Whether you call them directors, supervisors or governors, companies’ top overseers must get involved in sustainability. Here’s how
Of all the challenges facing corporate sustainability leaders, a lack of board-level support can be one of the most frustrating. While a chief executive’s top priority is day-to-day operations, directors’ main job is to think big, look out for long-term material risks to shareholder interest and advise on strategic opportunities. By these standards, sustainability should be a natural fit for most directors.
In practice, though, boards have engaged less with sustainability than many CEOs or shareholders would like. A study by EY (formerly Ernst & Young) that looked at all shareholder proxy initiatives found that the largest share, 45%, dealt with environment and social issues – and, in the past five years, shareholders voted to support these initiatives at steadily higher rates.
“Investors see sustainability questions as highly material to company strategy,” says Aron Cramer, CEO of BSR. “Whether it’s the decision to enter frontier markets like Myanmar or how best to operate in a climate-constrained world, these factors materially effect whether a business thrives or not. These are exactly the kind of things boards should be thinking about.”
Sustainability-minded CEOs are looking for some help from their boards, too. A 2010 poll of CEOs conducted by the UN Global Compact concluded that 93% of chief executives wanted their board members to discuss and act on environmental, social and governance issues. Yet that same year, only 75% of CEO respondents reported that their company directors took an active role in “considering and acting on sustainability”.
If both investors and CEOs are pushing for boards to get smarter about sustainability, it’s curious that progress has been so slow. The culprits, Cramer says, are corporate convention and a lack of education. Directors are typically drawn from financial, legal and management backgrounds; thus very few have formal sustainability training.
The UN Global Compact – the world’s largest corporate citizenship and sustainability initiative – hopes to tackle this sustainability-IQ deficit with its LEAD Board Programme, which it’s getting ready to trial this fall. So far, five companies have agreed to trial the [program, which will consist of two half-day sessions delivered by an expert mediator: power and gas utility Enel and petroleum producer Eni (both of Italy); power and gas utility Eskom (of South Africa); chemicals maker Yara (of Norway); and cellular company SK Telekom (of South Korea).
Five best practices for boards
The UNGC has been developing the program since January of 2011, consulting with Cramer and a dozen or so other global sustainability leaders. Some of the top practices the program will emphasize include:
* Define the business case for sustainability. Boards should help define how and why sustainability can benefit shareholder interest by boosting sales, cutting costs and/or enhancing profits. Once directors map out the issues that are most material to the company, they can single out top priorities, which in turn can help the chief executive lead the mission – and get buy-in from employees and business partners.
* Establish or approve targets. Just as they do for sales, market share growth, and other key indicators, boards should help establish or approve sustainability targets – both in the short- and long-term – for their companies’ sustainability performance and include them in the business strategy. A wide range of metrics is available, from mature standards such as the Dow Jones Sustainability Index to more industry-specific measures, or early-stage metrics can be developed in house.
* Set clear standards for performance and recruitment. Boards should align annual performance reviews of incumbent executives with criteria that make sustainability a priority, just as they do with stock price, sales growth and other conventional performance indicators. When hunting for a new executive, boards should include sustainability in the search criteria. Candidates should be able to demonstrate clear understanding of – and a commitment to – their industry’s best sustainability practices.
* Link remuneration to long-term goals. Executive bonuses have long been linked to short-term financial targets. Given that sustainability stabilizes growth over the long term, but must be implemented in the near term, it follows that CEOs should be rewarded along both timelines. For example, progress toward long-term interests can be rewarded by linking part of pay to stocks, bonds or reserve payments released a decade or so in the future. For near-term rewards, boards can link a share of CEO’s regular cash compensation to the achievement of year-to-year sustainability objectives.
* Take responsibility for implementation and communication. Communicating sustainability achievements to shareholders is also vital, whether in a separate sustainability report or integrated into the financial reporting. Directors should also formally sign off on the company’s sustainability report. Although this is not legally necessary in most jurisdictions, director signatures send a high-profile confirmation to stakeholders that sustainability and transparency are company priorities.
If all goes according to plan, the curriculum will be tweaked according to feedback from the pilot companies and then rolled out to all comers in 2014.
In time, these voluntary lessons may become required reading in some markets, Cramer notes. South Africa was the first country to mandate an integrated reporting standard, including sustainability metrics, for listed companies. Trading exchanges in Hong Kong, Shanghai and Sao Paolo are moving in a similar direction, he says.
As the sustainability reporting standards spread, more corporate directors will want to get up to speed, before they’re obliged to do so.
To learn more about the nuts and bolts of the curriculum, start here: LEAD Board Programme. Deeper details aren’t yet available, but will surface in coming months.
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