Assessing Directors’ Performance of Oversight

Board oversight of sustainability is not just about establishing and maintaining an effective framework for managing sustainability issues, it should also include appropriate measures for evaluating and improving sustainability governance.  Directors can approach their duties in this area from a number of perspectives.  First of all, a process for assessing the performance of the entire board, and individual directors, with respect to their sustainability oversight responsibilities should be established, often under the auspices of the board’s governance and nominating committee.  Second, information collected while verifying the information included in the company’s sustainability disclosures can and should be used to identify specific areas for improvement.  Third, directors may direct the CEO and other members of the executive team to test the company’s sustainability framework by undergoing assessments developed and overseen by independent certification and ratings bodies.  Fourth, companies can rely on one of the emerging methodologies for measuring CSR performance.  Finally, ISO 26000 can be used as a framework for designing and measuring the effectiveness of the company’s CSR implementation methods.

Boards of public companies must, as a matter of good practice and in accordance with specific legal and regulatory requirements, conduct regular evaluations of the performance of the board as a whole and the performance of specific committees of the board and each of the individual directors.  Board evaluation is a relatively new phenomenon and standards are still emerging on the right questions to ask and how assessments should be conducted.  Moreover, in order for the evaluation and assessment to be meaningful there needs to be some understanding as to just what is meant by the term “effective board”.  One report on board evaluation advised that in order for the board to be effective it must have the right people, the right culture, the right issues, the right information, the right process and the right follow-through.[1] 

Boards of public companies typically delegate the evaluation and assessment process to an independent committee, generally the nominating/governance committee, and the process should focus on assessing sustainability knowledge and effectiveness and ensuring that gaps are addressed.  According to a Global Impact publication, topics to be covered in the assessment process should include awareness of sustainability risks, opportunities, trends, impacts and dependencies related to the company, its value chain, industry and operating context; knowledge of the sustainability policy, strategy, best practices and their application to the business; awareness of stakeholder issues and quality of stakeholder relationships; effectiveness and adequacy of sustainability decisions, discussions, tone at the top; and effectiveness of the board’s role in monitoring the company’s sustainability performance.[2]

The members of that committee should be versed in the methods and tools that have been developed to make the assessment process more efficient and objective including the use of questionnaires and interviews. [3]  Individual evaluation of directors can be carried out in a variety of ways including self-evaluation, peer evaluation, a combination of self-evaluation and peer evaluation, evaluation by the nominating/governance committee and evaluation by an outside consultant.  Hopefully one of the byproducts of the evaluation and assessment process is that the directors gain a fuller appreciation of their value to the company and the important role that they can play in setting and executing company strategy and supporting the activities of the management team that they are overseeing.

A number of assessment tools that boards and individual directors can use with respect to oversight of sustainability have been created in recent years.  One example provided by Canadian Business for Social Responsibility included the following questions[4]:

• Has the board developed a common understanding of the business case for sustainability and is that business case reviewed on a regular basis, no less frequently than annually?
• Has the board and management reached agreement on a common definition of CSR and has the company’s commitment to CSR as so defined been explicitly communicated among the company’s stakeholders?
• Has the board and management developed a CSR vision for the company and incorporate CSR into the company’s overall mission and values and the company’s code of conduct and ethics?
• Is the board aware of the significant CSR-related issues that are relevant to the company’s business and the industries in which the company operates and are those issues incorporated into the company’s long-term strategies?
• Has the board established a formal framework for conducting its oversight of sustainability including designation of committees with responsibility for CSR and appointment of an executive officer for CSR activities with a reporting relationship to the board?
• Does the board regularly review progress on the company’s performance with respect to CSR goals, objectives and targets?
• Is CSR included as a factor in recruitment of the CEO and other executive officers and is compensation of the executive linked to performance on CSR goals and targets?
• Has the board ensured that materials CSR risks are considered with the company’s enterprise risk management program?
• Does the board have a means to identify the CSR impacts of its decisions and are CSR impacts, issues and opportunities explicitly considered when approving major decisions?
• Does the board review its own practices to reduce the social and environmental impacts of board meetings?
• Does the board receive unfiltered information on stakeholder issues and concerns?
• Has the board implemented auditing procedures to assess the extent to which the company’s CSR commitments are adhered to across the company and within the company’s supply chain?
• Is the board’s composition and skill set consistent with a strong commitment to sustainability, meaning that the membership of the board reflects the cultural and gender diversity of the marketplace and candidates for directorship are required to have CSR skills, knowledge and experience?
• Does the board’s new director orientation process and ongoing professional development program include CSR-related skills?
• Has the board ensured that the company has a formal external reporting program that covers material CSR issues and is the board actively involved in management’s assessment of which such issues should be reported and how?
• Does the board approve the company’s CSR reporting to stakeholders and do those reports include a message from the chairperson of the board?

