Shades of Leadership

Leadership and ESG

Written for NACD BoardTalk, July 14, 2021:

Investors Have Spoken: What Can We Learn About ESG from the 2021 Proxy Season?

 

The 2021 proxy season marked the apex of a tumultuous year in which companies tackled pandemic mitigation, work-from-home environments, and urgent conversations around racial inequity and the climate crisis—meaning environmental, social, and governance (ESG) issues reached heightened importance in every boardroom.

The corporate ESG focus culminated in the theater that took place at the Exxon Mobil Corp. annual meeting in late May. On that day, a small but impactful activist organization teamed up with three large institutional investors to take on what was once the most powerful company in the world. When the dust settled and the final votes were tallied, three of the board’s longstanding directors were unseated.

Changing attitudes around the role of enterprise in our society mean that board directors and executive leadership across the business world must engage on ESG. During the recent NACD Texas TriCities Chapter webinar “2021 Proxy Season & ESG: What Just Happened?” speakers Anne Sheehan and Kris Ramesh addressed the reasons for ESG’s elevated agenda position, the challenge of measurement, and the consequences of thinking of ESG as a blip that will go away.

Here are some key insights from the webinar, which was moderated by chapter board member Travis Wofford.

Having Deliberate Conversations

Commentary during the webinar emphasized one key point: although ESG is here to stay, how we measure both inputs and outputs has yet to be decided. Organizations such as the Value Reporting Foundation and the Task Force on Climate-related Financial Disclosures are attempting to create standardized reporting, but with multiple players in the game, the waters are muddy.

That being said, having deliberate conversations in our boardrooms is paramount. How we address ESG at the board level impacts not only a company’s license to operate—in many industries—but can also provide strategic clarity and competitive advantage. Two questions that all directors should consider: What inputs will result in measurable outcomes? What ESG metrics are critical and material to our company’s operations and strategy?

Looking individually at “E,” “S,” and “G,” directors should also consider the following questions:

• Environmental:
  • Based on greenhouse gas and carbon footprint measurements, how are we achieving carbon neutrality?
  • How are we measuring water use and waste?
  • On the topic of our environmental narrative (which everyone has seemed quick to develop), do we have metrics to back up our progress?
• Social:
  • How are we measuring the achievement of diversity in our organization?
  • How is management impacting the processes that result in those outcomes? Are they examining opportunities for promotions, especially into positions with profit and loss responsibility?
  • What is our impact on local communities?
  • Do those in our supply chain reflect the values of our organization?
• Governance:
  • Do we have transparency on how our board governs?
  • Have we set targets on board diversity?
  • Do we have the right set of skills in our boardroom to provide the best independent oversight of the organization and its strategic imperatives?
  • Is there transparency in and a performance orientation to the compensation structure for the CEO and executive leadership?
  • Are our compensation practices aligned with investor and stakeholder interests?

Companies’ Progress on ESG

Over the past year, increased investor, activist, and regulatory focus has resulted in significant progress by many boards relative to ESG. Of 456 new directors who joined S&P 500 boards in the past year, 72 percent are women or people of color. Meanwhile, major oil companies, for example, have shifted strategy relative to net-zero carbon emissions targets and investment in alternative energies.

Some of the largest car manufacturers have declared electric vehicle production goals. Many corporations—across numerous industries—have committed to significant investment in historically Black colleges and universities and community programs to serve underrepresented populations.

There is no doubt that the private sector is accepting a larger role in creating opportunity and equity across our society—particularly during a time when the pandemic has highlighted inequities of access.

Avoiding a Confrontation

For boards wishing to avoid an Exxon-type confrontation with investors, our panelists offered the following advice:

• Actively engage in conversations with shareholders. The days of keeping board directors away from shareholders are over. It is particularly important for compensation and nominating and governance committee chairs to engage with key investors in order to create a common understanding of various ESG concerns and to demonstrate transparency in the board’s oversight of strategy.
• Focus significant energy on the firm’s capital allocation. How much money is spent on maintaining legacy strategy, and is there an appropriate amount spent on innovation? A strong narrative around the capital allocation strategy can put investor concerns at ease if they believe the board is focused on the company’s future impact.
• Remember that having a good narrative is important—but not enough on its own. If the company wants to make a commitment, be sure that it’s backed up with facts and measures. Empty promises can easily be called out as greenwashing.
• Don’t underestimate the impact of passive index funds. They are entering the ESG conversation and can play a big role in shifting not only funds but also mind-set.

