As discussions of sustainability move beyond financial performance, they tend to spawn divergent views. Many frame the term as what constitutes responsible behavior in driving continued development and growth without deteriorating the environment, depleting natural resources, or creating conditions that destabilize the economy and vital social institutions. Still others prefer to cleave to the traditional view of the corporation and remove external stakeholders and the environment all together to focus solely on the sustainability of the business and its profits.
The type of short-term thinking applied when formulating policy and the kinds of long-term thinking driving sustainability development discussions are like oil and water, and looking to the business world, short-termism on the part of senior management is a sustainability killer. Without a long-term outlook in both the private and public sectors, the sustainability discussion will continue to be over before it begins.
Straight talk about sustainability leads to acknowledgement of several important realities:
Sustainability performance without acceptable financial performance is untenable. The two must be integrated, and neither is a substitute for the other. Overreach in pursuing either preempts long-term progress.
Many directors and senior executives believe the focus on sustainability is inevitable and, of necessity, strategic. Some constituencies believe that investments on the environmental, social, and governance fronts are incompatible with positive near term returns.
Reasonable people can differ in their views as to the appropriate sustainability objectives for a given organization, based on the industry, stakeholder interest, and long-term outlook, as well as the time frame in which the entity should pursue those objectives.
A meaningful impact is only possible through the collective efforts of multiple entities in the private sector, sound policies in the public sector, cross-border global cooperation, and investors committed to the sustainability agenda.
The concept of selective investing offers a set of standards for a company’s operations that socially conscious investors use to evaluate investment alternatives. As professionally managed funds deploying environmental, social, and governance (ESG) factors to screen investments have increased assets under management into the trillions of dollars, directors and executives have taken notice. Earlier this year, the CEO of BlackRock issued a letter to chief executives calling for a “positive contribution to society” beyond financial performance in realizing their organization’s full potential, with emphasis on “understand[ing] the societal impact of [their] business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect [its] potential for growth.” As these and other related demands have increased from the investor community, so have requests for increased transparency.
Governance—the “G” in “ESG”—has steadily emerged as a significant differentiator and, increasingly, a make-or-break factor for investors. Bad corporate behavior during the Enron era at the turn of this century, reckless risk-taking precipitating the 2007-2008 financial crisis, catastrophic cyber breaches, egregious violations of laws and regulations, and wanton disregard of safety considerations in addressing cost and schedule pressures have accentuated the importance of effective governance and the strong organizational culture it encourages. As important as these matters are, they’re mere table stakes. The focus on sustainability raises the bar further, with the BlackRock letter calling for a “new model for corporate governance.”
There are other reasons why ESG is important. Younger generations place high importance on sustainability issues. A recent survey noted that 56 percent of public company directors believe that a corporate social responsibility policy increases a company’s ability to attract and retain employees. Also, deploying cost-effective technologies to increase process efficiencies and develop environmentally friendly products and services has become attractive in many sectors. While there is a long road to travel littered by brutal politics and more questions than answers, world opinion has been coalescing around achieving the goal of sustainable development.
Perhaps this is because the world around us all is changing so much. Advanced technologies make feasible what was impossible a decade ago. Global population growth continues to explode, and changing demographics and resource scarcity affect operations. Businesses are left to ask themselves what they are to do in the face of these changes, and corporate directors have a role in leading their companies to action.
Directors should ensure that management answers the question, “What does the organization do about sustainability?,” based on the nature of the entity’s industry, culture, markets, stakeholder priorities, regulatory environment, appetite to lead and invest, intrinsic challenges from an execution standpoint, and long-term outlook. Approaches to consider might include the following:
Articulate sustainability guiding principles and core values;
Assess current ESG performance to identify gaps and opportunity areas;
Conduct an assessment of opportunities to improve performance and address the risks of inaction;
Assess the entity’s current policies, processes, organizational structure, reporting, methodologies, and systems supporting the pursuit of sustainability objectives;
Based on the above, formulate a sustainability strategy and road map of key initiatives supporting that strategy;
Establish accountability for results by setting targets, assigning executive sponsorship, defining initiative ownership, specifying the appropriate performance metrics, and integrating those metrics with operational performance monitoring and the reward system; and
Establish disclosure controls and procedures to ensure reliable internal and external ESG reporting.
The strategy taken by investors in this age of sustainable development is challenging perceptions of the role of the corporation in society. The questions around sustainability—and how hard companies should be working to drive it as a goal—require serious reflection for executive management and the board. A strong commitment to sustainability places an emphasis on actions, not words; on disruptive innovation, not “business as usual”; and, most importantly, on leadership, collaboration, and transparency.
