Vanguard Group CEO William F. McNabb III just tipped the list. The world’s top three asset managers—Blackrock, Vanguard, and State Street Corp.—are now calling the companies that they invest in to adopt climate risk disclosure.
In a recent open letter to corporate directors across the globe, McNabb explained that Vanguard, the $4.5 trillion mutual-fund management firm, expects businesses to embrace materiality-driven disclosures to shine more light on sustainability risks.
Summing up the challenge of climate risk, McNabb wrote that it’s the kind of risk that tests the strength of a board’s oversight and risk governance. That’s the crux of the challenge for directors. As investors ratchet up the pressure on companies to analyze their exposure to the impacts of a warming planet, they’re calling on boards to be knowledgeable about material climate risk and capable of preparing for its impacts and capitalizing on its opportunities.
As we heard in Karen Horn’s opening keynote of NACD’s 2017 Global Board Leaders’ Summit, directors can no longer ignore the inherent impact of these issues on the long-term value creation of the corporate world —ranging from climate risk, natural resource capital, and implications of the Paris Climate Agreement.
Board-level competence around climate change and other sustainability risks is the way forward. Through an understanding of what climate change means, why it matters to their business, and what their organizations are capable of changing, directors can successfully make climate risk part of their governance systems.
In a new report by Ceres called Lead from the Top, we outline ways that companies and boards can build up that competence.
But rather than settling with bringing on a director who is competent in sustainability, our report explains why companies must work to build an entire board that is competent to oversee these risks. By engaging thoughtfully on material sustainability risks as one cohesive body, this kind of board is able to ask the right questions of its management, support or challenge senior management as needed, and ultimately make informed and thoughtful decisions affecting corporate strategy and risk.
We identified three key principles that companies and boards can use as they work to build a sustainability-competent board:
1. Sustainability needs to be integrated into the director nomination process. Finding directors who can apply their knowledge about climate and other sustainability risk to relevant board deliberations is a good first step. Companies can get the right people on board by approaching this systematically as a part of the board nominations process, specifically identifying experience in material environmental, social, and governance (ESG) risks in the board skills matrix and by casting a wide net to consider candidates with diverse backgrounds and skills.
2. The whole board needs to be educated on sustainability issues that impact their company. For sustainability to become part of the fabric of board oversight and integrated into decision-making on strategy, risk, and compensation, all directors on the corporate board need to be well informed on material sustainability issues so they can lead thoughtful deliberations and make strategic decisions. Companies can do this through focused, ongoing training programs that bring in experts from outside the company and by educating the board on the connections between climate change and material impacts and the connections to risk and strategy. Embedding ESG into the existing board materials so it does not become one additional issue topic to vie for directors’ attention is essential. Sustainability managers embedded within companies can play a key role in driving this integration.
3. Boards should directly engage a diverse array of stakeholders, including investors, on sustainability issues impacting their company. With more investors paying attention to climate change and other sustainability issues, shareholders increasingly expect boards to engage directly with them on critical issues. One of the goals of McNabb’s letter was to nudge directors to engage directly with shareholders. Given this growing focus, material environmental and social factors should be made a part of any dialogue between directors and investors.
It all comes down to the bottom line. Risk and opportunity define business. Corporate boards will have a difficult time performing their fiduciary duty to the companies they lead and the shareholders that they represent without understanding the risks and opportunities created by climate change. Our report lays out practical steps directors can take as they consider how to make their board competent in addressing climate change and other environmental, social, and governance issues.
Veena Ramani is the program director of Capital Market Systems at Ceres. Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.
In the final mainstage panel discussion of the National Association of Corporate Directors’ (NACD) 2017 Global Board Leaders’ Summit, Richard Edelman, the CEO of communications marketing firm Edelman, spoke with Nicholas Donofrio and Helene Gayle about how corporate culture drives long-term value. He preceded the conversation by offering some sobering statistics. Since 2001, Edelman has researched and measured the trust invested in business, nongovernmental organizations, media, and government by the public. It found that, around the world, only 47 percent of the general population thinks these institutions are trustworthy.
Little more than half (52%) of respondents say they trust businesses. CEO credibility dropped in all countries surveyed, reaching an all-time nadir of 37 percent. Fearful over disappearing employment opportunities, people perceive their current way of life as being threatened, resulting in a rise in protectionist, antitrade sentiments. In addition, looking at survey responses from the investor community, 76 percent of investors indicated that companies should address one or more social issues, ranging from employee education and retraining to environmental issues.
From Edelman’s point of view, business is the last fortification defending public trust in our age-old social institutions. “The board matters,” Edelman said. “Reputation matters. Are you engaged when a company is considering the issues of the day? You have to be. You can’t sit back and let management do this themselves.”
