As discussions of sustainability move beyond financial performance, they tend to spawn divergent views. Many frame the term as what constitutes responsible behavior in driving continued development and growth without deteriorating the environment, depleting natural resources, or creating conditions that destabilize the economy and vital social institutions. Still others prefer to cleave to the traditional view of the corporation and remove external stakeholders and the environment all together to focus solely on the sustainability of the business and its profits.
The type of short-term thinking applied when formulating policy and the kinds of long-term thinking driving sustainability development discussions are like oil and water, and looking to the business world, short-termism on the part of senior management is a sustainability killer. Without a long-term outlook in both the private and public sectors, the sustainability discussion will continue to be over before it begins.
Straight talk about sustainability leads to acknowledgement of several important realities:
Sustainability performance without acceptable financial performance is untenable. The two must be integrated, and neither is a substitute for the other. Overreach in pursuing either preempts long-term progress.
Many directors and senior executives believe the focus on sustainability is inevitable and, of necessity, strategic. Some constituencies believe that investments on the environmental, social, and governance fronts are incompatible with positive near term returns.
Reasonable people can differ in their views as to the appropriate sustainability objectives for a given organization, based on the industry, stakeholder interest, and long-term outlook, as well as the time frame in which the entity should pursue those objectives.
A meaningful impact is only possible through the collective efforts of multiple entities in the private sector, sound policies in the public sector, cross-border global cooperation, and investors committed to the sustainability agenda.
The concept of selective investing offers a set of standards for a company’s operations that socially conscious investors use to evaluate investment alternatives. As professionally managed funds deploying environmental, social, and governance (ESG) factors to screen investments have increased assets under management into the trillions of dollars, directors and executives have taken notice. Earlier this year, the CEO of BlackRock issued a letter to chief executives calling for a “positive contribution to society” beyond financial performance in realizing their organization’s full potential, with emphasis on “understand[ing] the societal impact of [their] business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect [its] potential for growth.” As these and other related demands have increased from the investor community, so have requests for increased transparency.
Governance—the “G” in “ESG”—has steadily emerged as a significant differentiator and, increasingly, a make-or-break factor for investors. Bad corporate behavior during the Enron era at the turn of this century, reckless risk-taking precipitating the 2007-2008 financial crisis, catastrophic cyber breaches, egregious violations of laws and regulations, and wanton disregard of safety considerations in addressing cost and schedule pressures have accentuated the importance of effective governance and the strong organizational culture it encourages. As important as these matters are, they’re mere table stakes. The focus on sustainability raises the bar further, with the BlackRock letter calling for a “new model for corporate governance.”
There are other reasons why ESG is important. Younger generations place high importance on sustainability issues. A recent survey noted that 56 percent of public company directors believe that a corporate social responsibility policy increases a company’s ability to attract and retain employees. Also, deploying cost-effective technologies to increase process efficiencies and develop environmentally friendly products and services has become attractive in many sectors. While there is a long road to travel littered by brutal politics and more questions than answers, world opinion has been coalescing around achieving the goal of sustainable development.
Perhaps this is because the world around us all is changing so much. Advanced technologies make feasible what was impossible a decade ago. Global population growth continues to explode, and changing demographics and resource scarcity affect operations. Businesses are left to ask themselves what they are to do in the face of these changes, and corporate directors have a role in leading their companies to action.
Directors should ensure that management answers the question, “What does the organization do about sustainability?,” based on the nature of the entity’s industry, culture, markets, stakeholder priorities, regulatory environment, appetite to lead and invest, intrinsic challenges from an execution standpoint, and long-term outlook. Approaches to consider might include the following:
Articulate sustainability guiding principles and core values;
Assess current ESG performance to identify gaps and opportunity areas;
Conduct an assessment of opportunities to improve performance and address the risks of inaction;
Assess the entity’s current policies, processes, organizational structure, reporting, methodologies, and systems supporting the pursuit of sustainability objectives;
Based on the above, formulate a sustainability strategy and road map of key initiatives supporting that strategy;
Establish accountability for results by setting targets, assigning executive sponsorship, defining initiative ownership, specifying the appropriate performance metrics, and integrating those metrics with operational performance monitoring and the reward system; and
Establish disclosure controls and procedures to ensure reliable internal and external ESG reporting.
The strategy taken by investors in this age of sustainable development is challenging perceptions of the role of the corporation in society. The questions around sustainability—and how hard companies should be working to drive it as a goal—require serious reflection for executive management and the board. A strong commitment to sustainability places an emphasis on actions, not words; on disruptive innovation, not “business as usual”; and, most importantly, on leadership, collaboration, and transparency.
Now is the time for boards to take culture risk seriously and begin to find ways to understand it in advance of a toxic culture truly damaging an organization. The recent examples of bankruptcy at The Weinstein Company and the rapid loss of $2 billion in market cap at Wynn Resorts only serve to underscore the close connection between leadership and culture and toxic leadership and toxic culture with reverberations and repercussions not only on shareholders but stakeholders of all types.
In this second part of this blog series addressing culture oversight, I suggest three practical tools for boards to exercise proactive oversight on culture issues to enhance discussions that may already be in process. Embedded in these tools are the top ten questions the board should ask management about culture, as well as some of the key dashboard metrics a board should consider getting.
