How Your Board Can Improve Sustainability
Corporate boards are increasingly focusing on sustainability as shareholders, regulators, customers, and other stakeholders take action on this issue. While boards cannot be involved with all aspects of a company’s environmental initiatives, they can still influence their organizations to improve sustainability within the context of their board duties.
Set the Tone at the Top
A company’s sustainability success often depends on the culture within the company, so in evaluating executive performance, they should consider whether the C-suite is fostering the right environment.
Not only can corporate boards factor sustainability into executive evaluations and succession planning, but they can also tie it to executive compensation to encourage ways to improve sustainability.
“Given that, through academic research, it has been demonstrated that stronger corporate social responsibility performance can lead to fewer capital restraints, lower cash pay-performance sensitivity and increased transparency and engagement, it stands to reason that more and more companies would link these sustainability metrics to executive compensation,” notes Glass Lewis.
Engage with Stakeholders
In order to improve sustainability, it can often be useful to gain insight from stakeholders who may be closer to an issue than the board is.
For example, an environmental, social and governance (ESG) focused asset manager may be more attuned to how specific environmental topics like fossil fuel usage affect long-term value because they research this issue across many different types of companies. Similarly, non-governmental organizations (NGOs) might be studying an issue that they want to bring to a board’s attention, even when they are not a shareholder, and the board can benefit from this engagement to gain new perspectives.
With this insight, boards can then engage larger shareholders on the issue to see where they stand and they can decide whether it is something that should be factored into the company’s overall strategy.
However, corporate boards should recognize that more than half of ESG shareholder proposals are on immaterial issues, according to a study by George Serafeim, a Harvard Business School professor, along with two students, Jody Grewal and Aaron Yoon.
So while it’s good to engage with stakeholders to gain new perspectives on how to improve sustainability, boards should have at least some ability to identify what really matters to the company.
In order to be able to identify material issues and improve corporate sustainability in a way that creates shareholder value, boards should dedicate resources to it, just as they are doing with other topical issues like cybersecurity.
In some cases boards are forming a separate committee. As of 2016, 7% of S&P 500 boards have a separate “environment, health, and safety” committee, which is a slight uptick from the 6% mark in 2011, according to Spencer Stuart.
Even if boards do not form a sustainability-related committee, they should at least dedicate specific resources to the issue, whether it’s designating sustainability oversight tasks to an existing committee, requesting sustainability reports from management or some other dedication of people and time in order to prioritize improving sustainability.
With these efforts, the board can properly oversee the company’s sustainability efforts and guide the business in the right direction.
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