When looking to solve the widespread issue of flagging trust in businesses, directors may do well to take a look at corporate culture. Healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization. And in the past year alone, media headlines in industries ranging from banking to healthcare to entertainment to automotive manufacturing have highlighted examples of how deficient corporate culture can lead to financial and reputational disaster. As both a source of competitive advantage and as a potential risk, culture is a natural component of boardroom agendas. Yet all too often, it is regarded as a secondary human-resources issue that gets directors’ attention only when a problem arises. In NACD’s most recent public company governance survey, less than half of directors reported that their boards assessed the alignment between the company’s purpose, values, and strategy in the last 12 months.
To upend the common perception of culture as a soft issue, NACD convened directors and governance professionals to develop practical guidance that directors can use to enhance their culture-oversight practices. The resultant publication, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, makes ten recommendations on culture oversight and offers associated action steps and tools for directors. Donofrio, a director of Bank of New York Mellon, Advanced Micro Devices, and Delphi Automotive PLC, and Gayle, a director of the Coca-Cola Co., the Rockefeller Foundation, and the Center for Strategic and International Studies, co-chaired the commission.
“In many ways, the issue of trust is aligned with issues of culture,” Gayle observed. “While we have a sense of what our culture is, we haven’t defined it and put those pieces together so that culture can be a unifier across those issues.”
“It truly is not just about [financial] results anymore,” Donofrio added. “It’s about what you did and how you did what you did.” And if board members have concerns about how those results were achieved, it’s time to start asking the CEO and management team questions about the beliefs, protocols, and procedures underpinning the company’s performance. If the chief executive is resistant to examining these issues in an open dialogue with directors—or, worse, is taking positions contrary to the company’s espoused culture and values— that is a sign the company does not have the right leadership in place. As Gayle emphasized, “Creating and managing the company’s culture is the responsibility of the CEO and management team. Culture oversight, and holding leaders accountable for a vibrant and healthy culture, is the board’s job.”
Regarding the rising importance placed on a company’s stance on social issues such as education, the environment, or free trade, Gayle advised that directors frame boardroom discussions on these matters in terms of how a given issue is aligned with the business and take into consideration the communities in which the firm operates and the customers it serves. When Edelman asked if board recruitment should include asking directors about their views on key social issues, Donofrio said that these discussions ultimately tie in to the director-recruitment process, where the criteria for board candidates should include their ability to contribute to and support healthy culture—in the boardroom and across the firm as a whole.
Gayle agreed. “How you relate to society is part of how the company sees itself and how the company expresses its culture. Having a well-thought-out position on how [a particular social issue] furthers the business, how it creates an environment of trust, and how it fosters talent—all those things have to do with culture.”
According to acclaimed researcher and author Brené Brown, being vulnerable can be a strategic asset to any organization. Although this may sound counterintuitive to some, Brown made the case for how vulnerability cultivates innovation to a rapt audience of directors and corporate-governance professionals gathered at the 2017 NACD Global Board Leaders’ Summit.
Brown became an Internet sensation after she discussed her academic research on these themes at a TEDxHouston event in 2010. Although her presentation was enthusiastically received by her in-person audience, she was frustrated by negative online comments left on the video. But soon after, she discovered a quote by President Theodore Roosevelt that not only has reframed how she viewed her experience, but also has guided her subsequent work:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Brown then identified the following four qualities that, when operationalized within an organization, will create a culture of courageous leadership:
Vulnerability. Based on Brown’s research, there is no job where a person is not vulnerable. She noted that vulnerability is not the same as cowardice. Rather, it’s the willingness to expose your new ideas to public scrutiny. Without trying to do something new, and risking the possibility of failing horribly, progress can never happen.
Courage. It takes courage to compete in business. Luckily, Brown’s research into the behaviors of 80 senior leaders and more than 300 MBA students demonstrates that courage is a skill that can be taught and measured. She recommends four practices to instill a culture of bravery in an organization: (1) encouraging vulnerability, (2) defining the organization’s values and operationalizing those values, (3) inculcating trust between individuals and teams, and (4) empowering people with “rising skills,” or the skills to pick one’s self up and brush one’s self off after failing. Regarding rising skills, Brown pointed out that if your employees cannot recover from and learn from their failures, they will begin to feel that they need to be on the defensive—a mind-set that can hinder creativity and innovation.
Ethics. One of the most difficult situations a person can encounter in a business setting is standing up to someone who is making unethical choices. According to Brown, ethics should be the grounding framework that drives behavior. When someone acts outside the set of ethics that the organization adopts or outside the law, leaders must be brave enough to call out that person’s missteps. Her point holds particular relevance to directors and executives who are responsible for overseeing business ethics and promoting a culture of ethical performance.
Trust. Brown asked the audience, “If you can’t see a person’s vulnerability, will you ever be able to trust them?” Vulnerability is a key to building trust, and top-performing teams rate trust in their coworkers as the deciding factor for success.
Brown noted that people who lack trust in one another are likely to avoid confronting their fears and anxieties. Trust makes workers brave enough to develop and share their ideas, and allows them to discuss failures in a respectful manner.
“Can innovation come without exposure?” Brown asked. “Can you have innovation without vulnerability? No. It doesn’t exist.”