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Directors’ Questions for Assessing Board Oversight of Sustainability

An extensive survey of board oversight and governance of corporate responsibility and sustainability among large UK-headquartered companies, companies included in the FTSE 100 and Corporate Responsibility Index top performing companies, allowed the authors to generate the following questions that directors can use to assess and improve their contribution to effective board oversight and governance of corporate responsibility and sustainability:

• Have we made a public commitment to sustainability and if so, what is this?
• Have we linked our commitment to sustainability to our business purpose and strategy, and is this reflected in executive compensation and bonus criteria?
• Is sustainability embedded within corporate values and culture?
• Are senior executives committed to sustainability, and comfortable and credible in leading on that commitment?
• Do we have effective board oversight of sustainability?
• Does the company recruit, induct, train, appraise, reward, promote and take difficult decisions using the corporate values?
• Does the company’s enterprise risk management system incorporate risks and opportunities associated with social and environmental and economic impacts?
• Does the board regularly assess the company’s environmental and economic impacts?
• Does the company have a process regularly to review emerging sustainability issues and surface them at board level?
• When did the board last have an open forward discussion about Responsible Business and Sustainability issues and the implications for its business?
• Does the company have clear targets on sustainability and is it clear who has direct accountability for each target?
• Is there a “big, hairy audacious goal” of the type described by Collins and Porras in “Built to Last” for corporate responsibility and sustainability such as Unilever’s Sustainable Living Plan, carbon or water neutrality or “cradle-to-cradle” manufacturing?
• Is board discussion of sustainability already aligned with board discussion of its annual business performance review and its own key performance indicators?
• When did the board last discuss the company’s talent development strategy and is capacity to understand and deliver on Responsible Business and Sustainability an integral part of that strategy?
• Does the company publish a sustainability report and, if so, did the board and the CEO sign off on it?
• Is the company’s sustainability reporting linked to a recognized standard such as Integrated Reporting or the Global Reporting Initiative?
• Does understanding of Responsible Business and Sustainability figure on the list of desired skills /areas of expertise for prospective directors?
• Is corporate responsibility and sustainability included within induction of new board members?
• Is corporate responsibility and sustainability part of continuing professional development for board members?
• Does board effectiveness on corporate responsibility and sustainability feature explicitly in annual board appraisals (individual and collective)?

‌Source: D. Grayson and A. Kakabadse, Towards a Sustainability Mindset: How Boards Organize Oversight and Governance of Corporate Responsibility (London: Business in the Community, 2012), 17 (listed adapted from A. Kakabadse and D. Grayson, “Embedding the governance of responsibility in the business of the board”, in Cranfield on Corporate Sustainability (London: Greenleaf Publishing, 2012), Chapter 4).

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Assessments should also be done for individual member of the board and should begin with evaluating whether the director has developed the requisite “sustainability mindset” and the skills necessary to contribute to discussions of sustainability issues that may come up during the board’s deliberations.  If a director is not comfortable with sustainability, he or she needs to embark on a self-improvement program that would include additional training and education and regular meetings with stakeholder representatives to understand their specific concerns with respect to the company’s sustainability commitments.  Interactions with managers and employees involved in sustainability initiatives would also be helpful and companies often seek to provide support to directors by tapping outside experts to provide skills training.

