April 26, 2011
In last week’s feature article, I touched on various aspects of the growing debate about board governance of sustainability. In this week’s article, I look at how board engagement is likely to evolve in the years ahead.
Before returning to the specific sustainability issues shaping this discussion, it is worth looking at “secular” trends that impact directors’ perspectives on their responsibilities. Sustainability is but one development that directors are now factoring into their thinking and actions. It is essential to understand the overall landscape to gauge how sustainability fits into the picture. With that in mind, we can examine three key trends (apart from the traditional roles boards assume) that are likely to influence how boards think about sustainability.
- Agenda overload: At this month’s Fortune Brainstorm Green conference, two public company directors lamented the rising tide of requirements placed on boards. This development began with Sarbanes-Oxley in the United States and has proceeded to require more oversight by most boards. The more compliance-related activities increase, the less time there is for “new” areas like sustainability to take their place on the board agenda.
- Director diversity: Boards are facing increased attention to their composition as it relates to diversity, with a particularly healthy debate taking place in Europe. Whether quotas or other mechanisms take hold, it is nearly certain that board lineups will look different a decade from now. This will result not only in new demographics, but also new perspectives.
- Executive compensation: Boards continue to deal with public disapproval of executive compensation, particularly in the United States and the U.K. This has given rise to the “say on pay” movement, as well as more “no” votes on executive compensation at some companies.
As described in last week’s article, most companies now believe that certain sustainability questions demand their boards’ attention. How that gets implemented requires a careful look at the intersection of sustainability considerations and the broader governance trends described above.
In my view, the path forward should include both “hard” and “soft” governance mechanisms, i.e. formal and informal structures. While it’s certainly a positive development that boards are increasing their attention to and knowledge of sustainability matters, not all such questions can or should rise to the level of formal governance mechanisms.
In looking ahead, I would suggest a mix of options to strengthen boards’ abilities to help their companies navigate the complex set of questions that make or break the drive for sustainable business success:
- Dedicated board committees: There is much debate over whether this is a good step. At Brainstorm Green, the directors who spoke dismissed the idea as overloading boards that already have too much to do. They also noted that a separate committee seems inconsistent with the drive toward integration. All this is true, and yet. … Just as chief sustainability officers are needed to catalyze action by companies in their operations, specialized committees are needed to catalyze action by boards. This does not suggest that such committees are needed in perpetuity, which could marginalize sustainability as something that directors who are not on the committee don’t need to consider seriously. Indeed, it may be that their mandates should be limited. Ultimately, sustainability should be integrated into a board’s overall activities. But for the foreseeable future, dedicated attention to sustainability is best, either through a committee focused only on sustainability, or one that includes it as part of a broader agenda.
- Stakeholder directors: In considering sustainability, some would argue there is good reason to establish “stakeholder directors” as a means of diversifying the perspectives and networks at a board’s disposal. That is likely the instinctive reaction of any sustainability advocate. Board dynamics, however, suggest that adding stakeholder directors to boards is not likely to deliver the desired results. It is easy to see how a single “pro-stakeholder” representative could be a marginalized “party of one” at the board table. It is also hard to imagine how a single voice could effectively represent all perspectives that are relevant to a board’s consideration. This, then, is an idea that has superficial appeal but would not likely achieve desired results in practice. Leaving this mechanism behind, however, should not mean giving up on the concept of bringing diverse perspectives into the boardroom.
- Advisory boards: As discussed last week, the concept of informal (i.e. non-statutory) advisory boards has immense merit. Many of the benefits of stakeholder directors can be obtained through such bodies, without the dilemmas I mentioned earlier. While most such bodies have been set up to advise chief executives, there is no reason why there can’t be a link both to executive management and to the board. Indeed, my service on Shell’s External Review Committee, which had the opportunity to engage with both the chief executive and the company’s Corporate and Social Responsibility Committee, demonstrates that this can be done successfully. My fellow committee members and I had useful exchanges with directors eager to hear our views. There is little doubt that a board could learn a great deal from an annual interview of global experts on the risks and opportunities its company faces vis-à-vis sustainability, or the trends to watch. My hunch is that the right experts on an advisory panel would get more respect and attention from directors from “one of their own” set up as the stakeholder voice on the formal board.
One would expect sustainability advocates to call for more, more, more when it comes to board engagement on sustainability. My view, however, is that more is not always better. In recent years, every governance failure has been met with new requirements, and compliance-oriented solutions are not always best.
In the era of sustainability, though, every board should ensure that three things happen: 1. It addresses material sustainability questions—explicitly—as part of its mandate. 2. It has at its disposal all relevant information it needs to carry out these duties, with independent voices in the mix. 3. It measures performance and holds management accountable.
Boards that embrace this agenda will serve their companies very well and contribute to a business environment that works over the long run. After all, that is precisely what boards are meant to do.
To read part one of BSR President and CEO Aron Cramer’s series on sustainability at the board level, click here.
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