MANAGEMENT & SUSTAINABILITY
Governance for Sustainability
According to the Corporate Finance Institute, corporate governance is “a system of direction and control that dictates how a board of directors governs and oversees a company.” Governance is separate from the direct daily operational management of the company.
Traditionally, the most important governance responsibility of the board has been to ensure management acts in the interests of shareholders. Therefore, sustainability challenges this basic fiduciary role of boards of directors. If there was ever a time when fiscal responsibility was a tidy, clear charge to the board, that is no longer the case. Sustainability calls for a longer-term view and a broader definition of value and financial performance.
Successful boards are, and will be, more diverse and inclusive, and incorporate social and environmental value creation in decision-making processes in a variety of ways.
Four Key Aspects of Governance for Sustainability
The shift from shareholder primacy mindset to a stakeholder mindset defines a historic moment for business. Jack Welch, the former CEO of General Electric and widely regarded as the “father” of shareholder primacy, called it “the dumbest idea in the world” in 2009.
On one hand, boards of directors are responsible for value creation, financial performance, and returning profits to shareholders without whom the business wouldn’t have the capital it needs to grow. On the other hand, short-term shareholders may have little interest in long-term value-creation. Other stakeholders such as customers, employees, suppliers, and the community also have an interest in the firm’s success and in the responsible management of the enterprise.
How can governance satisfy the needs of a wide variety of stakeholders? Business for Social Responsibility (BSR) recommend four areas of focus for sustainability-focused governance that meets the needs of stakeholders not just shareholders.
Commitment
Commitment refers to practices and organizational structures that make it clear that upper management is dedicated to sustainability / ESG. For example, the firm’s Chief Sustainability Officer (CSO) is part of the C-suite and/or reports directly to the Chief Executive Officer (CEO); the Board of Directors has a standing Sustainability/ESG Committee; or the CEO serves on high level boards of leading sustainability organizations.
Case example: Philips CEO Frans van Houten Co-chairs the Platform for Accelerating the Circular Economy (PACE)
Accountability
Accountability is seen through the integration of sustainability / ESG into annual goals, performance management processes, and compensation. For example, business units set specific, measurable objectives that roll up into the firm’s overall sustainability goals and metrics.
Case example: Danone includes ESG performance in compensation for executive officers
Alignment
Alignment refers to how well sustainability is woven into and in accord with the existing business model, organizational structures, and core business processes and decision-making. For example, cross-enterprise sustainability teams are recognized by the firm and report into the same structure as other committees.
Case example: IBM’s Corporate Responsibility Executive Steering Committee is aligned with core governance structures
Flexibility
Flexibility in the interpretation and implementation of sustainability / ESG is critical since local conditions can vary widely. Effective governance, therefore, must balance focus and standards with the freedom to adapt to regional and cultural differences.
Case example: Bank of America’s Center for Women Entrepreneurs has differing platforms in the United States, India and Africa
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