Tool One: Arming the Board With the Right Information From the Right Members of the Management Team
Your chief ethics and compliance officer (CECO) and another executive (perhaps the chief learning, human resources or talent officer) are all good resources to report to the board from time to time and regularly on issues of culture. Indeed, an empowered CECO may be the best bet as she should be reporting to the board (or a committee thereof) on a quarterly basis anyway. His or her dashboard of ethics and compliance metrics should also include some of the key culture metrics described in tool two, below.
Moreover, the board or appropriate committee (audit, risk, compliance, regulatory affairs) should have regular executive sessions with the CECO and perhaps develop more informal methods of regular communication such as a phone call check-in between the CECO and the chair of the audit committee, for example, something I have done in my executive career and to great benefit of the organization.
When a company of a certain size, maturity, and complexity does not have an executive of the appropriate stature taking care of culture issues, it may indicate that the CEO doesn’t think culture is that important. Moreover, if there is an executive who should be thinking about culture issues proactively but is not or is not allowed the ability and resources to do this (for example, budget for a culture survey), that presents another potentially serious culture red flag. Last, other red flags may emerge when senior executives are not able to provide the arguably correct answers to the top ten culture questions the board should ask (listed below).
The Top Ten Culture Questions the Board Should Ask:
For the CEO: What does culture mean to you, and what is the importance of culture to you personally as the leader of the company? How would you, as the CEO, characterize the culture of the organization? Is it healthy, improving, ailing, or under serious stress?
Does the company have an explicit culture program in place and, if so, what does it consist of? Is it intertwined and integrated with the company’s mission, vision, values, and strategy?
If there is no current culture program in place, what is management’s plan to deploy one? What is the plan’s timing, budget, leadership, and details?
How do you measure culture at the company?
How do you keep management at the highest and middle levels accountable on culture issues?
Is there a member of senior management or the c-suite with an explicit remit to manage corporate culture?
Does the company’s performance management program and incentive structure incorporate cultural considerations and metrics? If so, how? If not, what is the plan to incorporate such considerations?
What are the top culture issues at the company today (good, bad, or ugly)?
When there are difficult culture issues (the bad and ugly kind), how does management handle them?
Is management aware of investor, employee, customer, and other stakeholder concerns or perspectives regarding corporate culture? Has there been any stakeholder reach-out on this issue?
Tool Two: The Customized Culture Dashboard
The company’s board should be reviewing a customized dashboard that is updated regularly. Such a dashboard should be unique to each organization but should include many of the following qualitative and quantitative considerations and metrics.
Ethics and Compliance (E&C) Metrics
E&C risk assessments – key data, key topics
Helpline or hotline trends and key issues
Training and communications trends and topics
Pulse surveys on ethics and compliance program
Investigations – type, process, and outcome
Periodic internal and external evaluations of the effectiveness of the E&C program
Employee and Culture Survey Metrics
Culture climate metrics geared at workplace issues including supervisory relationships
E&C program benchmarking against peers
Human Resources Data
Performance management results (with financial and non-financial metrics, as well as environmental, social, and governance metrics, included)
360 leadership assessments or the like
Tool Three: Benchmark Your Company’s Cultureand be Prepared to Intervene
Understand where your organization fits in the spectrum of workplace culture. An example of useful benchmarking may involve using the Ethics Research Center’s Global Business Ethics Survey. Get a culture survey done. Slice and dice it, and work to understand its results. Ask management about the culture climate, the temperature and how it is reflected at different divisions, business units, and more. Do your company’s culture surveys have consequences or are they merely window dressing? If the latter, why do them? If the former, what are the actual concrete consequences? Do “golden boys/girls” who are abusive get counseled, disciplined, or terminated when infractions occur? Or are they ignored or merely slapped on the wrist for things that get others fired?
If and when a culture issue threatens to suffuse the wellbeing of an organization and its leadership, the board must be prepared to intervene in a crisis—before or after it unfolds. The board’s keeping its finger on the cultural pulse and temperature of the company is vitally important to the long-term viability and sustainable profitability of a company.
With Gloom Also Comes the Promise of Light
With all the doom and gloom that toxic workplace culture issues raise, I would also underscore a hopeful note to boards and executives struggling to deal with the organizational cultural issues so clearly brought to the fore in 2017. Unlike the regulatory responses to the excesses of 2002 (Sarbanes Oxley) and 2008 (Dodd-Frank), I would suggest that the appropriate response to cultural issues that are emerging is not new regulation but self-regulation, a voluntary upping of the corporate cultural ante by elevating the importance of ethics, compliance, and risk management within organizations, powered and driven by a strong culture of accountability and “walk the talk” from the top. This entails a voluntary, value-creation mindset at the executive and governance levels of an organization that aligns a strong and resilient culture with sustainable profitability and that likewise recognizes that a toxic culture will in the short and long run lead to value and reputational erosion and possibly destruction.
