Recruiting ESG Directors

Steven A. Seiden is President at Seiden Krieger Executive Search. This post is based on his Seiden Krieger memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The pressure is now greater to populate boards with directors whose backgrounds satisfy ESG (Environmental, Social, Governance) standards. Agitation for ESG boardroom reform is emanating from a variety of quarters and is taking on an even broader definition than originally. Indeed The Business Roundtable’s recent liberal “Statement on the Business of a Corporation” would appear to align with such cohorts.

“Environmental” now includes how a company’s board is graded on its policies impacting climate change, sustainability, carbon footprint, water usage, pollutants, conservation, and its stewardship of nature in general. A highly respected international banker makes the case for “Mark-to-Planet Finance.” The environment now extends to company property, i.e. land, manufacturing facilities, offices, transportation modalities, and especially safety.

“Social” encompasses how a company empowered by its board interfaces with stakeholders: shareowners, employees, suppliers, regulators. Pertinent issues include non-discrimination, working conditions, fair pay, and executive compensation alignment with performance objectives. A board’s social report card is about its oversight of the company’s internal and external human relationships. Essential are boardroom and workplace ethnic and gender inclusivity and diversity.

“Governance” is how effectively the board leads itself and the company according to democratic principles. Are its constituencies being dealt with fairly and equitably?

How ISS and Glass Lewis view a company and its directors depends to a certain extent on its ESG profile. Even private and not-for-profit entities aren’t exempt from these standards given that external audiences determine their ESG reputations.

In short, every company and organization needs to be politically correct in terms of ESG.

A countervailing current to recruiting world class ESG board talent is the restrictions on board service ironically advised by ISS and Glass Lewis: number of boards on which a director may serve and age ceilings. What can boards do to mitigate the situation and help end the game of musical director chairs?

One remedy would be eliminating director age maximums. Many age 72 restrictions were incorporated in governance guidelines principles decades ago. Clearly, examples abound of valuable board members well into their 80s. If the purpose of such provisions is to remove incompetent directors, then there are other ways of accomplishing that. Proven effective is the board’s instituting a director evaluation process led by an independent consulting firm experienced in that function. Why lose otherwise valuable directors whose history on the board provides critical perspective?

Key in making seats available for ESG directors is to accept “newbies”…people who have never served on a public board. Greater attention ought be paid to qualified corporate officers outside the C-suite.

To illustrate my point about “newbies”, consider how to satisfy the “Environmental” board component of ESG. A cursory look at a cross section of American corporations reveals that a larger number than might be imagined could be in the cross hairs of investors including activists, both environmental or otherwise. Examples are those in automobiles, beverages, food, building materials/forest products, chemicals, energy,  drugs, consumer products, hospitals, mining, utilities. Finding ESG types qualified to be directors of such companies by reason of their backgrounds  AND with public board experience may be difficult.

Alternatively, a resourceful board (or its search consultant) might well consider, as one example, recruiting, albeit a “newbie” who has led one of the several Federal or local environmental agencies. Others could be environmental lawyers or consultants. Professional journals in the field might well reveal qualified candidates although lacking public board experience. Not main stream directors or the usual suspects, these types can bring fresh thinking to a boardroom. But they’re not out there in plain sight. Identifying them takes thorough and imaginative research. That said, due consideration must be given to the level of sophistication such directors possess to enable them to become valuable aside from their technical acumen.

This is equally true when recruiting “newbie” women and minority candidates in lieu of those with public board experience…a scarce lot indeed. Thus, what are the general qualities aside from gender and ethnicity which make them valued directors?

A “newbie” in a thus unfamiliar boardroom setting must possess a superior level of emotional intelligence and a demonstrated ability to understand and apply group psychology. This includes being both skeptical and persuasive with what will be a presumably intellectually competent and sophisticated group of incumbent directors. Uncommon advocacy skills and the proven ability to win on the verbal chess board of a group meeting are paramount. To be avoided: those who “go along to get along” and who prefer “safety in numbers.”

But how can it be determined that a “newbie” board prospect possesses the requisite attributes? Critical is that he/she needs to be vetted by the board chair or by the head of the nom/gov committee (or by their search consultant) utilizing face-to-face meetings with those in a position to corroborate such attributes as well as to reveal possible deficiencies. Such meetings ought to be with superiors, subordinates, and/or colleagues who can bear witness to his/her behavior in a group setting. In my experience mere telephone interviews are woefully insufficient given the gravity of director selection.

So then what constitutes the pool of “newbie” ESG director candidates aside from the aforementioned environmental specialists? Because sitting CEOs are frequently boarded up, boards should seek other public or even private company officers, COOs, CFOs, CMOs, CHROs, division heads, and others who report into the C-Suite. Certain not-for-profit CEOs may have indeed shaped board opinion and, as bold leaders, built an institution or better yet reversed the decline of one albeit without the press attention paid to their corporate counterparts. High ranking former government even military types may be ESG qualified. Academic officers and faculty might be suitable. I could even make the case for a successful litigator without public director experience being an effective advocate in a boardroom setting. Isn’t winning a jury trial analogous? Think “Last Angry Man” (woman?).

In conclusion, to attract qualified ESG directors, boards need to welcome “newbies”, be inventive in finding them, relax strictures on age, and allow for what might otherwise constitute overboarding, particularly for professional directors who aren’t full time corporate executives.

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