Board-Level Accountability for Sustainability: Why it Matters
Many corporate CEOs and investors have accepted the premise that sustainability issues are material to the long-term success of any business. The C-Suites of public companies increasingly recognize that effective management of social and environmental risks can improve business performance. Issues associated with sustainability include corporate reporting, climate change, resource usage, ethical sourcing, human rights, labor and community relations, and more. The concept of sustainable business seeks to combine environmental and social improvements with financial success.
Now it is time for boards of directors to be more involved in sustainability as part of their governance mandate. Sustainability and corporate responsibility (CR) issues can represent significant risks and opportunities to company performance. Therefore, oversight of social and environmental risk management and CR performance need to be incorporated into board governance to ensure that long-term shareholder and stakeholder interests are protected and promoted.
Boards need to understand how and when sustainability issues can:
- Impact or enhance a company’s strategy and vision
- Necessitate board level oversight and accountability
- Influence risk identification and management
- Require changes to board composition and expertise, and
- Improve external disclosure.
According to a UN Global Compact-Accenture CEO study in 2010, 75% of CEOs reported that their Board of Directors take an active role in overseeing sustainability issues. Some notable international companies have established a sustainability committee of the board, including Ford, Roche, Nike, Lockheed Martin, Monsanto, McDonalds, Coca Cola and HSBC. A board committee should have clear accountability for sustainability strategy and performance, whether by a standalone committee or by expanding the responsibilities of an existing committee.
In some companies the role is combined with the governance committee, overseeing matters relating to corporate governance and in promoting sustainable management of the Company’s activities. This combined committee supervises compliance of internal business principles and principles of behavior with respect to legal as well as safety and environmental matters and also oversees the preparation of the sustainability report.
As a member of the Sustainability Committee for DE Master Blenders NV’s Board of Directors– composed of primarily non-executive directors I saw, first hand, the importance of board involvement in setting top priorities for environmental responsibility and ethics. The directors on the committee were chosen based on our expertise on sustainability issues of particular relevance to the business.
Our combined experience in coffee sourcing, African economic development and strategic philanthropy led to innovations in the company’s policies. Beyond procurement, we also urged attention to reducing waste, optimizing natural resources and energy usage, and minimizing the overall environmental impact of all packaging.
Another key to an effective and functioning board committee or board focus on sustainability is board diversity. White men still hold 72 percent of Fortune 100 board seats. Women held just 17% of board seats at Fortune 500 companies in 2013, according to research group Catalyst.
It’s time these boards took seriously the need to include more women, visible minorities and individuals with expertise in the unique sustainability issues of importance to the company.
To sum up, boards should set these priorities:
- Board-level accountability for sustainability. Ensure the board regularly reviews the company’s sustainability performance to goals and targets, mandating a committee with explicit responsibility for these matters. Ensure compliance with sustainability policy across the firm and tie this to CEO recruiting and executive compensation.
- Material sustainability risks are understood and managed. Ensure that environmental sustainability and social responsibility issues are included in the company’s enterprise risk management framework and considered when approving major decisions like capital projects, new business lines and mergers and acquisitions.
- Sustainability influences board composition and expertise. Equip boards to make good decisions by ensuring director diversity and embedding relevant environmental, human rights and philanthropy knowledge and expertise.
- The company regularly discloses its sustainability performance. Boards should review and approve disclosure of the company’s sustainability performance in mandatory and voluntary reporting.
When sustainability is incorporated at the board level in this way, environmental practice, ethical and social values become important screens used in identifying joint venture partners, in hiring new senior executives, approving new investments, mergers and acquisitions.