ESG x Governance (6): Law, Compliance, Value Add – Déborah Carlson-Burkart

This is the sixth of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a lawyer and INED, and explore the insights she has gained in the course of her career.

Déborah Carlson-Burkart

Déborah Carlson-Burkart, specialises in strategic legal, compliance, and governance matters. She chairs committees for transforming companies and has advised on corruption, fraud, and money laundering investigations throughout her career, guiding regulated, listed, and private firms through transformative processes, especially under regulatory scrutiny.
Currently serving as an independent non-executive director at Visana Insurance Group, Fintech Bank N26, and technology company RUAG International, Déborah holds a law degree from the University of Zurich, an LL.M. from Duke School of Law, and a board certification from INSEAD. Fluent in four languages, she also lectures on governance and compliance at the University of St. Gallen and the Swiss Board School.

In your view: What is the relevance of ESG for overall company governance and success?

As a lawyer with decades of experience in compliance and governance, I’ve come to firmly believe that ESG factors are pivotal for overall company governance and success.
Having worked extensively with companies facing compliance challenges for over 25 years, I’ve witnessed first-hand the significance of ESG. It’s no longer a niche concern but a critical component of every company’s risk management strategy.
Effective governance demands the integration of ESG factors into decision-making processes, serving as a compass for navigating risks and seizing opportunities. This is particularly relevant in three key areas:

  • Risk management,
  • Long-term sustainability, and
  • Stakeholder management.

Companies that prioritise ESG are better equipped to navigate complex regulatory environments and capitalise on emerging opportunities. Even in highly regulated sectors, such as someones I am involved in, ESG-focused companies demonstrate greater agility and resilience.
In my capacity as a guest lecturer, I emphasize the importance of ESG, drawing from practical examples. Across the boards I serve on, ESG has become a central agenda item. While each company may prioritize different aspects of ESG based on its operations, the overarching commitment remains consistent.

For instance, at Beyond Gravity, a company specializing in satellite technology and aerospace, we’ve set ambitious ESG goals, aiming to lead the industry by 2025. This involves a targeted focus on environmental and social aspects, such as supplier monitoring and energy efficiency.
Similarly, at N26, an online bank operating across Europe, our emphasis is on governance and social responsibility, addressing compliance issues and fostering inclusivity.
Finally, with Visana, a comprehensive insurance provider, we’re undertaking specific projects to enhance our ESG performance, from sustainable investments to fostering a diverse and equitable workplace.
In each case, our approach to ESG is tailored to our company’s profile and priorities, reflecting a commitment to responsible and sustainable business practices.

What is the value add of ESG, including compliance and risk management, in overall company governance and success?

In my view, illustrated by the examples I’ve just shared, ESG initiatives offer more than just compliance and risk management—they add tangible value. While compliance and risk management are crucial and easily recognizable benefits, there’s a deeper impact. Allow me to elaborate with a case involving Viasana, where we’ve made numerous investments due to our surplus cash.

Firstly, integrating ESG principles enhances long-term financial performance. This, in turn, elevates our reputation across multiple dimensions. Reputation matters greatly—it not only attracts investors but also makes us an employer of choice. In an era where finding suitable talent for meaningful projects can be challenging, being an attractive employer is paramount.

Effectively, by prioritising ESG considerations in decision-making, we become a sustainable and trusted entity. This not only appeals to investors but also helps in risk mitigation and fosters sustainable growth. The potential benefits are considerable, though it’s important to acknowledge that there are costs involved. However, in my assessment, the positives outweigh the negatives.

How is the perception of ESG shaped differently across various markets?

Geographical disparities in ESG implementation, stem from diverse factors, ranging from regulatory frameworks to cultural norms and stakeholder expectations.
In Europe, for instance, regulatory standards are notably stringent compared to other regions. This is partly due to e.g. a lower tolerance for corruption, as evidenced by the region’s position in corruption indices. Compliance with regulations necessitates a shift in perspective, pushing us to consider long-term goals beyond immediate gains.

To illustrate, at Beyond Gravity, we’ve set an ambitious target to achieve a zero environmental footprint by 2026. While this goal is challenging, we’ve developed a clear roadmap for decarbonization. Operating across 14 different countries adds complexity, but we’re steadfast in our commitment.

