The Directors’ E&S Guidebook

Barbara Zvan is Chair of the E&S Committee at the Canadian Coalition for Good Governance (CCGG) and Chief Risk & Strategy Officer of the Ontario Teachers’ Pension Fund. Stephen Erlichman is Executive Director of the CCGG and partner at Fasken Martineau DuMoulin LLP. This post is based on a CCGG memorandum by Ms. Zvan and Mr. Erlichman.

Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell (discussed on the Forum here).

Since inception, CCGG has focused on good governance, and has, over the years, become an authority on best practice governance guidance for boards of directors. In recent years, CCGG has observed growing shareholder emphasis on environmental and social (E&S) factors. Companies have come under greater pressure to demonstrate that the right frameworks, practices, and capabilities are in place to identify and address material E&S factors as they emerge and to provide relevant and sufficient disclosures to shareholders along the way. Investors are facing increased responsibility to include E&S factors in their investment decision-making.

In 2016 CCGG initiated a process both to strengthen its existing best practice guidance for boards by including oversight of E&S factors and to provide guidance for issuers in the preparation of E&S disclosures to investors. Benefiting from its unique access to the boards of public companies in Canada and abroad, CCGG interviewed directors who sat on the boards of companies considered to be leaders in the management of E&S factors.

The complete publication (available here) summarizes their practical insights and combines them with information from CCGG’s review of existing literature on E&S oversight and with the experience and expertise of the Committee members. The result is twenty-nine principle-based E&S governance recommendations under eight key governance topics that are relevant for boards and companies around the globe. The Guidebook is intended as a supplement to CCGG’s Building High Performance Boards.

The report has two primary objectives:

  1. To bring a broader perspective and to drive deeper dialogue between companies and investors in the rapidly evolving E&S landscape; and
  2. To support boards in developing a robust, principles-based approach to the governance and oversight of E&S factors; an approach that will adapt to changing conditions over time.

While CCGG acknowledges that companies have many stakeholders, with varying sustainability priorities, this Guidebook does not address corporate social responsibility. It speaks specifically to the oversight of E&S factors that are, or may become, material to a company’s long-term value, and to the disclosure of those factors to investors.

It is our hope that the work herein is used by both directors of corporations and their investors globally, and that providing a clear path through corporate governance will help focus efforts on the oversight of material E&S issues.

Executive Summary

Good governance practices underpin a company’s ability to effectively address risks of all kinds and create long-term value for shareholders. What constitutes best practice evolves with experience, expectations, markets, and the regulatory environment.

CCGG has observed growing shareholder emphasis on environmental and social (E&S) factors in recent years, as investors become increasingly aware of their impact on returns. As a result, companies have come under greater pressure to demonstrate whether and how relevant E&S risks and opportunities are captured in corporate strategy and risk management practices. Investors want to see that the right framework, processes, and capabilities are in place to identify and address material factors, such as, through an enterprise risk management (ERM) system, and to provide sufficient transparency to shareholders along the way.

The board of directors is accountable for overseeing a company’s long-term strategy, and for laying a strong foundation of accountability for management in the execution and achievement of corporate priorities. The board has a responsibility to ensure that all material risk factors, including E&S, are managed, and that there is ongoing organizational understanding and ownership of their business impact.

It is obvious that E&S concerns can create reputational risk for companies, but that risk is increasingly extending to shareholders. Integrating E&S into corporate governance considerations is a part of the fiduciary duty of investors. The expectation is that investors will use their leverage with companies to prevent and mitigate adverse impacts to their portfolios by seeking fuller E&S disclosures, engaging investee companies on areas of concern, and considering further steps where companies do not make desired changes.

This report and set of recommendations were developed with an acknowledgment that there is no “correct” approach to E&S governance and it very much is a journey. Each company’s approach will be based on its unique situation and strategic course, and will take time to develop.

Therefore, while CCGG encourages boards to consider how these principles and guidelines apply to their respective companies, there is no expectation for companies to satisfy every recommendation right away. The guidance is designed to help boards develop the structure and practices to effectively oversee management of relevant E&S factors.

Key Governance Categories

Recommendations are organized under eight key governance categories, as summarized below:

Corporate Culture: Most of the participating directors emphasized the importance of culture in enabling an E&S consciousness that pervades throughout the organization’s activities. Culture fosters a constructive approach to health and safety, community relations, and environmental impacts. Tone from the top plays a vital role in driving desired behaviours and attitudes. Without an aligned culture, E&S management risks becoming a temporary box-ticking exercise.

Risk Management: The oversight of all significant risk factors, including those related to E&S, is a core function of the board. Organizations should have an enterprise risk management (ERM), or equivalent, system that enables an organization to identify and assess E&S risks as a fully-integrated aspect of the management of material risks, and not treated discretely.

Corporate Strategy: E&S factors with significant impact on value or risk to the business (now or over time) should be represented in the corporate strategy, and overseen by the board. This is a critical step in the holistic integration of E&S.

Board Composition: Effective boards look for the right mix of knowledge, experience, and character to enable constructive contribution to E&S discussion and oversight.

Board Structure: There is no right or wrong board structure for supporting effective oversight of E&S opportunities and risk. Rather, boards need to carefully consider the nature of the E&S issues when determining the most appropriate committee(s) to assign accountability.

Board Practices: There are a number of common board practices among companies with strong E&S management. The boards of these companies are highly aware of, and engaged in, E&S issues. They discuss E&S matters as a regular item on the board agenda, and use in-camera sessions with management, conduct site visits, and consult with stakeholders to gain first-hand perspective of the key issues.

Performance Evaluation and Incentives: A company’s rewards system is pivotal in driving behaviours and performance. Companies need to think carefully about the metrics used to assess performance and achievement of objectives. Companies that have integrated E&S factors into corporate objectives should include appropriate E&S metrics and targets within their remuneration framework. Many boards see this alignment as a core reinforcer of both individual and company commitment to defined E&S priorities.

Disclosures to Shareholders: Companies should consider the perspectives and needs of investors in E&S-related disclosures, particularly in financial reporting. Reporting should convey key considerations related to governance, strategy, and risk management with the right level of detail, context, supporting information, and metrics, so that investors can make better informed decisions. Boards should have the necessary controls in place, whether internal or external, to provide reasonable verification and assurance of the disclosure.

The complete publication is available here.

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