Thankfully, there are positive tales to be inspired by. A case in point: Microsoft Corp. Under its relatively new CEO, Satya Nadella, who recently wrote a book on the company’s culture, has instigated culture change there that by all accounts has had dramatic and beneficial impacts on all stakeholders, internally (employees) and externally (customers) alike. Nadella’s moves have also benefitted shareholders. When he became CEO in 2014, the share price was around $35; today, Microsoft’s share price is at $92.
With all the negative news, 2018 represents a rare opportunity for management and boards to understand, acknowledge, and tackle workplace cultural issues head on and in a more systematic and conscientious way. Culture is the fabric of an organization and that fabric can either be healthy and sustainable, able to contribute to the development of resilience and creation of value, or brittle, weak, and toxic, leading to financial and reputational vulnerability, value erosion, or even ruin. It is the direct responsibility of leaders—both management and board—to make the right choices on workplace culture.
Dr. Andrea Bonime-Blanc is founder and CEO of GEC Risk Advisory, a strategic governance, risk and ethics advisor, board member, and former senior executive at Bertelsmann, Verint, and PSEG. She is author of numerous books including The Reputation Risk Handbook (2014) and co-author of The Artificial Intelligence Imperative (April 2018). She serves as Independent Ethics Advisor to the Financial Oversight and Management Board for Puerto Rico, start-up mentor at Plug & Play Tech Center, life member at the Council on Foreign Relations and is faculty at the NACD, NYU, IEB and Glasgow Caledonian University. She tweets as @GlobalEthicist. All thoughts shared here are her own. This blog series borrows in part from her forthcoming book with Routledge/Greenleaf (2019), Gloom to Boom: How Leaders Transform Risk into Resilience and Value.
Few organizations or boards are capable of answering this question with any degree of certainty. Yet, the question is being raised with greater frequency and urgency due to actions by investors, regulators, customers, supply-chain partners, and competitors.
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Across every industry the increased focus on climate change is accelerating other megatrends such as disruptive technologies, digitization, urbanization, and evolving demographics. Underpinning these megatrends are a combination of technological leaps and upheavals in global society and the environment that will reshape economies, businesses, and lifestyles. For example, over $1 trillion worth of new markets for manufacturers are expected to develop over the next decade as industries transform. This shifting landscape creates many uncertainties, risks, and opportunities for new products, services, supply-chain structures, and improvements in resource management, among many others.
Taken as a whole, these pressures are driving companies to better assess, define, and enact strategies to increase their climate resilience. In their strategic oversight role, boards need better insights on the direct impacts of climate change on the organization as well as the indirect risks and opportunities associated with transitioning to a lower-carbon economy.
Yet, recent NACD corporate governance survey data suggests that many boards need a rethink on this issue. Six percent of respondents indicated that climate change would have the greatest impact on their businesses over the next year. The previous year’s report found that over 90 percent of public company directors believe that climate change would have negligible impact over the next five years.
Companies that focus primarily on climate change’s projected physical impacts expected to play out over the coming decades will have “blind spots” to the indirect risks associated with the transition to a lower-carbon economy. Companies must to go on the offensive to build climate resilience in order to gain competitive advantage.
Climate resilience has the capacity to adapt and succeed in the face of direct and indirect impacts of climate change. In addition to addressing and managing risks, it encompasses the ability to capitalize on the strategic opportunities presented by the shift to a lower-carbon and resource-constrained economy.
To provide boards with a line of sight into its organization’s climate resiliency, management teams can undertake one or more of the following actions:
assess climate vulnerability of operations and facilities;
embed climate impacts into enterprise risk management programs; or
undertake scenario analysis to enhance decision making around risks and opportunities.
As a start, companies can model the risk of physical assets to identify location-level risk exposure and the vulnerability of properties and assets to evolving weather events and climate change. A geographic portfolio review can also help map demographic and infrastructure vulnerabilities to natural hazards to better understand how supply chains may be impacted by weather events.
Existing enterprise risk management (ERM) and risk assessment processes can be used to increase awareness of climate risks and better assess resilience across the organization. Leading organizations are using their ERM processes to identify how direct and indirect climate impacts—including regulatory and technology developments—serve to accelerate or otherwise change the velocity of other trends and risk events. Framing climate as a risk driver helps to align the timeframe of the risk and opportunity assessment to that of most corporate planning cycles.
Scenario analysis is recommended by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures as a technique to assess climate impacts. Modeling different environmental scenarios (such as warming by a margin of 2 degrees Celsius and associated changes) gives form to the amorphous problem of climate change and provides mechanisms to discuss potential future states of operation. In selecting and devising scenarios, companies should consider the appropriate trade-offs in quantification, but also avoid excess complexity and optionality. When assessing for operational climate-risk resilience, it is critical to include a minimum of one favorable and unfavorable scenario respectively. This empowers organizations to make informed decisions regarding their longer-term strategies.
Overall, it is clear that the dialogue on climate change within boardrooms and among C-suites of companies across all sectors must evolve to a focus on how climate change will impact their businesses. The real measure of a climate-competent board is one that can address this critical question: how climate-resilient is the organization?
Lucy Nottingham is a director in Marsh & McLennan Companies’ Global Risk Center and leads research programs on governance and climate resilience. All thoughts expressed here are her own.