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Questions for Collective Assessment of Board Oversight of Sustainability

A Checklist for Company Secretaries included in the extensive survey of board oversight and governance of corporate responsibility and sustainability among large UK-headquartered companies, companies included in the FTSE 100 and Corporate Responsibility Index top performing companies, provides the basis for the following questions for collective assessment of board oversight and governance of corporate responsibility and sustainability, a process which should be conducted on a regular basis:

• How effective overall, on a scale of 1 to 5, is the board’s oversight and governance of corporate responsibility and sustainability?
• Does the board collectively, and each individual director, have a “sustainability mindset” when considering issues that come before the board for debate and decision, particularly issues relating to overall strategy?
• If the board and director do not have the necessary “sustainability mindset”, what are the hurdles and what can be done to overcome them?
• How would the skills and will of each director with respect to corporate responsibility and sustainability be rated on a scale of 1 to 5?
• What are the best tools and tactics to improve the skills and will of lower performing directors?
• Are there specific questions in the annual board appraisals designed to elicit insights into board effectiveness for oversight and governance of corporate responsibility and sustainability?
• Would a sustainability experts group to advise the board and senior management team be useful and acceptable?
• Can directors take advantage of memberships in director professional development organizations to help improve board understanding and effectiveness?
• On a scale of 1 to 5, how effective are discussions among directors about corporate responsibility and sustainability (i.e., frequency, length and depth), and the corporate responsibility and sustainability implications of any decision?
• Where are the blockages to effective debate and how can these best be tackled?
• What is the quality of board briefings about corporate responsibility and sustainability?
• How can induction and continuing training and education of directors be more effective in raising skill/will on corporate responsibility and sustainability?
• Does the board need to update its skills matrix for the board collectively and each individual director?

‌Source: D. Grayson and A. Kakabadse, Towards a Sustainability Mindset: How Boards Organize Oversight and Governance of Corporate Responsibility (London: Business in the Community, 2012), 18.

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Assessment of board performance should also include an audit of the steps that the management team have taken in order to integrate CSR into day-to-day operational activities.  Once again, questions for management recommended by Canadian Business for Social Responsibility can be used as the basis for this portion of the assessment[5]:

• Enterprise Risk Management: To what degree are social and environmental risks and opportunities identified, quantified and managed in our operations? In our supply chain?
• CSR Trends: What are the key social and environmental issues that could affect our long term success? What are our competitors doing on CSR and how are they benefiting from this approach?
• Stakeholder Perception: What are stakeholder expectations for a company in our industry? Are we perceived to be meeting those expectations? What are the risks if we are not?
• Decision Impacts: Have we considered the social or environmental impacts of this decision? Does this decision align with our CSR commitments?
• Financial Investments: Does our investment/asset management policy incorporate environmental, social and governance factors?
• Operations: Have we taken advantage of opportunities to reduce our environmental footprint in order to generate operational efficiencies and cost-savings?
• Products and Services: Do our products and services advance social or environmental benefits? Are there social or environmental risks associated with the life cycle of our products that need to be managed, from design and production to use and disposal?
• Human Resources: Does our human resources strategy reflect CSR? For example, is CSR incorporated into staff training and compensation?
• Impact Measurement: How are we measuring the social/environmental impacts of this area of our business?
• Integration: How is the management of social and environmental matters integrated into our core business processes, such as performance management, internal assurance and business planning?
• Brand and Market Development: Does our company and product brand include sustainability features aligned to our customers’ values? How can this help us advance market share?

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance. and an excerpt from Board Oversight of Sustainability by Alan S. Gutterman, which is available for purchase at various online booksellers.  Readers may also enjoy the author’s book on Sustainability and Corporate Governance.

[1] See Report of the NACD Blue Ribbon Commission on Board Evaluation: Improving Director Effectiveness (2001/2005).

[2] The Essential Role of the Corporate Secretary to Enhance Board Sustainability Oversight: A Best Practices Guide (United Nations Global Compact, September 2016).

[3] See Report of the NACD Blue Ribbon Commission on Board Evaluation: Improving Director Effectiveness (2001/2005) for examples of sample forms that can be used for board evaluation and the evaluation of individual directors.

[4] CSR Governance Guidelines (Canadian Business for Social Responsibility, 2010).

[5] CSR Governance Guidelines (Canadian Business for Social Responsibility, 2010).