Topics:   Corporate Governance,Corporate Social Responsibility

Topics:   Corporate Governance,Corporate Social Responsibility

January 5, 2021

‘Leading Minds’ Weigh Purpose and Its Implications

January 5, 2021

As the world geared up for the holiday season and a hopeful new year, governance experts gathered virtually to answer pressing questions about 2020’s top business themes—stakeholder capitalism and purpose—with an eye toward what’s on the horizon. NACD publisher and senior director of partner relations Christopher Y. Clark moderated the December 17 Leading Minds of Governance panel. Key insights are highlighted below from the conversation between Robert Galford, managing partner at the Center for Leading Organizations, lead independent director at Forrester Research, and a director at Shepley Bulfinch; Nichole Jordan, regional managing partner at Grant Thornton; Tracy McKibben, founder and CEO of MAC Energy Advisors and a director at United Services Automobile Association, ECOLAB, and Huntington Ingalls Industries; and Peter Tomczak, partner and chair of the North American litigation and government enforcement practice group at Baker McKenzie.

Whatever your definition of corporate purpose, how does the board play a role in embedding that purpose in an organization?

Tracy McKibben: Business has a “why,” a “what,” and a “how.” Purpose is the “why,” it’s the guiding light of the organization, it’s the path you follow to produce whatever products or services your company offers. There are four elements of purpose. The first is the definition of what that purpose is. It’s important that the board engages with management to determine what it is, and whether you look backward, asking how you fix something that already exists, or you look forward, asking how you drive behavior toward an area that could grow. The focus is around enhancing long-term performance. The second area the board should focus on is the examination phase, tying purpose clearly to the strategy of the organization. What are the business lines you’re in and how do they manifest that purpose? What are the capital investments you’re making? How do you organize yourself? Think about the capabilities of your team and how those can manifest your purpose, translating that purpose into action. Third are measurements and metrics, as the board needs to be clear about how they measure and determine if management is delivering on serving that purpose. And the fourth element is monitoring constantly whether there are deviations from that purpose, which can often bring risk—financial or reputational—into the business. If you’ve deviated from the purpose you’ve stated, and you’ve built the strategy on it, you introduce additional risk—which isn’t necessarily a bad thing.

ESG [environmental, social, and governance] and purpose often get confused and conflated; purpose must be supported by ESG goals and commitments, but they’re different. You cannot standardize a purpose, but you can standardize ESG metrics—and there is a growing push to do so around ESG metrics.

Nichole Jordan: In [Grant Thornton’s] work with businesses of all sizes across many industries, particularly in 2020, we found boards want to know if their companies have a purpose-driven mission statement and action plan and that the mission is lived in every decision the company makes. One thing the board can do is look back on 2020 and ask, How did our purpose guide our decision-making during the pandemic response? How did it help the business get closer to employees and serve customers in the way that was right for them during the pandemic? How did our purpose help strengthen operations despite all that businesses have faced in 2020? How effective were we in using that purpose to drive decisions?

Can you standardize purpose, or can’t you? There’s a feeling among some audience members that you can standardize purpose, especially at public benefit corporations. What are your thoughts?

Peter Tomczak: If your purpose is just like everyone else’s, then it may not be the most inspiring. But to respond more directly, I don’t disagree that, at some level of abstraction, most purposes would probably fit together under a certain umbrella. But that is different, as Tracy noted; they are standardized in the sense that companies report the same metrics. Purpose must be authentic, come from the company itself, and articulate what it is that the company stands for. Most public benefit corporations by definition articulate their purpose as some form of public benefit, but I would not characterize that as standardization.

One of the other panelists rightly noted that companies cannot avoid articulating a purpose or responding to demands to address ESG concerns, as that silence would likely be understood as taking a position. I would add also that a worse response than even saying nothing about your purpose is saying something false. If metrics show something materially different than your purpose, that will be an issue to many corporate constituencies.

Robert Galford: It’s suboptimal to standardize purpose, and that is particularly the case with public benefit corporations, where “purpose” is really an important part of the equation. There’s a framework we’ve used in a variety of settings to help think through purpose and how you can (and can’t) standardize it—I call it the five “G”s framework. One is goals—creating a statement of purpose. What are your goals? They can be much higher level. What are you trying to achieve? Two is guiding principles—those are a bit narrower than goals, the things we believe frame that issue, the things we wouldn’t want to violate. The third “G” is guidelines. It’s a lot more specific about what we do and how to proceed. Four is guardrails—behaviors we don’t want to engage in, things that would be a violation of purpose. You’ll note the “G”s get more prescriptive and specific over time. And five is gospels: What are the cultural, societal, and organizational things we don’t want to violate? What are the specific elements that are going to be important there?

Nichole, what do you hear from businesses about ESG now and looking ahead?

Jordan: First, [we’re hearing about] being intentional about listening to the needs of the employee base and understanding the importance of all that’s going on with social justice, ESG, etc. The board has a role in ensuring that management has an appropriate structure to listen and learn from the employee base. We see a renewed focus on business resource groups and advisory councils on understanding at a personal level what’s top of mind for employees around diversity, ESG, and their overall well-being—that really leads to the building of trust. Trust is an area that has been very fragile, but we’re seeing a renewed focus on building trust in the workplace. We hear from employees across many industries about the importance of leadership delivering on commitments including ESG. [In the 2020 Edelman Trust Barometer], 93 percent of employees felt that their CEOs and leadership teams speaking out on ESG and social issues was important to them. Next, it’s important to look at ESG outside the organization. The Biden [presidential] administration is expected to rejoin the Paris Climate Agreement [and other ESG initiatives]; we can expect to have a significant focus on this as we move into 2021. Ensure your disclosures are strong, complete, and adequate.

Nasdaq recently proposed board diversity listing rules to the US Securities and Exchange Commission. What do you find interesting in that proposal?

McKibben: It’s self-serving as to why they’re doing this. What they want is sustainably profitable companies that are growing, and it’s proven and well documented that companies that are more diverse make better decisions. There’s an understanding that the more diverse boards are, the more they’ll insist that management is diverse, which means more opportunities for growth.

Tomczak: Agreeing with Tracy, an interesting issue to watch will be what happens once this rule has passed. It’s hard to isolate the effects of one rule, but it is important to monitor where money is flowing in the world these days. Will investors and companies eschew becoming public companies because of this regulation? Also, it’s too simplistic to say this rule was passed and now noncompliant companies need to get some directors to meet it. There is much more involved in selecting directors, and the process may take some time. Often glossed over about the rule is that while it mandates an action, if you don’t [perform this action], you must explain why not. What is going to be said by companies [in the explanation of “why not”]? Ultimately, what happens will validate or invalidate if it’s self-serving.

Why is board succession planning a potentially damaging exercise?

Galford: It’s a bit of a hyperbole, but it isn’t wrong. A highly structured approach to board succession forces us into the initial box of deciding “OK, we have this many directors, so every two years we’ll need to get maybe two new people in, etc.” At that rate, in over-serving the goal of orderly succession, it could take you six years to turn over your board. But would you take six years to make and then implement a strategic decision? Be bold, add a couple of extra people to your board at once, try out new people to see how they work for a couple of years. Sometimes you do need an encouraging or enforcing function, so while it’s important to have corporate history and memory, it’s not as important as just getting it done, and making important change happen. It can become a crutch to fall back on the practice of structured succession planning. When we don’t permit ourselves to fall back on this, we change the definitions of what we’re looking for and it forces us to wonder, “Gee do we really know someone from this or that background?” We’ve got to burst through the bubble, be “wild.” Otherwise, we become prisoners of our own dilemma if we don’t really take action like this.


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