February 3, 2021
February 3, 2021
Every spring proxy season, CEO letters on stakeholders and sustainability return like the swallows, giving a sense of déjà vu. Yet nothing could be further from the truth. Every year brings a unique set of challenges to each company, changing the significance of time-honored governance concepts and shifting the lens through which boards deliver oversight.
We can see this ever-renewing perspective in the annual letters of Laurence D. Fink, CEO of BlackRock. Fink’s recently released 2021 letter to CEOs focuses on a new goal of achieving net-zero carbon emissions by 2050, and includes reflections on the events of 2020, underscoring the nexus of environmental and social issues and the critical importance of multifaceted disclosure. (A parallel letter to BlackRock investors provides further details from the investment perspective.) The newest letters build on a decade of Fink’s past letters to CEOs—on value-focused investment (2012), direct engagement with shareholders (2013), long-term investment (2014), capital management (2015), long-term strategy (2016), strategic correction (2017), purpose (2018), purpose and profit (2019), and, just last year, the reshaping of finance (2020).
Fink, who oversees more than $8 trillion in assets as the head of the world’s largest asset manager, wrote his latest letter after a year that has already gone down in history as one of the world’s deadliest. Life in 2020 was especially challenging in the United States. America suffered a series of tragedies reminding us that the world still suffers from the plague of racial injustice—even as many communities were affected by fires, flooding, and other catastrophes linked to climate change, and all during a global pandemic. Fink calls the pandemic an “existential crisis” that along with global warming demands an “ambitious response.” His words are a clarion call to action for not only CEOs and investors but also boards of directors that face any crisis, be it caused by the pandemic, by global warming, or by any other major risk.
So, given the state of the world in early 2021, what is truly “new under the sun,” and what can be done that has not already been done? Here are three novel economic and business developments from the last year, and consequently new opportunities for board action.
One set of developments that has no precedent is the series of government-mandated economic shutdowns over COVID-19, and the strategic pivoting that boards have been directing in response. While the world has known other pandemics, businesses in those eras continued to operate, so the economic impact was not as stark as it is now. Under the leadership of future-fit boards, companies are showing their resilience by revisiting business models. NACD anticipated this kind of need when we released our Blue Ribbon Commission report, Fit for the Future, in 2019, as well as our report, Adaptive Governance: Oversight of Disruptive Risks, the previous year. These are just two of many resources on resilience in our Strategy Oversight Resource Center.
In his 2021 letter, Fink notes: “Assessing sustainability risks requires that investors have access to consistent, high-quality, and material public information.” In 2020, BlackRock asked all companies to adopt disclosure recommendations from the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board (SASB) and in the 2021 letter reported a significant increase in the use of both disclosure approaches—with SASB reporting almost quadrupling. “Improved data and disclosures will help us better understand the deep interdependence between environmental and social issues,” says Fink. The recent appointment (Jan. 21, 2021) of Allison Herron Lee as acting chair of the US Securities and Exchange Commission, as well as the nomination of MIT Sloan School of Management’s Gary Gensler as future chair, promise to make nonfinancial reporting an even higher priority for boards. Boards can learn more about environmental, social, and governance (ESG) metrics and disclosing nonfinancial metrics in NACD’s upcoming expert director briefing, part of our new yearlong ESG Continuous Learning Cohort.
Finally, the current combination of low interest rates and high stock market values has no recent precedent, forcing boards into contingency planning for an inevitable correction. In a recent interview cited by Morningstar, scholar Laurence Siegal has called the currently low interest rates “literally unprecedented in human history.” As for the market, they hit a “trifecta” high on January 20, as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq indexes all hit record highs, reports MarketWatch. This situation in turn is causing boards to look beyond stock market valuations to consider the long-term value of their companies based on fundamentals such as business model, operations, and other factors. Meanwhile, the central goal of Fink’s 2021 letter—achieving net-zero emissions by 2050—looms as a challenge for every board. The board has an undeniable role in the sustainability of enterprise as noted in the Report of the NACD Blue Ribbon Commission on Board and Long-Term Value Creation. When we seek ESG competency on the board, we are not necessarily looking for future board members who know all about the latest environmental, social, and governance causes, as important as these may be. Rather, we are talking about a different way of monitoring the value creation and preservation of the business. In the end, shareholder and stakeholder values converge, but to serve both values, directors need to balance short-term and long-term interests in real time, responding to new events in new ways.
Many boards are looking to gain a deeper understanding of the ESG landscape and how to provide effective oversight. NACD’s first ESG cohort event on March 24 and 25 will help directors to create a definition of sustainability rooted in their unique business models, effectively integrate ESG into their strategies, and respond to increased stakeholder expectations. It is time for boards to shift their focus from passive to active oversight.
NACD: Tools and resources to help guide you in unpredictable times.