Adapting our implementation strategies to accommodate geographical nuances is imperative. However, our overarching objective remains consistent—achieving a zero or net-zero environmental footprint by 2026. We’re making progress, and with continued effort, we’re optimistic about reaching our target.

Based on your experience, where do you see the biggest alignment gaps between executive leadership teams and non-executive boards regarding ESG? What are your recommendations for non-executive boards to address these gaps?

The issue of misalignment between the board and the executive or leadership team is not exclusive to ESG management but rather a pervasive concern. Misalignment can manifest in various areas, and with ESG, given its relatively new prominence, there’s heightened awareness of potential discrepancies. Conversely, in financial matters, there’s often an assumption of alignment, only to realise differences during implementation or when objectives aren’t met.

I perceive three primary sources of misalignment:

  • A lack of understanding,
  • A lack of focused attention, and
  • Divergent goals.

Understanding ESG is complex, encompassing environmental, social, and governance factors with no universally agreed-upon definition. Consequently, there’s a learning curve, compounded by busy schedules, which can lead to knowledge gaps within both the board and executive ranks.

Additionally, competing priorities vie for attention amidst already full agendas, diluting focus on ESG initiatives. Moreover, executives may prioritize short-term gains, while boards often espouse a longer-term, sustainability-oriented perspective, inherently misaligning priorities.

To mitigate these challenges, many companies, including ours, have appointed dedicated managers for ESG, ensuring visibility and cross-functional connectivity. Aligning management and board goals is crucial.

One effective strategy we’ve adopted at one of the companies involves tying the annual bonuses to achieving company specific ESG targets. This approachfosters alignment across the organization, with bonuses linked to collective ESG success.

While not without its complexities, this strategy streamlines efforts toward a shared objective. It underscores the importance of cohesive goal-setting and incentivise alignment across hierarchical levels.

Where do you see the biggest gaps for board directors to become ‘ESG fit’? How can boards efficiently upskill in this regard, and what should be the priorities for board chairs?

Let’s address your second question first. The key to advancing without stepping on anyone’s toes lies in continuous education. INSEAD, for instance, offers a wealth of opportunities for ongoing learning. The courses and resources available are exceptional and immensely beneficial. In my view, just as with any emerging field, board directors must prioritise continuous education to refine their skills and remain effective.

ESG literacy, akin to financial literacy, should be a fundamental requirement for board members. Additionally, as technology like AI becomes increasingly significant, AI literacy will also become essential. In our INSEAD cohort (IDP 29), we’ve fostered a close-knit community. Regular meetings every two weeks allow us to share insights, best practices, and even failures. This collaborative approach ensures that each member stays updated and continually improves.

Continuous education is particularly crucial in the realm of ESG. Given its complexity and evolution, one never truly finishes learning. Engaging with peers and staying abreast of developments ensures that fundamental skills are consistently honed.

Returning to the question about chairing boards, a simple yet effective strategy is to prioritize ESG on the agenda. It’s imperative that ESG principles are deeply understood and integrated into every aspect of board and management decision-making.

As a chair, personal commitment to continuous improvement is vital. For instance, I chair three nomination and compensation committees, emphasizing the importance of ongoing education through these committees’ agendas. Additionally, being involved in two audit committees ensures that ESG reporting is meticulously overseen. However, it’s crucial to remember that execution is just one aspect—cultivating a culture shift towards ESG is equally essential.

In essence, like many endeavours in life, the energy invested in ESG initiatives yields growth. It requires a mindset shift and the dedication of at least one committed individual on the board to champion this cause. Mere box-ticking won’t suffice; what’s needed is a genuine commitment to play by the rules and sometimes a cultural transformation. .

Looking forward, what will be the biggest ESG-related challenges for non-executive boards, and what can companies do to address them?

When considering the most significant risks from a board perspective, three critical areas come to mind, based on my experience overseeing major companies:

  • 1. Environmental Risk Management: Especially when operating internationally, the challenges posed by environmental concerns loom large. Effectively addressing these issues is paramount to our operations.
  • 2. Social Responsibility Assurance: The landscape of social responsibility evolves rapidly, with geopolitical shifts and societal changes. Remaining vigilant and responsive to these changes is essential to upholding our commitments.
  • 3. Governance Oversight: While governance may seem straightforward, the reality is that boards often face challenges in critically assessing their own practices. Vigilance in governance starts at the top and requires continuous evaluation.

