It is clearer than ever before that sustainability practices can affect corporate value. That was the main thread of a panel that I led at the National Association of Corporate Directors’ 2016 Global Board Leaders’ Summit in Washington, D.C. My co-panelists Christianna Wood, director at H&R Block, and Seth Goldman, founder of Honest Tea, and I discussed the potential risks and opportunities that environmental and social issues pose to companies.
Sustainability is a broad term, and not every environmental or social issue belongs on the board agenda. But when an environmental or social issue has the potential to affect corporate revenue and earnings in the short and long term, sustainability absolutely should be on the table.
At the end of the day, it all comes down to materiality, and this is where corporate directors have a critical role to play.
Materiality is about determining a company’s priorities. As fiduciaries responsible for overseeing a company so that it not only survives but also thrives in the long term, directors have a responsibility to assess whether a company is making the right choices.
But the much harder question is: When does an environmental or social issue rise to the level of being material?
Here are some steps directors can take to drive discussions about whether sustainability issues are material to the companies that they oversee.
1.) Understand how sustainability is being integrated into your company’s efforts as a way to identify material issues.
There are a few ways to do this. Directors could point management towards the Sustainability Accounting Standards Board’s Company Implementation Guide, which provides a great starting point for companies to assess whether certain sustainability factors could be considered material for the purposes of the company’s financial filings. Directors could also integrate themselves more meaningfully into corporate efforts aimed at identifying material sustainability issues. They could provide perspectives on the connections between sustainability factors, corporate strategy, risk, and revenue.
2.) Include key issues being raised by critical stakeholders in the materiality exercise.
While a broader range of stakeholders is raising a variety of issues these days, the financial community is a particularly critical constituency to direct attention towards. As we discussed in our panel, the U.S. investor community is starting to make the connections between sustainability and the financial value of companies in their portfolios. During the 2016 proxy season, close to 400 shareholder resolutions on climate change and other sustainability issues were filed. Large investors including CalPERS, CalSTRS and State Street Global Advisors are asking their portfolio companies to put directors with climate expertise on their boards.
In addition to tracking broad sustainability trends that investors are paying attention to, prudent directors could consider opportunities to engage directly with key shareholders to get a sense of issues specific to the company and the industry. Directors could also track and engage with the broader activist and advocacy community as a risk management exercise.
3.) Weigh in on the time frame over which issues are considered to be material.
Since the board in particular is responsible for long-term corporate performance, directors play an important role in examining whether their company’s materiality process focuses on considering issues over the long or short term.
Overall, momentum is building to adopt a more long-term view to encourage companies and boards to think more broadly about sustainability and materiality. The recently released Commonsense Corporate Governance Principles, which are backed by major U.S. companies including JPMorgan Chase & Co., Berkshire Hathaway, and Blackrock, support the move to long-term thinking. And more companies including Unilever, Coca Cola, and National Grid are moving away from the practice of issuing quarterly guidance specifically to encourage investors and other stakeholders to adopt long-term thinking.
4.) Disclose details on what you consider to be your company’s material priorities.
Noting that determinations of materiality depend on whom the company considers to be its most significant stakeholders, governance experts are starting to call on corporate boards to release a statement noting critical audiences that the company is oriented towards and issues that the corporation is prioritizing. Companies like the Dutch insurance company Aegon have started to issue such statements.
The process of helping to identify the right issues is just a first step in a director’s responsibility on materiality. Directors have an important role to play in ensuring that material issues, when identified are integrated into board deliberations on strategy, risk, revenue and accountability systems. However, getting to the right issues lays an important foundation for the company and its key stakeholders to build on.
“The last several decades have proven that, more than ever, we are all interconnected and interdependent,” said NACD Chair Karen Horn. “We will rise—or fall—together, based on that trust.”
NACD Board Chair Karen Horn
Horn’s opening speech at the recent 2016 NACD Global Board Leaders’ Summit revealed a compelling case for strong, conscientious corporate governance in light of recent political, economic, and social turbulence.
