Giving Sustainability a Seat In the Boardroom
[Editor's note: This article originally appeared in the BSR Insight and is reprinted with permission. It is the first installment of a two-part series examining the role of corporate social responsibility in the boardroom.]
Sustainability today is seen by many company leaders as an important strategy in business success, and that idea has made it into more and more boardrooms in the last several years. In light of that trend, BSR recently completed a paper for the U.N. Global Compact examining the role of the board in corporate social responsibility (CSR). Based on that work, as well as BSR's experience working with member companies, this article examines board roles and responsibilities, the three approaches to incorporating sustainability into the board structure, and how the composition of the board influences the company's approach to sustainability.
Board Roles and Responsibilities
A board's responsibility for sustainability can be categorized in three ways: traditional duties adapted for a world in which sustainability is evermore important, explicit responsibilities for activities related to sustainability performance, and implicit responsibilities related to prioritization and agenda‐setting.
Traditional activities adapted for a new world: Boards generally focus on core activities -- overseeing business strategy, selecting and overseeing the chief executive and determining executive compensation, and ensuring legal compliance.
Given this, the integration of sustainability and governance is, in part, about the application of traditional governance activities to a 21st century operating environment. Over the past two decades, company leaders have learned that topics not previously considered relevant to business, such as human rights and climate change, can shape business success. Many have seen the hard‐won reputations of their businesses damaged by campaigns led by an increasingly vigorous civil society that is now fueled by social media. And many leaders have found it difficult to maximize the value of core assets when social and environmental questions can affect the legal license to operate. Moreover, the primacy of shareholder value, especially in the context of publicly traded companies, is subject to increasing debate.
In this context, directors' traditional responsibilities are being redefined to include ESG considerations. This is seen through the rewriting of charters for boards and board committees to include these topics.
Specific sustainability‐related activities: Boards are also undertaking several specific activities related to sustainability, including the integration of strategy and sustainability, a focus on stakeholder perspectives, the approval of sustainability reports, and the oversight of executive accountability and compensation for sustainability performance. In contrast to what is described in the previous section, these activities generally go beyond legal requirements.
As boards undertake these activities, new questions arise, and new sources of information grow in importance. The already complex subject of executive compensation has become more challenging for company leaders aiming to integrate sustainability factors into decisions about rewarding senior management.
Approval of sustainability reports also illustrates changing dynamics. Many boards now sign off on their companies' sustainability reports before publication. These reports do not raise the same kinds of legal attestation requirements associated with financial reports -- yet. The Johannesburg Stock Exchange, for example, now requires listed companies to report on sustainability considerations, and China's state‐owned Assets Supervision and Administration Commission now expects the largest state-owned companies to report as well. These developments coincide with a rising interest in "integrated reporting." As this movement gains steam, it's possible boards will devote more attention to how their companies report on energy use, water use, labor issues, and other topics directly related to Global Compact principles.
Implicit responsibilities: Directors also undertake informal activities that have a high degree of relevance to sustainability performance, such as setting agendas, raising questions, and shaping mindsets.
It is possible to reduce effective governance to the concept of stewardship, and good stewards of corporate assets ensure that management considers all relevant risks and opportunities. Doing so effectively means that the board takes a close look at topics such as societal and regulatory acceptance of new technologies and business processes, entry into new markets, and the impact of "externalities" on business success. Over the past two decades, we have seen multiple examples of the risks incurred when boards overlook such questions. In many cases, the ability of company leaders to bring their companies' innovations to market can rise and fall based on how well they anticipate whether society is prepared to accept those innovations.
According to 2010 research by the UN Global Compact, 39 percent of 1,300 surveyed companies have boards that "routinely address corporate sustainability issues." But the mechanism used by companies varies widely, with three models appearing most frequently: full board oversight, dedicated sustainability committees, and existing committees taking responsibility for sustainability.
Board committees: While an increasing number of large companies are giving their boards responsibility for oversight of sustainability, there is no current consensus about the best model to apply. In a 2009 Deloitte survey of 220 directors of American companies with more than US$1 billion in revenues, 37 percent of respondents said some committee should oversee sustainability responsibilities. When asked which committee should have oversight, 24 percent of respondents chose risk and governance committees, 22 percent chose the strategy committee, and 15 percent chose the audit committee. These figures suggest that the future may deliver not a single model but rather a range of options for companies.
Committee mandates: A 2010 BSR survey revealed that, regardless of whether they are focused on sustainability in whole or in part, board committees today generally define their sustainability mandate broadly, shifting away from a more narrow focus on single issues or topics. Typical mandates include a review of policies, practices, and positions; a review of performance against sustainability goals; and a review of trends in legislation, regulation, and public debate.
Company leaders implement these responsibilities through a mix of activities broadly related to overall board responsibilities, such as the dual purposes of advice and oversight. The most common activities include audit‐style reviews of commitments and data in sustainability reports, annual reviews of performance and goal-setting, and frequent and informal engagements on strategy development. As the lead sustainability executive at one global company put it: "When [the committee] started, it was more like a report card. Now it feels more like collaboration, or discussion around how we think about these complex issues."
External advisory panels: In addition to the formal committees comprising company directors, one more model merits attention: external advisory panels. These bodies are growing in number, and while they do not qualify as formal governance mechanisms, they represent an interesting development. In cases where they serve in an advisory role and/or provide a public oversight mechanism, they create a "soft-governance" model. Over the coming decade, it is possible that this mechanism will develop further, and some companies have begun experimenting by melding the "soft governance" of external panels with the "hard governance" undertaken by the formal board of directors.
One of the core questions relating to boards and sustainability is who sits on the board. While not yet widely adopted, the notion of the "stakeholder director" -- a director elected to a board specifically to represent the perspectives and/or interests of key stakeholders and to provide the overall direction of the company -- is a logical development for companies that see sustainability as a strategic imperative. If the shift in thinking described above, from a "pure" focus on shareholder value to one that aims to balance the interests of multiple stakeholders, takes hold, then it stands to reason that boards would evolve in a manner that ensures that stakeholder perspectives -- indeed, that the stakeholders themselves -- are in the room when decisions are made.
This shift has not yet occurred, but it will likely get more attention in the years ahead, especially if public policy makers redefine fiduciary responsibilities to include material sustainability matters.
One can imagine four possible futures for board composition:
• Status quo: In this model, we would see a slow but steady effort to increase board diversity, with a focus primarily on gender and global representation, but with little change to existing governance models.
• New voices: Governance models would remain very similar to what they are today, but with a rapid diversification of board composition to include directors chosen in whole or in part because of their knowledge, networks, and perspectives on material sustainability issues. This model integrates the "stakeholder director" concept described above.
• Formalizing the advisory panel: One could also see the maturing of the external advisory panel as a parallel body that maintains existing governance models with a formal channel to expertise that would enrich the board's ability to anticipate and manage key sustainability questions. This hybrid model might represent the "path of least resistance" to progress.
• Bi‐cameral models: As in Germany and some other jurisdictions, a dual board structure could emerge to balance shareholder and stakeholder interests in a more formal way than the hybrid advisory panel model described above.
Over the long run, the best solution is to integrate sustainability into all board activities so that it becomes "mainstream." This mirrors the indispensable effort by many company leaders over the past decade to integrate sustainability into business strategy and operations. Ideally, dedicated board committees would be seen as redundant in a decade's time ... but they might be needed now to catalyze the transition.
Image CC licensed by Flickr user Lars Plougmann.