In today’s business environment, companies must navigate a myriad of regulations and expectations related to sustainability, diversity, inclusion, ethics, and transparency. The breadth of these considerations is vast and requires constant attention.

ESG serves as a tool to achieve and be held accountable for sustainability, a goal that transcends generations. Cultivating a sustainability mindset among decision-makers and influencers within the organization is crucial. They need not hold formal positions of authority but should influence and advocate for responsible and sustainable practices, recognizing our duty to stakeholders present and future.

I consider myself fortunate to collaborate with CEOs who recognize ESG as not just a moral imperative but also a sound business strategy. Their leadership underscores the potential for ESG initiatives to yield returns on investment and drive growth.

Indeed, sustainability presents not only a responsibility but also an opportunity for innovation. Across industries, including our endeavours at Beyond Gravity, in insurance, and banking, we explore how sustainability can catalyse the development of new products, services, markets, and revenue streams. We leverage sustainability to chart a course towards success and resilience.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

ESG x Governance (5): The CSRD Challenge – Céline Abecassis-Moedas

This is the fifth of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned business academic who is also an INED, and explore the insights she has gained in the course of her career.

Céline Abecassis-Moedas

Céline Abecassis-Moedas is an academic and corporate leader, with over 25 years of experience spanning academia, consulting, and board positions. She is the Dean for Executive Education and Associate Professor at Católica-Lisbon School of Business and Economics, and serves as a non-executive director on the boards of CUF (chair of the innovation and sustainability committee), Vista Alegre Atlantis in Portugal, and Lectra (Chair of the remuneration committee and member of the CSR committee) in France. She also was on the board of Europac in Spain and of CTT and Grrenvolt in Portugal. She earned her PhD from Ecole Polytechnique, a MSc from Dauphine University (France), and is also an INSEAD IDP-C certified independent non-executive board director.

How does ESG, particularly with the emergence of the CSRD, impact company governance and success?

In my view, the relevance of ESG for overall company governance and success is multifaceted. Firstly, it’s a requirement. Legislation is evolving, and 2024 is a pivotal year as companies will need to report increasingly detailed ESG information due When I say it’s a requirement, I’m referring to the Corporate Sustainability Reporting Directive (CSRD). The first cohort of large companies will need to report on their fiscal year 2024 activities under this directive.
From my perspective, obtaining this information is quite challenging, especially for SMEs, which are often suppliers to the companies on whose boards I serve. It’s like we’re reinventing accounting or creating a parallel system of accounting. We must report all these new metrics, and many companies are unsure where to begin.

What’s the added value of ESG beyond compliance and risk management, considering your board and academic experience, and do you see any geographical variations in its importance?

Yes, it’s an interesting topic. Last week, during our Advanced Management Programme (AMP)—the most senior programme we have— I invited a guest speaker (a female seasoned expert in the area) to discuss the Corporate Sustainability Reporting Directive (CSRD) because it’s a major topic. She titled her talk “CSRD: Challenge or Strategic Opportunity,” which aligns perfectly with what we were considering. While not all companies view it as an opportunity, some definitely do.
For example, I serve on the board of a company in technology for the fashion industry that focuses on computer-aided design and manufacturing. They report on metrics such as energy usage and improvements over time. This company structurally benefits the environment by helping its clients reduce waste. However, since it’s their clients’ waste being reduced, it doesn’t directly reflect on the company’s own sustainability metrics, which is frustrating. The fashion industry is highly polluting, but by enabling on-demand fashion and reducing waste, this company contributes to sustainability. This exemplifies how CSRD can be seen as an opportunity rather than just a challenge.
On the other hand, I also sit on the board of a ceramics company, which uses a lot of energy. The recent rise in energy costs has been a financial nightmare for them. They’re now considering changing their energy sources to become less dependent on traditional, more polluting options. For them, CSRD is more of a challenge, but it can become an opportunity.
I notice more industry-specific differences rather than geographical ones. My experience is mostly in continental Europe—Portugal, France, and some in Spain. I suspect the topic is less pressing in the US, but I don’t have detailed information on that.
I am an optimist and believe CSRD presents opportunities for those who understand what is at stake. In the last two years, I’ve seen the growing importance of our role as non-executive directors in this area. While executives drive these initiatives, we have a significant responsibility bring external perspectives and best practice from company to company. This makes our work as non-executives particularly valuable.

