Boards should clarify roles for oversight responsibility for sustainability activities, including external reporting.
  • Directors need to establish parameters for sustainability reporting to the board regarding the information required to support robust discussions with management.

Expert Commentary

A number of items included in the resource center provide expert commentary on myriad issues related to sustainability and social responsibility. A favorite of mine is “Living in a Material World,” an article written by Veena Ramani, program director of the Capital Markets Systems, at sustainability-focused nonprofit Ceres.

Ramani discusses the corporate director’s critical role in engaging with management over which sustainability issues are material for the enterprise. She offers four suggestions for board members who want to address the materiality of certain sustainability risks.

Boardroom Tools & Templates

The resource center houses several tools and templates to assist directors as they oversee sustainability-related risks and opportunities. One such tool is the “Self-Assessment: Is Your Board Sustainability-Ready?” evaluation. Directors can answer a set of questions to gauge their board’s level of engagement—or lack thereof—in sustainability oversight.

Videos and Webinars

The NACD BoardVision—Sustainability Oversight video in the resource center features a candid discussion by EY subject matter experts Brendan LeBlanc and Kellie Huennekens on how investors are engaging with boards around sustainability and social responsibility issues. (A transcript of the video is also available here.)

Conclusion

Our hope is that you find this resource center useful and visit it often. We will continue to update it regularly with new and interesting content. If you would like help finding resources on a specific subject matter, please let us know. We welcome the opportunity to engage with directors on pressing needs and concerns.

Building a Strong Board Culture: Perspectives From Fortune 500 Committee Chairs

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This blog post is one installment in a series related to board oversight of corporate culture. The National Association of Corporate Directors (NACD) announced in March that its 2017 Blue Ribbon Commission—a roster of distinguished corporate leaders and governance experts—would explore the role of the board in overseeing corporate culture. The commission will produce a report that will be released at NACD’s Global Board Leaders’ Summit, Oct. 1–4.

In a recent study by Stanford University’s Rock Center, less than half of directors surveyed strongly believe their boards tolerate dissent, and 46 percent expressed concern that a subgroup of directors has disproportionate influence on boardroom decisions. A 2015 survey cited by Heidrick & Struggles reflects similar concerns about culture in companies as a whole: 87 percent of organizations listed culture and engagement as a top challenge, with half of business leaders ranking the issue as “urgent”—a 20 percent increase from the prior year.

Sound, ethical culture in the boardroom sets the tone for the rest of the organization.

In light of the importance of the culture issue for boards, NACD, Heidrick & Struggles, and Sidley Austin LLP cohosted a meeting of the Nominating and Governance Committee Chair Advisory Council on March 28, 2017. The session and a related conference call brought together nominating and governance committee chairs from Fortune 500 corporations to discuss how boards can improve their own cultures and, by doing so, reinforce the elements of good culture in their corporations. The discussion was held using a modified version of the Chatham House Rule, under which participants’ quotes (italicized below) are not attributed to those individuals or their organizations, with the exception of cohosts. A list of attendees’ names are available here.

The council meeting resulted in the following takeaways:

1. Recognize and implement characteristics of a strong board.

Council delegates at the meeting listed a number of indicators of productive boardroom culture:

  • Extensive and thorough preparation on the part of every director, without exception. “Every board member needs to have an in-depth understanding not just of the company, but its peers, competitors, and the broader industry. Passive reliance on management presentations for information is no longer sufficient.” Another director added, “Intellectual curiosity and learning agility are essential ingredients of good board culture.”
  • Directors are able to strike the right balance between collegiality and directness, challenging one another―and management―constructively. “Attack the issue, not the individual,” said one director.
  • The board has well-functioning continuous improvement processes, including regular evaluations, director and committee succession planning, and review of needed skill sets in light of current and future strategy. This includes the notion that board service is not a guarantee, but subject to the needs of the board and the strategic direction of the company.
  • The board should model the culture that the corporation as a whole desires: “Walk and talk the culture you’re expecting.
  • The board has a healthy relationship with management and can speak with candor.

Holly Gregory, partner at Sidley Austin, added that the notion of teamwork as an element of productive board culture goes beyond semantics. “Boards are teams in the legal sense,” she said. “The board’s authority is as a body, and board decision making is by collective action.”

2. Use inflection points as opportunities to address board culture.

Directors agreed that changes in board leadership—such as a committee chair, lead director, or nonexecutive chair—can be good opportunities to reevaluate board culture and performance. According to one delegate, “How are you challenging yourselves? Your board may be working fine today, but maybe you’re missing a chance to take the board’s performance and culture to an entirely different level.

