8 minute read
Boardrooms in charge of sustainability
By Marga Hoek
Marga Hoek is a global business and thought leader on sustainable business and capital. A non-executive chairman and board member, she is also author of The Trillion Dollar Shift, gold medal winner in the best business book sustainability category in the Axiom Business Book Awards.
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Risks and Opportunities
The evidence suggesting that boardrooms should prioritise sustainability is growing rapidly. Due to fast rising risks on the one hand and more and more facts to support sustainability’s opportunities, sustainability is positioned at the top of boards’ agendas. The risks are more obvious than ever, with environmental disasters, poor labour relations, safety incidents and scandals increasing. The World Economic Forum’s Global Risks Report, released every January, notes that environmental concerns, specifically climate change, top the global risk list. In this digital era, transparency is key, whether one likes it or not. Reputations are at stake, as well as investments. The risk now lies clearly in nonsustainable business practices and investments. Policies on integrated reporting, procurement and disclosure are progressing, pushing companies in the direction of sustainability – even if this isn’t happening apace quite yet. Environmental, Social and Governance (ESG) risks are common knowledge by now and are not only investor related. Companies’ fiduciary duties to not only oversee governance yet also social and environmental aspects, will only grow. By now, sustainability is defining a company’s ability to operate as well as being core to a company’s competitiveness.
Sustainability: both risks and opportunities
However, for boards, sustainability is not only a risk factor. It is thus not only a purely defensive matter, yet an offensive challenge as well. Sustainability influences financial returns both on the risk as well as the opportunity side. It offers opportunities for long term value creation, unlocks new markets and thus can drive profitable growth. Surprisingly though, there is currently a huge gap between awareness and subsequent action. Nonexecutive boards are generally used to working with the usual nomination, remuneration and audit committees’ structures. They do not put it on the strategy agenda and to be honest are, overall, reluctant to adapt to incorporate sustainability in their structure and agenda. There is both a need to change and an opportunity to make it financially worthwhile. Thus, I foresee and support change.
Frontrunners’ Boards
Frontrunner companies show us the way forwards and I am happy to be able to contribute to a number of them. Nestlé, for instance, recognised the significance of sustainability for the company and installed a combined nomination and sustainability committee, that ensures their managerial sustainability and oversees the long-term succession planning of the board.
The committee ensures the company’s sustainability and how its long-term strategy relates to its ability to create shared value. It is interesting to see that Nestlé recognised long-term succession planning and sustainability are intertwined. Even more importantly, the board structure of Nestlé demonstrates the recognition that sustainability presents both risks as well as opportunities, which is to be pursued by a shared value business model. As forwardthinking companies now recognise, the 2020s will be the decade of sustainability. The next ten years will open up many business opportunities - if shared value (generating economic value in a way that produces value for society by addressing its challenges) is deployed. It not only secures the risks, since the company is constantly set on both reducing its negative and growing its positive impact on society.
Marga Hoek
It also points the company constantly to new markets opening up – for instance in offering solutions to issues such as food waste, recycling materials and reducing waste, renewable energy and beating poverty. Typically, shared value orientated companies align with the Sustainable Development Goals, the SDGs, as described in my book The Trillion Dollar Shift. Nestlé isn’t the only company paving the way. DSM also demonstrates forward looking thinking and behaviour. DSM’s supervisory board appointed its own sustainability committee in 2009 to supervise the managing board on sustainability matters. In addition, in 2011 the company established an external sustainability advisory board - a diverse, international group of thought leaders to help deepen the company’s understanding of sustainability topics like malnutrition, climate change, inequality and renewable energy. The company recognised that such in depth understanding was crucial if they were going to really understand external stakeholder needs, conduct advocacy efforts and handle dilemmas.
