Broadening board compositions, reduced focus on quarterly returns and stronger sustainability/compensation linkages are just a few of the ways that board directors can elevate sustainability concerns more effectively at the companies they serve on. So concludes a new Ceres report highlighting the generally weak performance of U.S. corporate boards in prioritizing environmental and social issues and recommendations for boosting their effectiveness on such issues.
Dozens of corporate directors, senior corporate leaders, investors and governance experts were interviewed for the report.
“While we’re seeing improvement from corporate boards on sustainability concerns, they still have a long way to go in terms of governance processes and bottom-line action,” said Mindy Lubber, president of the nonprofit sustainability group Ceres, which authored View from the Top: How Corporate Boards can Engage on Sustainability Performance. “As more companies are increasing their efforts to tackle climate change and other sustainability challenges, it’s critical that corporate boards realize and embrace a stronger leadership role, and do it more smartly.”
“This report is both timely and helpful,” added Margaret Foran, Chief Governance Officer, Vice President and Corporate Secretary at Prudential Financial, who was interviewed for the report and wrote a report foreword. “Combining practical recommendations and case studies, it is a powerful tool for boards who want to better incorporate sustainability into their processes and action.”
The report identifies key corporate sustainability trends, including wide-ranging research showing that strong corporate sustainability practices lead to superior financial results.
It also found that while there has been a measurable uptick in director engagement on sustainability issues, it is still largely the exception among most companies. A 2014 Ceres analysis of 600 of the largest publicly traded U.S. companies found that only 32 percent incorporate sustainability at the board level.
Perhaps most importantly, the report found that even when there is elevated board involvement, it doesn’t always produce tangible social and environmental impacts. “Except in the case of a few leading companies, it is often unclear whether board sustainability oversight is achieving meaningful performance improvements,” the report concludes.
Among the key recommendations for boosting board effectiveness:
- Rather than considering “sustainability” too broadly, focus on company-specific material issues that significantly impact operations and revenues. (The report cites Unilever’s board involvement in the company’s Sustainable Living Plan, the company’s integrated sustainability and business strategy.)
- Recruit diverse candidates with expertise and backgrounds on key sustainability issues and offer sustainability training. (The report cites Prudential Financial’s inclusion of expertise in “environment/ sustainability” as a key board qualification.)
- Involve key staff responsible for enterprise profit and loss in board deliberations on sustainability (The report cites meetings of Nike’s board sustainability committee, which includes regular discussions with key executives on how business and sustainability strategies are aligned.)
- Avoid over-emphasis on short-term returns by embedding sustainability and longer-term thinking in strategic planning. (The report notes that Unilever, Coca Cola and National Grid have moved away from issuing quarterly earnings guidance in order to focus on long-term performance.)
- Establish stronger linkages between executive compensation and sustainability goals.
“As long-term investors, we are looking for a company to be managed for resilience and sustainable growth,” said Anne Sheehan, Director of Corporate Governance at the California State Teachers’ Retirement System (CalSTRS), the nation’s second-largest public pension fund, who was interviewed for the report. “Informed board oversight for sustainability is critical as companies realize the role they play in meeting the challenges of a diverse world.”
Download the whitepaper at: www.ceres.org/view-from-the-top