What alignment challenges do you observe between executive leadership and non-executive boards in terms of ESG, and what recommendations would you offer to address these?

In terms of alignment, I also see the need to balance the Environmental (E), Social (S), and Governance (G) aspects of ESG. When people talk about ESG, they often prioritize the Environmental part, while the Social and Governance parts receive less attention. Two companies where I serve on the board—a tech company, and a healthcare company—are very people-oriented. Both have faced the issue of doing a lot in terms of social initiatives but not reporting it effectively. It’s a pity because their efforts are not visible. They needed to make an effort to report better, use more KPIs, and show their social impact more clearly.
The environment part is always present and significant but difficult to address. As for governance, it’s often assumed to be well-managed, but it should receive more focus. This could be because governance was previously well-handled, or because the other two areas need so much attention that governance is overlooked. I believe it’s a bit of both.
In governance, two things are particularly important, diversity and processes. Diversity on the board is essential, beyond just gender diversity. Diversity is becoming mainstream, but it’s crucial to extend it beyond gender. More than anything it is the existence of processes that guarantees good governance.
Finally the balance between the three and they interact is core and needs to be looked at.

What are the main gaps for boards to become ‘ESG fit,’ and how can they efficiently up-skill directors? What should Board Chairs prioritize?

What I’ve been observing more and more from the inside is that, in the last year or two, companies are increasingly hiring for ESG roles. They are bringing in consultants and hiring dedicated ESG personnel within the company. It’s like we’re creating a second accounting system and now building the team for it.
If you compare it, today a company might have an accounting team of 25 or 30 people for regular accounting and only two or three for ESG. It will take time to build up to the same level, but that’s where we are getting. As both a board member and an academic, I see that even the most dedicated companies often don’t know where to start. The CSRD rules are very demanding, still being designed, and this creates a significant challenge. Companies often don’t know where to begin. They are seeking help from consultants, but even the consultants are still learning. This situation is both exciting and a bit scary because we are all learning as we go.
For boards to be “ESG fit,” the biggest gap to close is in understanding and capability. Boards need to prioritize building their own knowledge and skills in ESG. This means Board Chairs should create ESG training for board members, hire or consult with experienced ESG professionals, and integrate ESG considerations into the core strategy of the company.
Efficient and effective up-skilling can be achieved through dedicated training programs, learning from best practices, and ensuring ongoing education on the evolving ESG regulations and expectations. It’s essential to foster a culture of continuous learning and adaptation to keep up with this rapidly changing field.

What are the primary ESG challenges ahead for non-executive boards, and how can companies address them effectively?

I think the big challenge is not just having a strategy and an ESG strategy separately, but rather integrating ESG as an essential part of one cohesive strategy. Not all companies are ready for this integration, and in some cases, it might require significant changes that are daunting for them.
The role of the board is essential here. Because we have a broader perspective and can bring insights from across different companies, non-executive directors have a unique responsibility. For example, I serve on the boards of three companies with different activities, but the discussions we have in one often become relevant in another.
One example I’m proud of is how we integrated ESG into the variable remuneration of the CEO at one of the companies. As the Chair of the Remuneration Committee and a member of the ESG Committee, I led multiple discussions to include ESG criteria in the CEO’s variable pay. For 2024, 50% of his variable remuneration will be based on ESG performance, which is a significant change. Next year, we plan to extend this to a few more executives and eventually further throughout the company. This makes ESG truly strategic; if variable remuneration is tied to both EBITDA and ESG, it changes priorities significantly.
Another critical issue is getting the right information, which is often challenging. In the private healthcare group that I sit at the board of, we discovered that anaesthetic gases had the same carbon footprint than their entire fleet of vehicles. Initially, this seemed like a mistake, but after thorough checks, including comparisons with NHS data, it was confirmed (Desflurane has a significantly higher global warming potential compared to Sevoflurane). We then had to convince doctors to switch to the gas with the lower carbon footprint. This example illustrates how crucial it is to have accurate information; without it, significant impacts can go unnoticed.
In summary, for boards to be “ESG fit,” they need to integrate ESG into their core strategy and ensure accurate information flow. Prioritizing ESG training, hiring knowledgeable professionals, and setting clear ESG metrics in executive compensation are key steps. This approach not only aligns short-term actions with long-term goals but also makes ESG a fundamental part of the company’s success.

