Framework for Board Oversight of Sustainability

CSR and corporate sustainability are broad and challenging topics and the directors must carefully consider how the board’s duties and responsibilities will be discharged and allocated among board members.  According to KPMG, the structure and processes a board creates to oversee CSR and corporate sustainability will vary based on a number of factors, such as the size and complexity of the company’s operations (including its supply chain and whether operations are international), its industry, the magnitude of the company’s CSR risks and opportunities, the degree to which CSR issues are central to the company’s strategy, and the level of director expertise regarding relevant CSR issues.[1]  One well-known corporate governance advisor has counseled that directors should begin the process of developing an oversight framework for CSR and corporate sustainability by asking and answering the following questions[2]:

• How should concerns regarding CSR and corporate sustainability be integrated into the board’s discussions on strategy and risk oversight? Strategy and risk oversight are two topics that all board members should be working on and actively discussing during each board meeting and investors are looking to see whether CSR and corporate sustainability have been formalized as priorities in the board’s governance guidelines and overall goals.
• To what extent should CSR and corporate sustainability topics be included as standalone agenda items for board meetings?
• What information should be provided to directors (e.g., data on how the company’s efforts compare to those of its peer companies, leading industry standards, and the CSR-related priorities of key shareholders and proxy advisory firms)?
• Which metrics should the board and members of the executive team focus on in considering progress against CSR and corporate sustainability goals (e.g., goals involving reduction of water usage and emissions, reducing on-the-job injuries and employee turnover, or improving workforce diversity and employee retention)?
• What process should be used for drafting and reviewing public disclosures about the company’s CSR and corporate sustainability efforts?

In addition, the board should also consider how the company’s current efforts and activities with respect to CSR and corporate sustainability compare to its peers, how investors and other stakeholders perceive the company’s engagement with and disclosure of CSR and corporate sustainability and whether or not the company has been effectively communicating its CSR and corporate sustainability strategies, goals and actions to investors and other stakeholders.[3] 

The entire board also needs to consider whether it has the full team and resources necessary to effectively and credibly carry out its oversight responsibilities.  For example, consideration needs to be given to the following issues and questions[4]:

• Does the board have a sufficient number of members to staff the requisite standing and special committees and to meet expectations of investors and other stakeholders with respect to diversity and ability to effectively engage with stakeholders? Institutional investors have expectations regarding director age, diversity and periodic refreshment that need to be understood and respected and the CSR and corporate sustainability pronouncements from the board will not be seen as credible unless board composition demonstrates a commitment to diversity and stakeholder representation.
• Does the board include directors who have knowledge of, and experience with, the company’s businesses? While there has been a substantial wave toward including “independent” directors on boards in recent years, and this remains good advice, boards should consider adding more than one director who is not “independent” when and if that person can provide the outside directors with insight into the day-to-day operations of the business.  Given that the CEO is already a member of the board, other inside directors, typically drawn from the senior executive team, must have the experience, reputation and confidence to provide views that may differ from those offered by the CEO.  
• Are all of the directors able to devote sufficient time to preparing for and attending board and committee meetings? Being an effective director requires a substantial commitment of time and physical and mental resources and each director must be able to fully participate and engage in the difficult debates that continuously occur at full board meeting and during committee meetings.  Boards can no longer afford to have ceremonial directors appointed for public relations purposes, particularly when the institutional investors and other stakeholders are closely monitoring reports on director attendance and participation.  Also important to consider is the time expected of each director to participate in stakeholder engagement and relationship building and education and training (see below).  
• Does the board have processes in place to ensure that directors receive all of the data, presented in a clear and objective manner, which is critical for them to be able to make sound decisions on strategy, compensation and capital allocation? Directors cannot rely solely on reports prepared by the CEO to make their decisions as fiduciaries for investors and other stakeholders, but must instead ensure that objective data is collected and analyzed through the company’s internal controls and made available to directors well in advance of meetings.  Data requirements should be sorted out in advance between directors and management when discussing and adopting key performance indicators for each CSR initiative and program.
• Does the board have procedures in place to ensure that directors receive continuous training and education on the rapidly expanding list of topics that will appear on the board’s agenda? Directors should ensure that they are provided with regular tutorials by internal and external experts as part of expanded director education and the curriculum must cover each of the key topics that must be addressed from a CSR and corporate sustainability perspective including issues such as climate change and supply chain management and processes such as stakeholder engagement and disclosure/reporting.  

