Topics: Risk Management
Topics: Risk Management
May 6, 2021
May 6, 2021
Seventy-two percent of directors and business leaders believe that the impact of environmental, social, and governance (ESG) issues on corporate long-term performance and value creation is one of the most important reasons to focus on such issues, according to a KPMG Board Leadership Conference survey conducted in mid-January. With this swell of ESG concern and opportunity, now is the time for former military leaders to put their skills to use in the boardroom. Veterans bring diversity of thought and experience and an understanding of what strong leadership can add to the top tier of businesses. Most veterans also have command of human resources and are trained to be agile amid change. Understanding the strengths of military leadership and how those strengths can be applied to the boardroom is, in part, what motivated NACD years ago to begin its pioneering programming for veterans.
On April 22, NACD virtually hosted the Sharpening Your Sword Forum for veterans seeking new or additional board training on topics falling under the ESG umbrella. Susan Paley, vice president of the chapter network at NACD, moderated the three-hour event that featured Annalisa Barrett, senior advisor at the KPMG Board Leadership Center, and Peter Tomczak, partner and chair of North America litigation and government enforcement at Baker McKenzie, who discussed how to define and oversee ESG and manage associated legal risks, respectively.
The environmental aspect of ESG issues, for one, is often thought of as pertaining to a single concern: climate change. But, Barrett noted, the changing climate, with simultaneous shifts in biodiversity and a depletion of natural resources, sometimes forcibly pushes people to migrate. This, in turn, may generate refugee status for entire regions of people and impact labor pools globally, creating interconnected environmental and social problems.
Tomczak added that such linkages between the three elements of ESG are complicated by the fact that different corporate stakeholders may have different views. “For example, if you’re dealing with green technology and wanting to make things greener… that actually might mean moving jobs out of communities and to non-unionized labor,” he said. While “going green” may initially appear to be a positive change that would garner stakeholders’ approvals, doing so may (and often does) result in new ESG issues.
Organizations often struggle to consider social factors. One director attendee asked, for instance, “Where do you see the boundaries for engaging in things, especially social justice-related issues, that are unrelated to a corporation’s core business? What are the pros and cons of engaging in those complex issues when they are not necessarily material or relevant to the core business?”
“When we come to the ‘S,’ the social factor within ESG,” said Barrett, “this is one that causes directors questions in terms of what level of oversight is appropriate…. Any stance that’s taken by the company, and, in turn, by the CEO… needs to be done with caution and with a plan for executing on that commitment. Ensure that follow-up takes place and that management teams are held accountable for executing on the commitments.”
To clarify other social elements that boards should be thinking about, Barrett noted that they can look internally to a company’s employees, independent contractors, gig workers, and the employees of suppliers and question if this group represents a broad mix of racial and ethnic backgrounds, sexual orientations, veteran status, disabilities, and more. Then, they can question management on whether those workers from underrepresented groups have equal pay and development opportunities.
Externally, boards can push management to consider all the ways that a company’s products and services may impact society both positively and negatively. Companies may consider whether their products cause health problems, for instance, or are equally available to all societal groups. Technology use—including the ethical implementation of artificial intelligence—as well as cybersecurity and data privacy can be social considerations, too.
As for the “G,” this includes traditional good governance considerations in addition to compliance, bribery, and corruption issues, and tax transparency and responsibility.
Indeed, Barrett and Tomczak both reminded the more than two dozen attendees that there are reputational and legal risks that come from addressing—or failing to address—ESG issues. The trade-offs that must be made in determining how to respond to the interests of various stakeholders on ESG action are for directors to decide in their own business judgments.
One helpful approach is from a compliance perspective, offered Tomczak. As in assessing company compliance, he recommended starting with a risk assessment and ensuring that this is done by a multifunctional team that extends beyond the legal department. “Number two, memorialize it,” he said. “I can’t tell you how many times people say to me, ‘I know we did that; I know we talked about that’…. Make sure that you are able to demonstrate with a contemporaneous record that as a director, you were doing your job.” The next step is to mitigate the risks identified.
That said, the board must show clear decision-making ability and push management and outside advisors to determine which risks are the highest priority and have the greatest likelihood of happening. “When everything is a priority, nothing is a priority,” Tomczak commented.
The importance of this risk assessment and prioritization cannot be understated. Traditionally, plaintiffs seek litigation for monetary reward. This is changing. “Now you’re also dealing with plaintiffs who may be less interested in money, who are very interested in saying, ‘I want to publicly expose who you are,’” Tomczak said. “Everything I tell you today probably will be different in six months because we are in a moment of radical change, both in terms of what the laws are [and] how we’re approaching the litigation of them.”
A company cannot, however, be managed in fear of litigation. “Lawyers can be scary and talk about statistics, numbers, and the value [of claims], but they’ll also talk about the opportunity,” noted Tomczak. “When you think about what the company is going to look like in 15 years, and when you think about what we’re going to be doing as a business, what our employees are going to be doing, what the next generation of management is going to be doing—how do we bring that up? How do we frame our decisions now to have that resiliency to last?”
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