Dambisa Moyo is a renowned global economist, author, and board director. She is a preeminent thinker who advises key decision makers in strategic investment and public policy, as well as a trusted advisor on macroeconomics, geopolitics, technology, and millennial themes. Moyo currently sits on the boards of Barclays Bank and Chevron Corp. She will speak at NACD’s 2018 Global Board Leaders’ Summit on “Harnessing the Future” with Shelly Palmer. NACD’s Summit programming will feature a plethora of speakers who will focus on exciting future trends to keep board members ahead of the field.
We caught up with Moyo as she prepares for her keynote at Summit and for the release of her book, Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth—and How to Fix It (Basic Books, 2018). Moyo shared her thoughts on the major economic issues that boards are overlooking, emphasizing why they should be addressed sooner rather than later. Highlights from the conversation follow.
What is one major economic issue that boards are currently overlooking that should be addressed sooner rather than later?
This quote is usually attributed to Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” I think that is really a powerful statement. Too often we understand risk as being a constant, immediate and short-term. When it comes to risk, we need to take a fundamental step back. We need to look at the bigger picture to think about how we approach risk over the long-term.
Ask yourself, “What are the things we are not seeing today that we will look back on and wish we saw coming?” Board members 10 or 15 years ago were making very rational bets assuming that we were going to be in a globalized economy and in a stable democracy where there would be no populism, but that has turned out not to be the case. We didn’t anticipate issues such as populism, trade risk, tariffs, and protectionism.
Technology and the risk of a jobless underclass Moving forward, the risk of creating a jobless underclass as a result of increasing automation and technological advances is considerable. Tech holds benefits in terms of reducing costs for companies, but where will revenue come from if no one is working and a large number of people live in a jobless underclass?
Demographic shifts Our planet will hold 11 billion people by 2100. How do we navigate the challenges around aging populations and shifting consumer demands? Where should we transact our business and how should we transact our business? Companies need to think about this not only in terms of business but also in terms of hiring human capital. We have to focus on the quality and quantity of the world’s population and then figure out where our talent pool lies.
Income inequality It has become clear that issues around pay have come to the fore. The issues of pay inequality between the genders, and between the company CEO and the company’s median or lowest-paid employees are now top of mind. Companies are now being required to address some of these income-inequality issues, which means that in the public’s mind the board’s governance responsibility has broadened from the idea that companies are just there to maximize shareholder value.
Natural resource scarcity Natural resource scarcity has come to the forefront due to the imbalance between increasing urbanization and demand for products and the shrinking supply of arable land, potable water, energy, and minerals. This dynamic could create a lot of inflation. How do we navigate that?
Debt Debt is at an all-time high. Virtually every class of debt is at a historical high: government debt, household debt, credit card debt, auto loans and student debt. Is that sustainable? The US Congressional Budget Office notes that US debt and deficits are a big risk and caution that they are unsustainable. It’s a big risk for companies because they have to decide if they should borrow at a low interest rate and what the debt burden will do to their customer base.
Productivity Productivity should be increasing in a world where we do things more efficiently thanks to technology, but unfortunately we are actually seeing productivity decline around the world. There are real questions about what the implications might be for companies and growth around a decline in productivity.
Your new book, Edge of Chaos, will inform directors’ understanding of the current economic climate. Which topic would have the greatest impact on their oversight duties?
For corporate board members the most important issue is myopia. This is economic short-termism in both the corporate and political space. A lot of the issues threatening the global economy are long-term, intergenerational, structural problems in the economy. These harken back to my list of six economic problems. These are all long-term problems.
One of the biggest challenges that we face is that policymakers are paid and rewarded for short-term thinking. Policymakers are constantly facing reelection and that means they’re thinking very short-term in terms of how they deal with issues. Companies face a challenge because they are focused on reporting quarterly earnings and their investors are very keen to see the short-term returns. This is a hurdle that we need to reevaluate.
The mismatch between long-term economic challenges and short-term political myopia needs to be bridged. My book offers 10 ways to get through that. I also highlight some of the biggest consequences of short-termism that we’ve seen in the corporate space. For example, CEO and CFO tenures have shortened and the holding period by portfolio managers has shortened a lot. There have also been issues around the life span of companies. A company in the 1930s had a life span of around 100 years. It’s now only about 16 to 17 years before a company is bought and sold. All of these things lead to how companies should think about their overall strategy and how they fund themselves.