A decade from now, we will look back on the 2021 proxy season as a pivotal time in corporate history. Shareholders are now holding boards accountable for the wider environmental and social impact of enterprises—and they are willing to challenge any director they deem unfit for this new purpose.

Shortcuts to Board Leadership - Part Two

In 2018, I published a  blog entitled, “Shortcuts to Board Leadership” as I was getting quite a few requests (and still do) about how to accelerate one’s journey to board service, particularly in the private/public company sector. I’ve shared it with numerous people who have hopefully gleaned some insight from my two primary points: (1) Establishing a clear personal narrative about your uniqueness and (2) Becoming top-of-mind with those who nominate candidates.

Oh, and the punchline: There are no shortcuts.

Since that time, the pressure to diversify boards has increased even more. The continued threat of strategic disruption calls for more relevant skills around technology and cybersecurity. The social unrest incidents that took place in the summer of 2020 highlighted the need to increase opportunities for people of color. An elevated focus on ESG calls for voices in the boardroom that can help shape the strategic agenda of an enterprise’s role to the wider community. Finally, the changes brought about by the COVID-19 pandemic further advantages boards which have directors in touch with the changing desires and preferences of today’s workforce.

As a result of these factors, the traditional practice of considering only C-suite executives for board service is being questioned. More general managers, division-level CFOs, SVPs of technology, those with specialized industry skills, and individuals with only experience in academia or the public sector are weighing the possibilities of becoming directors. Particularly in the interest of diversifying gender and ethnicity, recruiters and governance committees are giving consideration for more specialized knowledge and perspective. I know this because of the calls and referrals I’m receiving from both recruiters seeking to widen their network and from individuals who seek those opportunities.

What was once a role only available to sitting/former CEOs, CFOs and a scattering of C-suite executives is now a possibility for those slightly lower in organizations. But as a result, the odds of finding those coveted board seats are becoming even more difficult as the net gets cast wider than it ever has in the past. How can candidates truly stand out amid the thousands of resumes being circulated to sitting directors and recruiters every day?

Although most companies have on-boarding programs, those are generally designed to familiarize new directors to the business of the enterprise. Because directors in past decades have been selected primarily from board-facing executive roles, it has been unnecessary to train individuals on the actual role of a director; they’ve all known how a board feels and operates because they've spent a great deal of time in the room. New directors today who might not have had board-facing roles (and have only presented to the board from time to time) should nonetheless have a strong understanding of the duties of directors and be able to participate as a full director from Day One of board service.

Fiduciary responsibility and oversight of strategy and enterprise risk continue to be among the primary role of the Board of Directors. Understanding these areas of a director’s role is critical, and a candidate can increase his/her advantage to be prepared. There are a few great programs that can prepare executives for board service; many are offered by university business schools or organizations that serve the board community. In the United States, the premiere organization for board governance, NACD, offers a comprehensive director certification. As an item-writer for the foundational exam and now a member of its  Corporate Directors Institute oversight board, I can attest to its rigor, thoroughness, and relevance.  Internationally, the Institute of Corporate Directors of Canada, and the Institute of Directors for the UK  both offer good background for board service and assessment of board readiness in their respective markets.

The competition for board seats will only become more intense in the coming years. As the scrutiny of enterprise continues to grow in our society, having the right voices around the table becomes increasingly more critical. Positioning yourself as a qualified director with unique experience and perspective is the key to standing out from the ocean of candidates vying for slots. For those who haven’t held significant board-facing jobs, the attractiveness of your candidacy can be increased by investing in preparation. That combined with the two points I made in my initial blog will get you as close as you can to a shortcut.