Directors’ Adoption and Oversight of Sustainability

Research has found that corporate social responsibility (“CSR”) and corporate sustainability initiatives are most effective when CSR principles have been integrated into the company’s governance and management processes and organizational culture.  CSR governance begins at the top of the organization with the board of directors, which has been charged by emerging corporate governance guidelines and stakeholder expectations with responsibility for oversight of the environmental and social impacts of the company’s operations.  The directors and members of the senior executive team must proactively respond to the serious challenges confronting business, and society in general, from neglect of important environmental and social issues.  Governance policies and procedures must explicitly address the concerns of all of the company’s stakeholders, not just shareholders but also employees, the environment, customers, supply chain partners, community members and business partners.  Ideas regarding organizational design need to be re-visited in order to coordinate CSR activities.  Finally, continuous efforts need to be made in order to establish and maintain an organizational culture in which all of the members share the same views and values regarding the importance of balancing economic, environmental and social responsibility in order to achieve the level of collaboration necessary to pursue sustainability initiatives.

CSR and corporate sustainability are like any other important management initiatives and require proactive leadership from the top of the organization.  In fact, it is clear that the “tone at the top” is an important factor in the success or failure of any CSR or corporate sustainability initiative and the directors and senior executives of the corporation are uniquely positioned to act as external and internal champions of CSR and corporate sustainability and proactively communicate with everyone involved with the organization on a daily basis about the impact of new environmental and socially responsible products and services.  The directors and senior executives must also commit to investing the time and effort necessary to explain the corporation’s CSR and corporate sustainability initiatives to customers and other stakeholders and develop and implement metrics for tracking and reporting progress.  While environmental and social responsibility certainly extends “beyond the law”, directors and officers must be mindful of their fiduciary duties and understand how laws, regulations and standard contract provisions are rapidly evolving to incorporate environmental and social responsibility standards.  Among the issues and activities that will need to be considered in establishing and maintaining effective governance and management processes for CSR and corporate sustainability implementation are the following:

• Understanding the drivers of enhanced board oversight of sustainability including investors’ expectations as to the role and responsibilities of directors and changing societal beliefs regarding the political and social roles of corporations
• Understanding how CSR and corporate sustainability is changing the traditional fiduciary duties of directors and officers including the ascendance of the stakeholder-focused model and the introduction of alternative legal architectures for sustainability-oriented businesses
• Working with the board of directors to integrate environmental and social responsibility into the governance structure and the traditional roles and responsibilities of directors
• Assisting the board of directors on the design and implementation of an effective framework for board oversight of CSR and corporate sustainability
• Counseling the board of directors and senior management on the development and implementation of CSR and corporate sustainability commitments and instruments
• Incorporating reports on CSR corporate sustainability initiatives into board meetings and understanding how to create effective environmental and social responsibility committees and integrate sustainability into the activities of other board committees
• Developing job responsibilities for the senior social responsibility officer and designing effective internal organizational structures and systems for managing CSR and corporate sustainability initiatives and programs and supporting CSR and corporate sustainability commitments and expectations such as preparation and distribution of sustainability reports and stakeholder engagement
• Implementing formal management systems relating to sustainability-related issues and topics based appropriate standards issued by the International Organization for Standardization (e.g., ISO 14001 (environment); ISO 26000 (social responsibility) and ISO 28000 (supply chain security))
• Reviewing and modifying job responsibilities and compensation arrangements of executive team members, particularly the chief executive officer, to incorporate CSR and corporate sustainability commitments and attainment of CSR- and sustainability-related performance goals
• Providing education and training to directors and executive team members on sustainability issues including the creation and management of stakeholder advisor groups and teams of external experts
• Assisting directors, executive team members and managers and employees within the internal sustainability group with key CSR- and sustainability-related activities such as transparency and disclosure and stakeholder engagement
• Identifying and counseling directors and officers on ethical issues that will arise as they discharge their duties and responsibilities with respect to CSR and sustainability

While each of the issues and activities listed above are important, governance processes relating to CSR cannot be effective unless and until the directors are brought on board.  A discussion paper prepared by Global Compact LEAD on the role of boards in overseeing corporate sustainability and implementing the Global Compact principles cited a 2010 survey by the Global Compact that found that 39% of the 1,300 respondents to the survey had boards that routinely addressed corporate sustainability issues and that the most frequently used models for structuring sustainability at the board level included tasking the entire board with oversight, creating new committees dedicated exclusively to sustainability and using of existing committees that assume responsibility for sustainability as one aspect of their activities.[1]  The paper cited studies showing that when existing committees are selected to oversee sustainability the most common choices have been the risk, governance, strategy and audit committees.  Committees charged with sustainability responsibilities are expected to interact with the full board, meet anywhere from one to four times annually and often include the lead executive in discussions.  Specific activities included developing an appropriate definition of “sustainability” and related goals and commitments; reviewing policies, practices and positions; reviewing performance against sustainability goals; reviewing of developments and trends in legislation, regulation and public debate; and regular audit‐style reviews of strategy, commitments, performance and goal setting and sustainability reporting.

