July 22, 2021
July 22, 2021
The forces reshaping the business landscape—the COVID-19 pandemic; accelerating megatrends; a Biden administration policy agenda focused on climate, racial justice, and other social issues; and calls for companies to address the concerns of stakeholders—are prompting introspection in the boardroom.
In our ongoing work as part of the KPMG Board Leadership Center Lead Director Initiative, the lead directors and independent chairs we interviewed (under Chatham House Rule) collectively highlighted key areas of focus for lead directors to help their boards raise their game and add value to their businesses.
It is clear from our discussions that the shift toward purpose; environmental, social, and governance (ESG) issues; and stakeholders is real—and these issues are now priorities for most companies, as well as their stakeholders. While for many companies, addressing ESG and stakeholder issues as strategic issues has been a formidable challenge, COVID-19 and the events of the past year have brought to light the importance of these issues, particularly the “S” concerns, and have helped companies identify the ESG issues that are most critical to creating long-term value. What is the role of the board in helping to ensure that these issues are priorities for the company—and that the company is “walking the walk”?
These are the key messages we heard:
Help focus the ESG conversation. While management should drive the ESG conversation, lead directors emphasized that if that isn’t happening, board leaders must help foster the discussion by asking direct questions about where their companies are on their ESG journeys.
“As lead director, it’s my job to help keep the boardroom conversation focused on the ESG issues that matter most to the business and understand how management is addressing them,” one director said.
Keep stakeholders front and center. As one lead director noted, the board can play an essential role in listening for instances in which management “may be tone-deaf or may be prioritizing shareholders and not giving other stakeholders proper consideration.” Another said, “Boards today need to be more aware of the context in which the decisions are made, particularly on issues such as ESG and [diversity, equity, and inclusion], and understand the importance of these issues to key stakeholders.”
Help ensure ESG is driven by strategy and linked to incentives. The lead directors we spoke to agreed that tying ESG performance to executive compensation signals the importance that the board places on defining ESG and how it fits into strategy. While companies often have meaningful initiatives at the operating level, said one leader, “finding a way to embed these initiatives in compensation incentives is a helpful signaling device and rewards those activities.”
Have a disclosure framework and a disciplined process. Finding the right ESG disclosure framework for the company is key: “It has to be the story that you want to tell about how you are stewarding E, S, and G,” one director said.
Once you have a framework, have a process for engaging the full board and its committees to determine what is material to the company. For instance, one nominating and governance committee chair said she views her role as that of the “ringleader,” coordinating those discussions and ensuring that they happen—and not solely at the nominating and governance committee level.
“Your ESG story should be about what is material to the company, and that varies greatly across industries and company size,” she said. “Figuring out what is material is part of the larger discussion of strategy and risk, so that disclosure flows from what is informing your business plans as a company.”
Since companies can have legal liability even for ESG statements not required in US Securities and Exchange Commission (SEC) filings, board leaders said it’s important to have an internal process for validating company-presented data that is as rigorous as the disclosure controls and procedures in place for information included in SEC filings.
Understand that ESG-related proxy activity is intensifying. ESG has been front and center in shareholder proposals this proxy season, consistent with the trend over the last five years. This season is also seeing “Say on Climate” proposals (asking for shareholder votes on how companies are addressing climate risk) and proposals seeking to tie compensation to ESG metrics.
Institutional investors have set specific expectations for ESG disclosure on, for example, board and C-suite diversity, diversity-related data, sustainability, and climate-related risk. Management teams and directors should be prepared to respond to those perspectives.
Set expectations for the CEO speaking out on social or political issues. A number of lead directors we spoke to (but not all) felt that CEOs should be speaking out on issues that reflect a company’s values. In those cases, one lead director said, “the board should be kept informed. It doesn’t have to be a formal conversation every time, but I think it would behoove the CEO to have some conversations with at least a set of directors, if not the full board.”
And, as another lead director noted, “Remember that saying nothing is saying something.”
Patrick A. Lee is a senior advisor with the KPMG Board Leadership Center.
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