ESG and Stakeholder Capitalism are Changing Corporate Boards

ESG and stakeholder capitalism will have a meaningful and lasting impact on US corporate boards, according to a new study by The Conference Board. 68 percent of survey respondents believe that ESG will have a significant and durable impact on their boards, while 53 percent say the same about stakeholder capitalism.

Released today, a suite of reports describes how the focus on ESG and multi-stakeholder interests is affecting boards, and provides forward-looking insights on how boards can:

• Incorporate ESG and stakeholder interests into their core business decisions;
• Adjust their composition, structure, and capabilities;
• Enhance the information that they receive and how they engage with stakeholders; and
• Improve how they evaluate the company’s, senior management’s, and their own performance.

“We are at the outset of a sustainability transition of business, which overall may be as significant as the digital transition but will affect each company differently,” said Paul Washington, co-author of the report and Executive Director of The Conference Board Governance & Sustainability Center. “Accordingly, as with any ‘strategic inflection point,’ the role of the board is changing and becoming more of a strategic partner with management in setting priorities and balancing the interests of multiple stakeholders. This does not require a shift in the line between board and management responsibilities, but does require a fresh look at board composition, structure, and capabilities.”

The reports by The Conference Board Governance & Sustainability Center were produced with Morrow Sodali and Weil, Gotshal & Manges. Included throughout are insights from a Working Group featuring more than 240 executives from 137 companies. Highlights include:

Part 1: Implications of ESG and Stakeholder Capitalism for Boards

Overall impact and outlook

• The focus on ESG and concern about the long-term welfare of stakeholders have already affected boards. 
  • Topics discussed: For virtually all boards (95 percent), ESG and stakeholder capitalism has affected topics discussed, according to Working Group participants.
  • Factors considered in decision-making: For 52 percent, it has affected the factors the board considers in decision-making.
  • Actual decisions: For 24 percent, it has affected the actual decisions they make.

 “Boards do not need to reinvent the wheel. They have long considered issues that now fall under the heading of ESG and have factored the well-being of employees, customers, and communities into their decision-making. Just as companies are integrating sustainability more deeply into their business, boards should evaluate how they can build ESG and stakeholder perspectives into existing board and governance processes,” said Merel Spierings, co-author of the report and Researcher at The Conference Board Governance & Sustainability Center.

Part 2: Board Composition and Capabilities

• While corporate proxy statements tend to emphasize the diversity of “hard” skills and experience of the board, the company and the board are well-served by having directors with certain attributes in common.
  • These include a clear understanding of the role of a board, strategic business experience, intellectual curiosity, and a willingness to “do the work”: Boards should be especially cautious in recruiting directors whose views of sustainability were cemented at a time when it was a siloed discipline.
  • Having specialist directors can be counter-productive if the rest of the board defers to them too much: While companies may want to add directors with specialized experience in key areas such as HCM and cyber, generalist skills and attributes are more important.

Committee Structure & Leadership

• The shifts toward ESG and stakeholder capitalism are affecting the board’s committee structure and leadership.
  • 84 percent of Russell 3000 companies currently disclose the assignment of some form of ESG responsibilities to the full board and/or one or more board committees.
    • The Nominating and Governance committee leads the way in ESG responsibilities: This committee is also most likely to be responsible for climate-related topics and corporate political activity.
    • However, this approach will likely evolve over time: While the Nominating and Governance committee currently leads the way, companies will continue to experiment with different approaches to address the shifts toward ESG and stakeholder capitalism.

“As companies are thinking about the allocation of ESG responsibilities they will want to consider the responsibility for coordination as well,” said Lyuba Goltser, Partner, Weil, Gotshal & Manges. “A benefit of allocating ESG responsibilities to several board committees is that each committee can dig deep into its assigned areas, but there are risks as well, including potential overlap in responsibilities, and the siloing of issues with individual committees. These risks need to be controlled and managed.”

Part 3: Board Information and Engagement

• The amount and quality of information on ESG and stakeholder expectations can be improved.
  • 43 percent of Working Group respondents say boards typically receive too little information regarding ESG and stakeholder expectations; 39 percent say they receive just the right amount. None of the respondents indicate the board is receiving too much information.
  • 48 percent of Working Group respondents say that the quality of information that’s provided to the board is “just OK,” while 43 percent say it is good. None say it is excellent.

“In support of the greater board awareness and focus on ESG-related topics, keeping directors connected to stakeholder views requires a combination of consistently insightful and relevant information as well as direct board engagement,” said Susan Choe, Head of US Corporate Governance & Sustainability, from Morrow Sodali. “When it comes to direct board engagement, companies can take several steps, in coordination with management, including having their board members directly engage with shareholders, meet formally and informally with employees, and serve on and meet alongside management with community advisory groups.”

Part 4: Board Evaluations of Corporate, Management, and Its Own Performance

• Boards are evaluating their company’s performance in ESG and stakeholder relationships, but can do a better job. 
  • The boards’ evaluations of ESG can be improved: 56 percent of Working Group respondents indicate that their board evaluates their company’s ESG performance on at least an annual basis. But 48 percent of respondents think their board is doing only an OK job.
  • Stakeholder relationships are discussed in a piecemeal way: 60 percent of Working Group respondents say the stakeholder relationships are discussed in a piecemeal way. Only 8 percent say the process to evaluate the company’s relationships with stakeholders is comprehensive.

• It is important to ensure that there is alignment among the board’s annual evaluations of the company’s performance, management’s performance, and the board’s own performance in addressing key ESG topics. If an area is strategically important to the company, it should appear at all three levels of review.