Don’t miss out on Moyo’s keynote, at the 2018 Global Board Leaders’ Summit, happening September 29 through October 2 in Washington, DC. There will be plenty of opportunities at Summit to discuss the future of the economy, globalization, and much more. Register now to attend.
Two NACD panels recently tackled issues surrounding sexual harassment in the corporate setting, and how directors should act and react to issues that could have profoundly negative impacts on company reputation and workforce satisfaction.
Key takeaways for directors ranged from careful CEO hiring to board composition. The following concepts could be readily applied to your own board’s conversation about overseeing this risk.
Aggregate Data to Spot Problems Before They Happen. Given that the board is ultimately responsible for overseeing company culture (including a culture that tolerates sexual harassment), the board should work to mitigate risks rather than taking up sexual harassment issues once a problem has surfaced, according to Michael Aiello, chair of the corporate department at Weil, Gostshal & Manges LLP. Lucy Fato, executive vice president and general counsel for American International Group (AIG), stated that boards should aggregate information to get the full picture, including:
Internal audit findings related to culture;
Employee relations/human resources reporting, including hiring trends, turnover statistics, and reports from exit interviews;
Hotline reporting, including whether there are too many or too few complaints; and
Company legal settlements and insurance payouts.
Board members should also probe whether the company’s investigative processes are fair and thorough.
Go the Extra Mile in CEO Hiring. In light of the board’s primary role of hiring and firing the CEO, along with the fact that fallout from CEO misconduct can significantly impact shareholder value, a board should take steps to ensure that its candidate of choice does not have a history of sexual misconduct or even tolerance for a culture in which harassment is an open secret. According to Sabina Menschel, president and chief operating officer at Nardello & Co., to really know who you are hiring into the corner office, conduct an investigation that includes public records, social media, and supplemented standard reference checks. With regard to CEO hiring, Fato stressed, “Ethics, integrity, and how you carry yourself as a public figure should be a factor in whether you can lead the brand.”
Risk Starts at the Top. The CEO and senior management are not alone in the potential spotlight of the #MeToo movement. Board members also must be vetted fully, and once in place, board members should receive code of conduct training, just as employees do, said Fato. In addition, the board should pick one corporate policy per year on which to do a deep dive as part of its oversight duties. Tabletop crisis preparedness exercises also should be conducted.
Superstar? Irrelevant. A board may face a difficult choice if a superstar CEO is found to have violated the company’s code of conduct, fearing that a dismissal could impact short-term shareholder value. According to Brenda Gaines, director, Tenet Healthcare, Southern Co. Gas, and NACD, superstar status is always irrelevant when investigating misconduct. She suggests that the board should take action to remove an offending CEO and then have a separate conversation about revenue and valuation implications. She added that the company must be clear about its culture and key principles, and should have zero tolerance for misconduct, applied to everyone in the company equally. “Board members have to keep each other honest,” she said.
Expand the Company’s Enterprise Risk Management (ERM) Framework. Sexual harassment should be a part of each company’s ERM framework, given that fallout from a misstep can be quite severe, emphasized Fato. Also, when doing employee surveys, ask specifically about harassment issues. To do so demonstrates that the company cares about these issues, said Menschel. Also, in terms of monitoring potential issues with long-tenured employees or even board members, consider updating background checks at regular intervals, stressed Fato.
Diverse Boards Matter. The #MeToo movement will have an impact on the boardroom, as well as on investor relations, according to Renee Glover, director, Fannie Mae, Enterprise Community Partners, and NACD Atlanta. Indeed, large shareholders are asking about diversity on the board, and they may request sexual harassment policies and pay equity measures. Gaines emphasized the clear-cut nature of the need for more diverse boards. “Diversity is good business,” she said, “and we are nowhere near where we should be. We need more gender diversity and more people of color on boards. Don’t miss this in the search for skill sets.”
Find an Ally. Rochelle Campbell, manager for board recruitment services at NACD, says that she encourages boards to have at least two diverse members on the board, as such boards tend to be more successful. For women and people of color who are new to a board, they can play an important role in discussions about sexual harassment and equal pay for equal work. When asked for practical advice for new board members, Gaines shared best-practice approaches to oversight of misconduct:
Get the facts right.
Take the emotion away.
Look for an ally on the board.
Glover summed up the issue: “We can do better. And when we do, we can get on with realizing the deeper value that a diverse board can deliver.”
Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.