Forward looking boards integrate sustainability, profitability and growth
Unilever also installed a corporate responsibility committee in its nonexecutive board. The committee oversees Unilever’s conduct as a responsible business, sustainability and corporate reputation. The committee monitors progress on Unilever’s Sustainable Living Plan, its overall sustainability plan, and reports back to the other board members, thus ensuring that sustainable thinking and behaviour is embedded in the board as a whole. Like DSM and Nestlé, Unilever also recognises the market potential of sustainability and applies it to its investment schemes. Acknowledging that sustainable brands outperform non-sustainable peer brands and grow 69 per cent faster, their focus has shifted to a shared value approach. Brands at Unilever need to perform on a sustainability basis, or will be sold off. Only sustainable brands are bought, like the Vegetarian Butcher. Thus, the M&A agenda is also driven by this same shared value approach. These things can only be done successfully, if the top of the company - both the executive but also the non-executive board – is set up for sustainability success.
Good governance is key
Good governance, however, is key for both supervisory and advisory boards to work well. DSM has worked out a profound set of governance to ensure the advisory board can challenge freely and management is obliged to take their advice very seriously and incorporate it into decision making. This is in stark contrast to many advisory boards, which are set up to demonstrate the company’s sustainability interests or, even worse, set
body of evidence indicating influence financial returns and drive long-term value. Yet, the It is crucial to bear in mind
“80% of millennials want to that the board has or creates access to relevant information. work for a sustainable, purpose Beyond disclosure strategy, many boards do not feel driven company.” they have access to the sustainability information up for marketing reasons. throughout this decade. new reporting and disclosure Obviously, non-serious Besides all the obvious standards to drive change advisory boards only attract reasons discussed, there is an here. It’s also key to ensure professionals that do not take important, additional reason: the entire board, as well as themselves seriously enough the shift in generations. the sustainability entity, really or are not equipped for the job. Hence it is a means to but not an end and better not to Within this decade 75 per cent of the workforce will understand how sustainability is tied to business value and operate as such. Only then, do it at all. consist of millennials and sustainability will be perceived Supervisory boards need to integrate the sustainability council well in the overall GenZ. These new generations inherited a damaged world and will make absolutely sure this gets solved. 80 per cent as a business and growth driver, which in itself is a condition for success. supervisory board structure of millennials want to work Preceding the set-up of these and mandates, like the examples above have. Just adding a sustainability expert to the board does not suffice, if it is not formalised, embedded and synergised with the other committees and for a sustainable, purpose driven company. 65 per cent are willing to pay more for sustainable products and services. Soon this generation will be the majority of your sustainability bodies, chairman and board members can get going right away, organising some quick wins. For instance, establish or increase the frequency of management board members. employees, your customers, reporting on sustainability risks your policy makers and every to the board. In the end, the CEO and chairman of the non-executive board need to support this fully and implement it carefully. stakeholder you can imagine. Lack of attention to changing consumer and commercial Establish or clarify the responsibility of a board committee with a sustainability The selection of members is expectations are the number mandate. Establish a as crucial as the structure. It one threat to a company’s disclosure strategy to is a business challenge and ability to operate. stakeholders and embed this opportunity and although members and sustainability chairs need to be experts on The chairman must drive the change in (sustainability) reporting. Review the sustainability executive department and the topic, it is just as important So, boards obviously need professionalise this, whilst that the overall sense of the to prioritise sustainability connecting it clearly to a committee is a business one. If and the chairman must drive shared value model. Improve not, synergy will not arise - let this change. He or she must data systems to enhance alone grow. either chair the supervisory the possibility of gathering board committee or at least relevant data. Make sure Boards need to adapt be a member. In case of an sustainability risks are sooner rather than later additional advisory council, identified and embedded in Companies that neglect the the chairman must make sure risk management. The list goes physical and economic impact governance is set up in such a on. Realise: this change is here of sustainability do so at their way, as to ensure the impact to stay. Any board should own peril. There is a growing of such an advisory body. adapt, as soon as possible. that sustainability factors “The risk now lies clearly in present an opportunity to non-sustainable business practices they need. The board can use need to liaise will grow rapidly and investments.”
