3 areas where corporate boards need to change

In a recent opinion piece, scholars Edward E. Lawler III of USC’s Marshall School of Business and Christopher G. Worley of Pepperdine University’s Graziadio School of Business and Management make a convincing case for fundamental, ground-up changes in corporate boards to achieve effective, long-term sustainability policy.  They cite three key areas where change is needed.

Board membership. Most corporate boards in the United States and other developed countries are staffed by individuals who understand both the financial performance of the organization as well as the products and services it offers. These board members are, however, generally less knowledgeable about how their organizations impact employees, society and the environment. This needs to change dramatically. Boards need to have members who understand the impact organizations have on the environment, their employees and society in general. This stakeholder approach to board membership differs significantly from the membership model that most boards use today, which is oriented toward financial accountability.

Performance information. For a board to lead and evaluate the effectiveness of a sustainable organization, it’s critical that the board receives information about the company’s triple-bottom-line performance. Today, all too often, boards do not have good information about the environmental performance of their corporation or about its social impact. The Global Reporting Initiative, currently used by more than 50 percent of large U.S. corporations, is increasingly improving its measurement approaches so that boards can get comprehensive longitudinal information about the environmental and societal impacts of their organizations.

Performance Accountability. Boards can’t be true to sustainable effectiveness if their decisions consistently maximize the financial performance of the organization at the expense of social and environmental performance. Unfortunately, in their decision-making today, directors often feel bound by their fiduciary responsibilities to maximize shareholder value.

In response to this tension, an interesting and new alternative has appeared. In some U.S. states, companies can now become benefit corporations. When an organization is incorporated as a benefit corporation, the board is legally required to consider other stakeholders in addition to shareholders in its decision-making. This frees the board, for example, to reduce the financial returns to shareholders in order to improve its company’s environmental and social performance. Perhaps the best known U.S. company to adopt this new form of incorporation is Patagonia, Inc., based in Ventura, California.

The changes the authors suggest will make the role of boards more difficult. After all, decision-making is more complicated when you try to balance the performance of an organization so that it integrates three kinds of outcomes. Inevitably, board members will need to spend more time on corporate business. Decision-making is likely to take longer and involve intense debates as diverse board members discuss and work to develop decisions that integrate social, environmental and financial objectives. This is likely to be done effectively by a board only if it has positive decision processes and its members receive training in group decision-making and spend some time developing themselves as a decision-making team.

This article is adapted from “Why Boards Need to Change”  by Edward E. Lawler III and Christopher G. Worley, which was published in the Fall 2012 issue of MIT Sloan Management Review. The complete article is available here. Copyright  Massachusetts Institute of Technology, 2012. All rights reserved.

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