An interesting 2012 analysis of large UK-headquartered companies, companies included in the FTSE 100 and Corporate Responsibility Index top performing companies, allowed researchers to identify the following different models for oversight and governance of corporate responsibility and sustainability[5]:

• A formal dedicated corporate responsibility and sustainability or similarly titled committee of the board of directors where all of the members are board members (sometimes including executives of the company if they are also board members). Formation of a dedicated committee sends a clear signal to both internal and external stakeholders that the company and the board takes sustainability seriously; however, such a structure does come with risks of reinforcing a silo mentality.
• A “mixed” corporate responsibility and sustainability committee including at least one board member, generally a non-executive (i.e., independent) member, and senior executives who are not board members. This structure can be helpful in creating an effective link between strategy and implementation; however, it may lead to confusion between the roles of the board and executive members of the committee.
• An explicit statement that issues of corporate responsibility and sustainability are reserved for, and are to be addressed by, the board as a whole, and there is no delegation to a board committee. If the board is not sufficiently experience in identifying and managing issues associated with environmental and social responsibility this approach may be inadequate; however, over time having the full board maintain responsibility is the best way to ensure a holistic approach to the subject and makes sense when and if the entire board is experienced and properly trained in corporate responsibility and sustainability and consciously considers corporate responsibility and sustainability dimensions in every discussion of strategy and operations in the boardroom.
• A board member (usually a non-executive (i.e., independent director) is publicly designated as the lead director for corporate responsibility and sustainability. A variation of this approach was to have several board members designated as lead directors for particular issues or topics such as climate change or health and wellbeing.  This approach offers a focal point for corporate responsibility and sustainability on the board; however, success depends on the authority and credibility of the lead director(s).
• A “below the board” corporate responsibility and sustainability committee consisting of only non-board members such as the CEO and other executives that reports back into the board through the chair, CEO or lead non-executive (i.e., independent) director. This approach ensures operational awareness; however, it does carry the danger of divorcing the board too much from consideration of the relevant issues.
• An explicit extension of the remit of an existing board committee (e.g., the audit or governance committee), all of the members of which are board members (sometimes including executives of the company if they are also board members). This approach ensures greater coordination and collaboration in developing and implementing strategy and corporate responsibility and sustainability initiatives; however, those topics may suffer for attention in the face of the alternative well-established agendas of other committees and their existing heavy workloads, particularly in the case of audit committees.

A small number of companies failed to make any explicit statement regarding oversight of corporate responsibility and sustainability, which could have meant either that they did not understand or acknowledge the potential serious impact of issues in those areas or that they believed that such issues were already being adequately considered in boardroom discussions.  In light of the risks and opportunities associated with corporate responsibility and sustainability, and the intense scrutiny that companies are under with respect to those issues and how they are being addressed from corporate governance perspective, failing to have some specific structure in place is arguably short-sided and will likely raise serious questions among stakeholders.  In addition, failure to formally integrate corporate responsibility and sustainability into the board’s agenda will likely cause the company to miss risks and opportunities, which will ultimately have a negative impact on overall corporate performance.  Moreover, when the board does not make a point of considering corporate responsibility and sustainability in some manner, issues in those areas will not be adequately addressed in annual meetings and reports and performance with respect to such issues will not be measured.

The researchers noted that, in practice, the models described above were not generally mutually exclusive and that some companies employed several of them at one time or transitioned from one to another as their needs changed or board members became more comfortable with certain issues.  The researchers argued that while structure is important and can help boards focus their attention, the long-term goal should be to develop and maintain the appropriate “sustainability mindset” across the entire board such that corporate responsibility and sustainability considerations are seamlessly and automatically included in all important boardroom deliberations on strategy and the overall purpose of the company.  At that point there might no longer be a need for specialized committees; however, board members would continue to benefit from inputs from the company’s internal sustainability groups and external advisors and experts.  In fact, the researchers found that a significant number of the companies had chosen to supplement their board structures with formal, standing or ad-hoc, stakeholder-engagement mechanisms including stakeholder and/or external sustainability expert panels to advise the board and/or members of the executive team.

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] ESG, Strategy and the Long View: A Framework for Board Oversight (KPMG LLP, 2017), 18.

[2] H. Gregory, “Corporate Social Responsibility, Corporate Sustainability and the Role of the Board”, Practical Law Company (July 1, 2017), 3.

[3] D. Kuprionis and P. Styles, “Translating Sustainability into a Language Your Board Understands”, The Corporate Governance Advisor, 25(5) (September/October 2017), 13, 15.

[4] Adapted from M. Lipton, S. Rosenblum, K. Cain, S. Niles, V. Chanani and K. Iannone, “Some Thoughts for Boards of Directors in 2018” (Wachtell, Lipton, Rosen & Katz, November 30, 2017), accessible at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.25823.17.pdf.

[5] D. Grayson and A. Kakabadse, Towards a Sustainability Mindset: How Boards Organize Oversight and Governance of Corporate Responsibility (London: Business in the Community, 2012), 6-9.