Council members also suggested a number of other inflection points to use as opportunities to examine board culture:

  • Patterns of breakdowns or concerns regarding compliance and ethics—“If we see two or three ethical violations and we don’t do anything about it, what does that say about our strategy and the performance of the board?
  • Major transactions“After a large acquisition, [a culture-consulting firm] came in to work with management. Then [the firm] came back and did a session for the full board. We got a much better understanding about how our culture was aligned with where the company was going.” Another director observed, “Creating the culture for a spin-off board was easy compared to [changing culture on] an established board. [In either case], team-building on the board is actually a good idea.
  • CEO successionThe previous CEO had a very strong demeanor in the boardroom and [held strong control] over strategy. After he stepped down, the lead director was in a position to take a much more active leadership role that coincided with a significant regulatory change. The board was much more challenged and became much more engaged in strategy and more productive and useful to the company.”

3. Proactively examine board culture at scheduled periods.

Although the inflection points described above can be useful opportunities to review board culture, council meeting participants agreed that boards should be proactive about assessing and molding their cultures. “You don’t know the culture you have before you hit a bump in the road,” one director said. “Be that person that says, ‘maybe we can improve by doing XYZ.’ If our major shareholders had been listening to the process we just went through, how would we feel about that?” Theodore Dysart, a vice chairman at Heidrick & Struggles, observed, “It’s important for boards to be able to rally after a crisis, but how can that cohesiveness of purpose be made more routine? We are seeing a growing number of boards making use of tools and processes to embed cultural assessments more deeply, but it is not yet a widespread practice.”

Directors provided a number of examples where their boards took a proactive approach to evaluating culture:

  • Board succession planning“On one board, we initiated a self-examination of our culture in anticipation of some turnover coming up due to director retirements. We realized it was an opportunity to clarify what we stand for as a board, how we want to operate, and the elements of board performance we want to evaluate.”
  • Reviewing key management reports—“We use the review of the company’s sustainability report as an annually scheduled inflection point [to review culture]. It has extensive statistics on environmental, safety, and other issues, as well as key stakeholders and the firm’s interactions with them. It helps us see the cultural underpinnings of the company and also drives deep discussion about our own culture as a board.”
  • Risk appetite discussions—“Our board’s discussions about risk appetite led us to a conversation about culture. It emerged that we were not all on the same page with respect to the level of risk we felt was appropriate for the strategy. Some directors were gung ho; others were more reserved. The work we went through to gain alignment highlighted some important aspects of our board culture and dynamics.

Board evaluations provide another opportunity to assess the current state of boardroom culture and identify opportunities for improvement. See the Report of the NACD Blue Ribbon Commission Report on the Strategic-Asset Board for specific guidance and tools to help conduct evaluations and elevate board performance.

Council delegates emphasized that both measuring and changing culture can be extremely challenging, but the benefits are significant. As one director observed: “The board can have a culture and interact with senior management to form what you believe is the tone at the top. It takes a different curiosity to see if that trickles down into the institution. There’s no magic here; this is really hard work, but directors can have enormous positive impact when they model and reinforce the company’s desired cultural attributes.

Additional Resources

Culture and Compliance: Board Lessons From Volkswagen

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This blog post is one installment in a series related to board oversight of corporate culture. The National Association of Corporate Directors announced in March that its 2017 Blue Ribbon Commission—a roster of distinguished corporate leaders and governance experts—would explore the role of the board in overseeing corporate culture. The commission will produce a report that will be released at NACD’s Global Board Leaders’ Summit , Oct. 1–4.

A panel discussed how the iconic company became embroiled in scandal.

Wells Fargo & Co., Volkswagen AG (VW), Mylan NV, and Valeant Pharmaceuticals International are just a few of the companies that have recently experienced high-profile corporate crises stemming from ethics and compliance breakdowns. As corporate directors look to learn from these scandals, the John L. Weinberg Center for Corporate Governance, Association of Corporate Council, and Bloomberg Law® this April co-hosted the event Volkswagen Emissions Scandal—Lessons for Investors, Boards, Chief Legal Officers and Compliance & Governance Professionals.* The panel discussed the VW emissions scandal and lessons for boards of directors and general counsel (GCs) on instituting a corporate culture that promotes ethics and compliance.

