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Responsibility

How Boards Can Steer Companies to “Build Back Better”

N. Craig Smith, INSEAD Chaired Professor of Ethics and Social Responsibility, and Ron Soonieus, INSEAD Executive-in-Residence and Managing Partner at Camunico |

The momentum for sustainability is strong despite misgivings over current financial strains. Few businesses can afford to ignore it.

When the history of the Covid-19 pandemic is written, it will no doubt note how, in one fell swoop, the bug accomplished something humanity had long struggled to do: slash global carbon emissions by an expected record of 7 percent in a single year. The planet we live on remains very much in the grip of climate change, and the pandemic has only underscored the destructive consequences of our “war on nature”.  

As the novel coronavirus swept the globe last year, the European Union, China, Japan and the United Kingdom announced ambitious plans to cut emissions over the next decades. Developments on the ESG (environment, social and governance) front have been especially robust in Europe. The EU Commission is holding a public consultation on sustainable corporate governance. Switzerland has held a referendum, which was rejected, on whether to impose new standards on Swiss businesses’ activities abroad. In the UK, the government plans to mandate financial disclosures by 2025, following the recommendations of the Task Force on Climate-related Financial Disclosures.     

But there appears to be a disconnect on climate action among countries. The G20 – which accounts for two-thirds of the world’s population – is spending 50 percent more in stimulus money in sectors linked to fossil fuels than low-carbon ones. Our ongoing research, published in Management & Business Review, indicates that the world of business may likewise be divided on sustainability issues.

We had previously identified five archetypes of board behaviour, from “deniers” to “true believers”, based on in-depth interviews with 25 experienced Euro­pean non-executive directors repre­senting 50 well-known companies. From a recent check-in with some of the interviewees, we find that the pandemic may have widened the gulf between those resistant to and those supportive of sustainable practices.

As one director told us: “We are fighting to survive; sustainability is not on our priority list.” Meanwhile, another said, “Covid-19 shows us that ESG consid­erations are increasingly material to our ability to create value sustain­ably.”

Six actions for boards

Leaders may be split on sustainability, but momentum to “build back better” is growing in society at large as political and financial imperatives align. According to a Boston Consulting Group study, 50 percent of US investors think it is important for companies to continue their ESG agendas and priorities while navigating the crisis, even at the expense of some earnings. Big corporate names – from Microsoft, Starbucks to Shell and BNP Paribas – have announced plans to cut emissions or improve the environment in other ways.

More broadly, there is a growing realisation in many sectors of society that one lesson we must learn from Covid-19 is that predictable but inadequately addressed high impact events, like pandemics and climate change, can exact huge costs.

Business has its part to play and boards, in turn, have an important role in steering companies safely through climate change and other systemic externalities. For boards that are still not unified in their pursuit of sustainability, we suggest six ways to help achieve consensus.

  1. Revisit company statements of purpose.
  • What does value creation mean to your company?
  • Are your company’s efforts consistent with current sus­tainability demands and principles? Are they in line with the UN Sustainable Development Goals?
  • Does your company have a comprehensive view of how the world is changing as a result of the coronavirus pandemic and of its role in these changes?
  • How is your company sup­porting societal progress? Does your corporate culture encourage participa­tion?
  1. Schedule a meeting of the entire board with the sole purpose of discussing sustainability.
  • Ask the CEO to provide all pertinent data on the company’s sustainability prog­ress.
  • Compare leading sus­tainability practices of benchmark companies with your company’s.
  • Discuss in detail the process by which your company identifies risks and opportunities in the medium- and long-term – does it consider the possibility of systemic risks and shocks (like pandemics)?
  • How will gaps be filled? Does the company have existing strategies for reach­ing goals and strate­gies needed for future devel­opment?
  1. Audit board members’ sustainability exper­tise and mindset.
  • Which sustainability arche­type predominates on your board?
  • Do the directors have suf­ficient expertise and inter­est to embed sustainability thinking in their processes, risk management and in­vestment decisions, includ­ing mergers, acquisitions and innovation?
  • Does the board need to re­cruit new members, perhaps those with specialist expertise?
  • How should the board’s membership evolve to make sustainability a priority?
  1. Organise the board in such a way that it can effectively over­see sustainability.
  • Which board committees should concern themselves with sustainability?
  • Should there be a dedicat­ed ESG committee? If so, how will it report to the main board?
  • Does the board have a pro­cess to plan and act in accordance with a range of events on differ­ent timescales, including in times of crisis?
  • Would it help for an indepen­dent expert panel to scruti­nise the board’s actions and progress?
  1. Evaluate the information provid­ed to the board on sustainability.
  • What information does the board currently have and what further information does it need?
  • Does the board regularly receive bench­mark data used to judge its performance and that of competitors?
  • Has the board established suitable key performance in­dicators for manage­ment?
  • Does the board need addi­tional resources to better understand or investigate the firm’s sustainability per­formance?
  • Is there a suitable balance between attention to effi­ciency and resilience?
  • If the company received government support during the pandemic, evaluate the fundamental economic reasons for this support and prioritise them in evaluating strategy going forward.
  1. Explore how the firm engages with, and learns from, its crit­ics.
  • Does the board need to hear from its critics more directly?
  • Determine and prioritise common denominators in the “build back better” sentiment among key stakeholders.
  • Study potential ESG litigation and policy developments in the geographies the firm operates in and stress test current governance approaches against them.
  • In the event of any corporate restructuring, should the firm allocate funds to expedite or intensify ESG efforts?  

Our six actions should help boards develop a comprehensive view of changing ESG factors and better address pressing sustain­ability challenges facing the communities in which they operate. In a pandemic-scarred world, companies’ long-term growth and profitability will increasingly depend on such efforts.

N. Craig Smith is the INSEAD Chair in Ethics and Social Responsibility, director of ESRI (the Ethics and Social Responsibility Initiative), a part of the Hoffmann Global Institute for Business and Society, programme director of the INSEAD Healthcare Compliance Implementation Leadership Programme and a specialist professor at the INSEAD Corporate Governance Centre. He is also a member of the Scientific Committee of social responsibility rating agency Vigeo Eiris. His latest book (with Gilbert Lenssen) is Managing the Sustainable Business.

Ron Soonieus is an INSEAD Executive-in-Residence, Managing Partner of Camunico, and Senior Adviser at Boston Consulting Group. Ron works closely with the INSEAD Corporate Governance Centre and the Hoffmann Global Institute for Business and Society.

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