Horn’s governance experience is extensive and includes serving as a director at Simon Property Group, vice chair of the U.S. Russia Foundation, and vice chair of the National Bureau of Economic Research. She also previously served as chair of the audit committee at Norfolk Southern Corp., lead director and chair of the compensation committee at Eli Lilly & Co., and a director of T. Rowe Price Mutual Funds.
Horn began by thanking outgoing NACD chair Reatha Clark King for “her leadership and her positive influence on our organization’s growth,” and praised the audience for their own strength of leadership in the boardroom. She then turned to the guiding concept behind this Summit’s programming—convergence.
“Convergence is an important theme at a time when our world appears to be tearing itself apart,” Horn said. She pointed out that hostility seems to be the prevailing sentiment of our time and that frustrations with the current domestic and geopolitical environments are the impetuses for growing division. “I feel we must focus on a wider, longer view—a more broadly encompassing perspective that leads us back toward convergence,” she said.
Horn—who previously served as president of the Federal Reserve Bank of Cleveland and as an economist for the board of governors of the Federal Reserve—made several recommendations meant to address the evolving relationship between society and capitalism, using conscientious governance. (For more information on the roles of capitalism and corporations, view the NACD blog post “Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards.”)
Addressing Income Inequality
Directors can take a role in addressing social issues like income inequality, Karen said, adding that income inequality is an example of a challenge that “affects not only our immediate stakeholders, but everyone downstream who will be affected in the long term as well as the short term.”
Horn agrees that free trade is an excellent driver of economic value across the board, but that the path to growth can unintentionally leave some individuals behind. She suggested public, private, and government entities alike should develop programs that lift up those who are taken advantage of or otherwise harmed on the path to greater economic progress. “Looking at an issue like this from the perspective of those who will not benefit, or may even be hurt by it, is the first step toward finding compromises and solutions that will minimize negative fallout,” Horn said about the corporation’s role in growth as a greater good.
One such program that directors could collaborate with policy makers, social leaders, and other stakeholders on is how to address the controversial debate over minimum wage increases. “Everyone has an opinion, and it is clearly a divisive issue,” Horn conceded to the audience. “If we are to find a solution that works, again, we must become familiar with the divergent perspectives.”
The Imperative to Lead
Capitalism is being impacted by “globalism, social and demographic shifts, new technology, increased transparency and resource scarcity,” According to Horn. In the face of these paradigm shifts, directors have the opportunity to converge with stakeholders to build a better path forward for all, and have a unique opportunity to rebuild the public’s trust in the role of corporations.
“People are searching for leaders they can trust, leaders who are smart, confident and strong—who are understanding and compassionate,” Horn said. “This is a role sometimes filled by government, but trust in government is at an all-time low, so the leadership gap needs to be filled. I believe we are some of the leaders who can and should fill that gap.”
Horn’s address closed with a charge to directors that will resound through her term as chair of NACD and beyond.
“Corporate America has an immense amount of talent, and we need to step up before we are stepped over,” she entreated. “There is no question that we have the ability to take this leadership challenge, but only if we act responsibly, transparently, honestly and with careful regard for different perspectives. If we can do that, we can move our culture back toward civil discourse—toward convergence.”
“Society needs financial wealth … but it matters how you make the money,” said Rajendra Sisodia, co-founder and co-chair of Conscious Capitalism Inc., and director of the Container Store Group. “Businesses not only create, they can destroy financial wealth, as well.”
Sisodia, a marketing professor at Babson University whose published books include Conscious Capitalism and Firms of Endearment, delivered a keynote address on capitalism’s transformative power Tuesday at NACD’s Global Board Leaders’ Summit. The four-day summit convened more than 1,300 attendees—the world’s largest gathering of corporate directors—in Washington, D.C. from Sept. 17-20.
Roots of Capitalism
One of the most significant conclusions of Scottish moral philosopher Adam Smith’s seminal 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations (often referred to as The Wealth of Nations), was that places rooted in freedom tend to be more prosperous. Smith’s work became a foundational text on how capitalist markets work.
