Sustainability in the Boardroom

This post comes to us from Matteo Tonello, Director of Corporate Governance for The Conference Board, Inc., and is based on a paper by Mr. Tonello titled Sustainability in the Boardroom, which is available here.

In a recent paper, Sustainability in the Boardroom, published as part of the Conference Board’s Director Notes series, I discuss the findings from a survey of board practices in the area of sustainability by 50 public companies of different industries and revenue groups.

The survey revealed flaws in how corporate boards oversee their companies’ social and environmental initiatives. In particular, what appears to be largely missing is access to independent sources of information on the impact of business operations on the environment as well as detailed procedures and metrics for integrating social objectives into daily corporate activities. Directors mostly rely on reports by senior executives (89.2 percent of respondents) and almost never use additional sources (including peer-company benchmarks, environmental reports, director education programs, and consultants) that would help them critically verify and analyze any internally produced information on these matters. For most companies, sustainability discussions with the board only take place in reaction to emergency situations like the oil spill in the Gulf.

The following are the other major findings:

  • Efforts are fragmented — The majority of companies report missing the basic foundations of an enterprise-wide sustainability program, including a clear mission statement, a dedicated functional department, and a system to assess whether sustainability activities help financial performance. As many as 61.9 percent of surveyed companies do not use any metrics to link executive pay and accomplishments in the social or environmental sphere.
  • Standardization and benchmarking are lacking — Most surveyed public companies (76.5 percent) do not employ any of the widely endorsed standards existing today in many areas of social and environmental concern. Instead, these companies often resort to their own definition of sustainability, preventing the development of a level playing field for performance assessment by investors and other constituents.
  • Reporting is not always meaningful — Unlike some of their European counterparts, sustainability reporting by U.S. public companies remains embryonic. Companies that voluntarily disclose progress on their sustainability initiatives tend to do so via their public website or through a dedicated sustainability report. But as many as 42.9 percent of respondents indicate that their companies do not include any information on metrics in their disclosure.
  • Rising activism may make the difference in the near future — Recent regulatory developments and the increased sensitivity of enforcement authorities to the risk implications of environmental issues have opened the door to shareholder activism. In the last few years, socially responsible investment companies and large retirement funds have submitted a growing number of resolutions on matters of corporate sustainability, ranging from climate change to political spending and from board diversity to pay disparity. Approximately 57 percent of surveyed companies report having received an explicit request from an activist investor.

The full paper is available here.

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  1. Posted Saturday, July 24, 2010 at 1:44 pm | Permalink

    “. . . metrics to link executive pay and accomplishments in the social or environmental sphere . . .”

    But this is exactly the problem: the metric has to go both ways, and link environmental and social issues to the economic sphere. One cannot expect companies to reward executives primarily on the basis of whether they are friendly to activists’ causes or not. A corporation is an economic creation, and its directors are first and foremost concerned about protecting or improving its economic position. ESG concerns must be expressed in economic terms for directors and managers to take them seriously enough to dedicate substantial corporate resources (including managerial pay) to tackle them.

    It has been a failing of much ESG activism that it has failed to make an economic case for particular proposals, but has gone ahead and demanded them anyway. A corporation cannot be expected to dedicate itself to the general welfare at the expense of its economic condition, because it would be violating its duties to (most of) its shareholders. Activists should give the economic arguments priority, and when they are weak or absent, they have to be prepared to turn to the general political process instead, if they must make their case on other grounds.

    One can ask for, and even expect, a modest amount of pro bono effort on behalf of the community (including the environment), but to expect a substantial diversion of the company’s resources one must make a strong economic case that this effort is necessary to maintain the company’s franchise, or that it will improve the company’s economic results. Sometimes the case is there to be made, but is not given enough emphasis in arguments. Sometimes it is not yet there, and one must either do more research in order to develop such an economic argument, or turn to other fora to promote one’s cause.

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  1. By U.S. Boards Lag on Sustainability | The Murninghan Post on Monday, July 26, 2010 at 12:31 pm

    […] a post written for Harvard Law School’s Forum on Corporate Governance and Financial Regulation, Tonello […]

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