Corporate Governance Causes of the VW Scandal

Charles M. Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, notes in an article that three main governance practices at VW created a perfect environment for noncompliant behavior stemming from a lack of independent shareholder representation on the board:

  1. A complicated web of interests with dual-class stock, pyramidal ownership, and family control. The Porsche and Piëch families own just over 50 percent of VW’s voting rights through their preferred class stock in Porsche Automobil Holding SE, which in turn owns shares of VW (known as pyramidal ownership). Ferdinand Piëch, the grandson of Porsche company founder Ferdinand Porsche, was chair of VW’s supervisory board at the time of the scandal and served as CEO from 1993 to 2002. Piëch’s primary goal is said to have been to create the largest automaker in the world, with less regard for creating profit and shareholder value. This directive from the company leader, in an environment where shareholders outside of the family had little influence over the board, created a corporate culture where employees chose noncompliant behavior over failure when designing the “defeat devices” used to cheat U.S. emissions tests.
  2. The government as a major shareholder. VW was a state-owned enterprise until 1960 when it became privatized and left Germany’s Lower Saxony region with a 20 percent stake in the company. Elson opines that the interest of government officials is to be re-elected, often achieved through high employment rates. Therefore, government representatives on the board of VW were driven to create jobs at VW, the largest employer in Lower Saxony, even if adding those jobs was detrimental to profits.
  3. Labor representation on the board (codetermination). German law requires all companies with more than 2,000 employees to fill half of the board with employee representatives. Elson argues that the board’s ability to provide effective compliance oversight was diluted by labor representatives on the board who were essentially monitoring themselves, and hence more focused on obtaining higher compensation and decent working hours for employees.

In light of these conditions at VW, panelists shared a number of leading practices for GCs and directors in creating a compliant corporate culture:

Lessons for GCs

  • “You can’t legislate ethics, but you can promote them,” said one panelist. Be the devil’s advocate and stress the importance of risk management and cultural tones at different levels of the organization, i.e., the so-called tone at the top, mood at the middle, and buzz at the bottom.
  • Ensure your board spends adequate time on compliance issues. Directors are often bogged down by compliance and want to spend more time on strategy, but prioritizing compliance at the board level will create a culture that allows strategy to be carried out successfully.
  • Get the right information to the board at the right time. According to one panelist, “The GC—as well as risk managers and in-house lawyers—need to be tough enough to speak up and report to the board. At Lehman Brothers, the CEO was known as the ‘gorilla on Wall Street.’ He doubled down on real estate, which the risk officer beneath him knew was risky, but their concerns were never known to the board.”
  • Remember that your duty is to the company—not the CEO—even if you’re reporting to him or her. “If [you as] the GC [are] aware of a violation, you need to do the right thing and not be swayed,” said one speaker.

Lessons for Directors

  • Increase your exposure to more employees, including mid-level employees, to get a better sense of the corporation’s culture in practice below the C-suite.
  • Create straight reporting lines from the compliance officer, chief risk officer, and internal auditor to committee chairs. This empowers these officers to speak openly with board members about their concerns without management present. (See NACD’s brief on Audit Committee Oversight of Compliance, which is open to the public for download.)
  • Incentivize compliance through compensation metrics. See NACD’s briefs on Incentives and Risk-Taking and Board-Management Dialogue on Risk Appetite for guidance on designing incentive programs that promote high performance while limiting unhealthy risk-taking.
  • Should your company have one in place, reevaluate multiclass stock structures in light of investor perspectives. Research from the Investor Responsibility Research Center Institute shows that “controlled companies generally underperform on metrics that affect unaffiliated shareholders,” while the “Commonsense Corporate Governance Principles,” released by major institutional investors and others, says that “dual class voting is not best practice.”

 

* The distinguished panel of speakers included: Robert E. Bostrom, senior vice president, general counsel, and corporate secretary at Abercrombie & Fitch Co.; Charles M. Elson, Edgar J. Woolard, Jr. chair in corporate governance, director of the John. L. Weinberg Center for Corporate Governance, and professor of finance at the University of Delaware; Meredith Miller, chief corporate governance officer at UAW Retiree Medical Benefits Trust; Gloria Santona, retired executive vice president, general counsel, and secretary at McDonald’s Corp.; Professor Christian Strenger, academic director, Center for Corporate Governance at the HHL Leipzig Graduate School of Management; Anton R. Valukas, chairman at Jenner & Block LLP; and The Honorable James T. Vaughn, Jr., justice of the Delaware Supreme Court. Italicized comments above are from panelists that participated in this event. However, this discussion was conducted under the Chatham House Rule, so quotes are not attributed to individuals or organizations.