“That same year—an extraordinary historic coincident in some ways—the United States was born as a country, but more importantly, an idea. [It was] the only country born out of a set of ideas,” Sisodia said. “The ideas all revolved around liberty and freedom.” Entire segments of the American population, however, were not initially given access to that freedom—including African-Americans, native populations, and women—but the nation has extended freedoms steadily over the course of its nearly 250-year history.
“What is capitalism? Political and economic freedom,” Sisodia proclaimed. It’s rooted in the idea that free markets—or economic growth driven by individuals, rather than a centrally planned economy directed by the government or a political system—help people collectively elevate their material living conditions and boost prosperity, he said.
Poverty and Capitalism
A misperception about capitalism, Sisodia said, is that it exploits people of lower income brackets, locking them into poverty. Research, though, suggests that as capitalist markets have expanded, poverty rates have declined.
Data from the World Bank show that rates of extreme poverty have decreased considerably over the past three decades. More than half of people in the developing world lived on less than $1.25 per day in 1981, compared with 21 percent living on that amount per day in 2010.
Sisodia credited that decrease to prosperity derived from capitalism, saying that the key challenge for lifting the rest of the world out of poverty is not the unequal distribution of income, but the unequal distribution of freedom.
How the World Is Changing
“What will it take for companies to flourish in the future—and not just flourish for the purpose of making a lot of money, but actually be agents of flourishing in society?” Sisodia asked. The simple answer, he continued, is that you must be in harmony with the fact that people have changed over time to become, among other things, more:
The rate of serious violent crimes in U.S. public schools has dropped significantly to about one-third of what it was in 1994. Europe, Sisodia said, had experienced 1,200 wars in 600 years, but since 1945, inter-state wars on the continent have disappeared.
Sisodia described the so-called Flynn Effect, which suggests that there has been a consistent increase in IQ scores from 1930 to the present.
Embracing of “feminine” values. “I think the great story of this century is … the end of the suppression of the feminine [side of humanity],” Sisodia said. Women now earn more college degrees than men in the United States, and as a result, the expectation is that women will rise in positions of leadership—particularly in white-collar work settings. That will naturally mean that so-called feminine values, which he described as including cooperation, empathy, and compassion, will gain more traction in society.
Tenets of Conscious Capitalism
Accepting that the world is changing, Sisodia advised that businesses embrace the four tenets of conscious capitalism. That means to act with:
A higher purpose, or more specifically, a purpose beyond generating profits. Sisodia’s website provides a further explanation by quoting University of Virginia Darden School of Business professor and Conscious Capitalism, Inc. trustee, Ed Freeman: “We need red blood cells to live (the same way a business needs profits to live), but the purpose of life is more than to make red blood cells (the same way the purpose of business is more than simply to generate profits).”
A stakeholder orientation. Conscious businesses exist not only to maximize ROI for shareholders, but also seek to enhance value for all stakeholders, leading to a more resilient business.
Conscious leadership that demonstrates care for purpose and people; and
Conscious culture built on trust, care, and transparency—not rooted in fear and stress (the risk of having a heart attack is 20% higher on Mondays for men, 15% for women, and most research blames the stress of returning to work for these statistics).
Boards: Stewards of Well-Being
Sisodia offered several considerations aimed at helping boards—and companies—become more conscious overseers:
The primary duty of the board is to the corporation—which has its own significant role in society—rather than shareholders.
Understand and shape the company’s higher purpose. Ask your board to reflect on why the company would be missed if it were to disappear tomorrow.
Consciously seek to create value for all stakeholders.
Appoint strong leaders with a capacity for love and care. It is not healthy to appoint leaders who are analytically smart but lack empathy and other forms of emotional intelligence.
Build a culture of “full-spectrum” consciousness, meaning that you are not only concerned with service to people and a higher purpose, but also efficiency, effectiveness, and success.
Ensure youth and feminine perspectives are heeded when making business decisions.
Humanity is more aware of its challenges and problems than ever before, Sisodia said in closing, and the individual and collective capacity to respond to those challenges has never been higher. “We have to create the organizational forms and philosophies and build business on [the ideals of] purpose and caring. … [A]ll of those answers that we need to our crises are out there inside somebody. We just have to figure out how to liberate that.”