With all the noise on the topic, I recently decided to spend some time asking Gib Hedstrom to give me the straight scoop about how boards address the issue of sustainability. Gib has been the “expert in the room” on these questions at more than fifty board meetings with major global companies, including Air Products, Ashland, and AlliedSignal (Honeywell). I asked him three simple questions. (OK, actually I asked him four):
What’s the best way for a board to define sustainability?
What do the “better boards” do in the area of sustainability?
As an individual director, what should I know about the topic? What questions should I be asking?
Here’s how Gib responded:
1. What’s the best way for a board to define sustainability?
Sustainability is about achieving enduring growth and profitability in the harsh face of 21st Century realities. The “new world order” of a swelling population, oil depletion, global warming, water scarcity, and economic turmoil makes this the fiercest competitive battleground for the next 20 years. It means rethinking everything.
It’s what I call “The Messy Transformation.”Most companies face significant risks. Yet whether you sell technology or transportation or consumer products – the opportunities are massive.
2. What do the better boards do in the area of sustainability?
The better boards bring sustainability into their deliberations about both risk and opportunity. On risk, they do three things:
Take a Business Portfolio Risk approach. For example, 20 percent of U.S. coal plants are scheduled to shut down by 2015. If that’s your energy source, it calls for a Plan B — and fast!
Encourage action on managing the relevant risk profile (short and long term) on Carbon Risk. For example, we see Samsung announcing that by 2013 it will cut by 50 percent the greenhouse gas emissions from its own operations and from the use of its products. We see Sony announce its plans to achieve a zero environmental footprint by 2050.
Keep Operational Risk management front and center. You don’t have to look far back in recent headlines for evidence about what a single disaster can do to your operations and public trust.
For the opportunity side, it’s about investment. Even in this uncertain financial climate, over $100 billion has been invested in renewable energy in the past two years. Companies like Cisco, IBM, Google and Microsoft are rushing to capture “smart grid” growth opportunities. P&G has a five-year goal to accumulate $50 billion in sustainable product sales by 2012, and will have “Sustainable Innovation Products” in 30 million U.S. homes by the end of this year. Bank of America recently announced it is ahead of schedule on its 10-year, $20 billion business initiative focused on addressing climate change.
3. As an individual director, what should I know about where a company stands on sustainability? What questions should I be asking?
At the next board meeting (or better yet, before it), ask these questions:
What would it look like to be a true sustainability leader? What would be the characteristics (e.g., zero waste, carbon neutral)? What would the portfolio look like (e.g., percent of sales from green products, services and solutions)? Is this just from our own operations or across our full supply chain?
Do we have a robust sustainability strategy and a multi-year plan that identifies our risks and opportunities? Our own sustainability scorecard?
So that’s what we hear from the true expert. Now, what does your board do?
Not surprisingly, some of our full board members are truly Leading the Way in this new shareholder environment. They have asked us to design a questionnaire for their largest shareholders to complete as part of the board evaluation process we’re doing for them. They are interested in knowing how fellow board members, senior staff, and shareholders all view their performance as a board and if each of those groups has suggestions/input for the board to improve its performance. They have asked to do this “off-cycle” from the shareholder meeting so they can receive the information and take whatever actions they consider to be productive.
By “personal,” I mean that when it comes to voting their proxies for director slates, shareholders will be focusing on individual directors in upcoming proxy seasons.
“Now, it’s personal” is an interesting phrase that I’ve heard more than once in recent conversations about director elections. By “personal,” I mean that when it comes to voting their proxies for director slates, shareholders will be focusing on individual directors in upcoming proxy seasons.
In companies with majority voting policies, individual directors deemed unworthy by shareholders won’t get their votes; enough abstentions and they’ll have to resign. And in the future, investors may be using proxy access to replace unwanted directors with their own individual candidates.
One target may be individuals serving on the compensation committee for companies where pay seems unrelated to performance. Shareholders may use “say on pay” to rebuke them collectively, and majority voting and proxy access to move them off boards.
Another target: audit committee members of boards that failed to anticipate and prevent financial crisis.
As for nominating/governance committee members, they may be targeted if there are overall failures in board performance—for example, perceived failures of oversight in company crises. In any case, they are on the front lines of communication to make sure that shareholders understand fully the value of the candidates they are recommending for the board and for service on key committees.
But there is a bigger picture to be seen. NACD’s resources drive home a key point: directors should never be seen solely as individuals. Even if shareowners are getting more “personal,” we have to help them see beyond individuals to the group. An undue focus on individual directors is the main risk in majority voting and proxy access because investors may hound out a director who possesses a rare expertise or trait that is a critical piece of the puzzle for a board. Conversely, there might be a “rock star” director who really does not add to the board. Only directors know this—and know exactly how boards function as a “whole.”
Boards and directors, long used to working collectively, can rise to this new challenge. Now, it is personal—but it’s also interpersonal. Directors can do a better job communicating who we are both individually and collectively, starting today.