A March 2014 study of board oversight of sustainability issues among S&P 500 companies commissioned by the IRRC Institute and authored by the Sustainable Investments Institute found that just a little over half of the companies had implemented board oversight of sustainability issues, with the level of implementation being even higher among companies that formally measured their sustainability performance and issued sustainability reports based on recognized sustainability reporting frameworks such as the Global Reporting Initiative or the International Integrated Reporting Framework.[2]  Other key findings described in the study included the following:

• Companies with oversight of environmental and/or social issues most often chose the corporate governance/nominating committee to undertake this task, while a close second was the practice of having a standalone sustainability-related committee assigned with oversight followed by other (e.g., technology, science or product innovation, operations or compensation), audit and risk committees in declining order of likelihood.  Only 10% of the companies that had voluntarily undertaken board oversight of sustainability elected to reserve responsibility to the “board-at-large”, while all of the others delegated responsibility to one or more committees.[3]
• Based on reviews of committee charters and references in sustainability reports to board oversight of environmental and social issues, social issues were more often covered by board oversight structures and policies than environmental topics.
• Political spending, which has long been the most popular interest among shareholder activists when developing their proposals for shareholder votes, was the most frequently mentioned subtopic in committee charters and sustainability reports, followed by health and safety, workplace diversity, human rights and climate change.  Other social subtopics included community investment, data privacy and employee relations.  Subtopics specific to particular business activities, such as animal testing, were also mentioned.
• Companies’ committee charter text explaining oversight duties covering sustainability issues varied widely from very concise and high level to extremely detailed.
• Most companies with board oversight of sustainability issues have established independence standards for the composition of those committees and permitted them to hire outside counsel, advisors and experts at their discretion to fulfill duties; however, only 5% had set explicit sustainability expertise standards (outside of financial expertise) for members of these committees.
• The paper and forestry, healthcare services, oil and gas, utilities and aerospace and defense industries were the most likely to have board oversight of sustainability issues, while the real estate, construction and engineering, technology hardware, retail, industrials and media sectors were the least likely.
• There was a very strong correlation between company size, as measured by revenue and net income, and rates of board oversight of sustainability issues: top quintile companies by revenue were more than three times more likely to have board oversight of environmental and/or social issues than those in the bottom quintile.

The sustainability executives surveyed in a report released by The Conference Board in June 2016 found that 55% of the respondents said that their boards of their companies met only once a year or never on sustainability issues and 69% of the respondents said that their boards spend four hours or less per year on sustainability issues.[4]  While it may be that a substantial percentage of directors do not believe that spending additional time on sustainability is necessary or feasible, another way to interpret the lack of engagement among the boards of so many companies is that the directors of those companies simply do not have a good idea of where to start.  Fortunately, there is no lack of advice on the steps that directors should consider in adopting and overseeing sustainability.

In 2017, researchers on corporate sustainability from the MIT Sloan Management Review and The Boston Consulting Group (“BCG”) reported that while 86% of companies agreed that boards should play a strong role in their company’s sustainability efforts, only 48% said their CEOs are engaged, and even fewer (30%) agreed that their sustainability efforts had strong board-level oversight.[5]  The report also mentioned a 2014 United Nations Environment Programme Finance Initiative study of 60,000 businesses that found that only 2% of companies that reported on environmental, social and governance (“ESG”) information had a director with responsibility for sustainability and that only 374 companies had a sustainability committee that reported directly to the board (and none of those committees included board members).  Results of a research study published in the Harvard Business Review in 2014 showed that no more than 10% of US public company boards had a committee dedicated solely to corporate responsibility.[6]  The researchers cautioned that a company’s top executives and board members needed to be mindful of the interests and expectations of investors and noted that corporate leaders must recognize that an increasing number of shareholders are (literally) invested in whether a company’s ESG activities connect with its financial success.[7]  Noting that improving board engagement on sustainability issues faced several hurdles (e.g., the unclear financial impact of developing sustainable business practices, competing priorities, a lack of sustainability expertise among board members and short-termism), the researchers recommended that steps to be taken to improve directors’ expertise with respect to sustainability through training, new appointments to the board and accessing external expertise through external/independent advisory boards.

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.

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[1] The Global Compact LEAD, Discussion Paper: Board Adoption and Oversight of Corporate Sustainability.

[2] P. DeSimone, Board Oversight of Sustainability Issues: A Study of the S&P 500 (IRRC Institute, March 2014), 1-2.  Among companies that had been targets of shareholder proposals calling for board oversight of sustainability, a much higher percentage (80%) had implemented board oversight of sustainability issues, an indication that companies were influenced by shareholder activism in this area even if the proposals failed to achieve the requisite support for passage (support for sustainability-related proposal has increased dramatically since they first began appearing in the early 1990s).  See also a similar survey of board oversight of environmental and social issues in North America that included Russell 3000 companies: Board Oversight of Environmental and Social Issues: An Analysis of Current North American Practices (Calvert Asset Management Company and The Corporate Library, 2010).

[3] A small, yet significant, number of companies spread responsibility for board oversight of sustainability issues over several committees, typically the audit, nominating and governance and social responsibility committees.  Id. at 10.

[4] The Seven Pillars of Sustainability Leadership: CEO Business Implications (The Conference Board, June 2016), 4 (as cited and discussed in V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 15, electronic copy available at: https://ssrn.com/abstract=3080033).

[5] D. Kiron, G. Unruh, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Corporate Sustainability at a Crossroads: Progress Toward Our Common Future in Uncertain Times,” MIT Sloan Management Review (May 2017), 15.

[6] L. Paine, “Sustainability in the Boardroom: Lessons from Nike’s Playbook”, Harvard Business Review, 92(7-8) (July-August 2014), 87.

[7] D. Kiron, G. Unruh, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Corporate Sustainability at a Crossroads: Progress Toward Our Common Future in Uncertain Times,” MIT Sloan Management Review (May 2017), 15.