The context for corporate performance is changing rapidly: Consideration of the corporation’s role in society is moving from the periphery to the center of corporate thinking as investors, customers, employees, and other stakeholders are challenging companies to understand the total impact of the company’s strategy and actions. A tighter connection between “social capital” and bottom-line performance is being forged.
Call it corporate social responsibility (CSR), sustainability, corporate citizenship, or environmental, social and governance (ESG), how a company manages environmental and social issues—and connects these activities to financial and operational performance—are increasingly signals to investors of how well the company is run and its long-term financial sustainability.
In this environment, it is critical that boards understand how the company is managing the risks and opportunities related to environmental and social issues, and embedding its initiatives into the corporation’s strategy and culture. How these issues are framed and discussed has a big impact on understanding why they matter to the business and how to address them. It requires a deep understanding of the business and the issues affecting the company’s long-term success.
Today, companies—and boardroom discussions—are moving at different speeds on addressing environmental and social issues, but wherever the company is on this journey, the board can help lead the organization forward by focusing on the big picture:
Help set (or reset) the context for the company’s discussion of environmental and social issues. What do these issues mean to the company and its customers, employees, and investors? Why do they matter? How do the company’s corporate responsibility initiatives relate to long-term value? Leadership from the board is critical, and language matters. (A boardroom discussion about the “connection between environmental stability and the company’s financial stability” will be more nuanced and meaningful than a discussion about “global warming.”
Energize management’s assessment of risks and opportunities. For starters, determine whether management has identified and understands the significant social and environmental risks related to the company’s operations—e.g., environmental degradation, product and worker safety, and waste generation—including associated legal, regulatory, brand, and reputation risks. Are there opportunities to improve operational efficiencies by reducing water usage, energy consumption, carbon emissions, and waste? Help determine how the company should target its environmental and social investments. And take a close look at the company’s supply chain—where some of the company’s greatest environmental and social risks and opportunities may reside.
Embed environmental and social initiatives into the strategy and look at these issues in terms of long-term value creation. What are the opportunities to improve the company’s strategy and operations by making environmental or social-related investments that align with the company’s business interests and long-term viability? This will involve trade-offs, potential disruptions, and an innovative mind-set. New skills and expertise (in the C-suite and on the board) may be required, as well as different KPIs and scorecards. As most boards and business leaders who are well down this path will tell you, this isn’t easy.
Tell investors and stakeholders about the company’s environmental and social efforts. Insist that the company’s environmental and social activities—progress, results, and linkage to strategy—be effectively communicated to investors, employees, and customers. Do investors have the information they require to evaluate the company’s environmental and social investments and their implications for long-term value? What are the views of our investors and other stakeholders regarding the company’s management of environmental and social issues?
Help set the tone at the top and culture around environmental and social initiatives. How is the company rewarding social responsibility and encouraging innovation, prudent risk-taking, and innovation? Help alleviate short-term pressures, and give management “permission” to think and act long-term.
Environmental and social issues continue to rise on investor agendas and can no longer be seen as “soft” reputational issues to simply be handled by the public relations or marketing department. Today, a company needs to see corporate responsibility as both a matter of principle and an economic imperative to be embedded into strategy and culture—and the board has a key role to play in setting the context, tone, and expectations to make this happen.
Dennis T. Whalen
KPMG Board Leadership Center