Could you provide an overview of University’s upcoming CSRD preparation program, its objectives, target audience, and key features?

The programme is still a work in progress, we aim to launch it by October. It will be called ESG Strategy and Reporting. The idea is to address the needs of the many companies that will soon be required to comply with the CSRD. For example, in Portugal, around 1,200 companies will need to report, a significant increase from the current number. The top 50 companies probably have the resources and knowledge, working with large Audit firms. However, the remaining thousand companies probably don’t know where to start.
Our goal is to build a programme that helps guide these companies through compliance. We’re still finalizing the length and cost because it needs to be accessible. We also want to involve the right experts, as few people have deep knowledge of the CSRD requirements. The programme will include expert instruction and numerous guest speakers from top companies that have already begun this process. We aim to create a community where participants can share best practices and support each other during and after the program. These companies are not in competition; they are facing the same challenges and would benefit from working together.
We see this as a significant opportunity, but we acknowledge that auditors are already moving into this space, which is only fair. We will need to collaborate with them to ensure the programme’s success.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

ESG x Governance (3): An ESG Executive’s Insights

This is the third of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned ESG executive, exploring the insights she imparts to non-executive boards regarding ESG-focused interactions.

Kiku Loomis

Kiku Loomis is a seasoned ESG professional bringing 20+ years of expertise in business and sustainability. Guiding global Fortune 500 companies, she strengthened sustainability programs and managed PVH’s human rights supply chain. Kiku directed traceability and certification at the Rainforest Alliance, later integrating Rainforest Alliance and Utz Certified. In 2000 she co-founded World Monitors, and launched the Fair Factories Clearinghouse, acquired by Worldly in 2023. Kiku is a director for the New York Solar Energy Society, former Foundry Theatre director, and on the Advisory Board for a biodiversity research project in Maui. She’s also a member of the ExCo of the INDEVOR Global Club and a founding member of the INDEVOR student club.

How do you perceive the significance of ESG for overall company governance and success?

My inclination is distinctly biased toward the complete integration of ESG into a company’s strategic framework. Over my 25-year career in sustainability, which began in my early 30s, I’ve consistently viewed ESG issues as pivotal business risks. Whether it’s human rights concerns or historical challenges like pollution, these have been part of our discourse for decades. ESG, in its current form, provides a more systematic and advantageous approach for companies, addressing risks while presenting new opportunities.
My focal point has always been ensuring a harmonious alignment of board strategy with the diverse opportunities encapsulated in ESG. For instance, aligning strategy with opportunities like electric vehicles or solar power significantly enhances the prospects of success. As we navigate the challenges of surpassing planetary boundaries, understanding dependencies becomes paramount, especially concerning supply chain risks. ESG serves as an invaluable framework, extending beyond immediate financial considerations to encompass societal values crucial for long-term health and value creation. While it may not yield immediate gains, I firmly believe that ESG plays a pivotal role in shaping a company’s medium and long-term success. This encapsulates the high-level, theoretical perspective I bring to the discussion.

What’s the key ESG misalignment between executives and non-executive board members, and how can non-executive boards effectively address and bridge this gap?

To start out: it is worth noting that not every board is the same! Boards may lack specific ESG knowledge, despite a noticeable rise in ESG discussions, especially in Europe. While board members may be aware of ESG matters, their proficiency in operational aspects could be limited. If an alignment gap exists, it might stem from a divergence in expertise between the board and the company. Turning to the second part, the ongoing discourse on ESG and the board’s agenda has prompted various training opportunities, though current materials often remain foundational. While non-executive board members may have a reasonable ESG understanding, the current imperative is to delve deeper into issues specific to their organizations. We’ve moved past the introductory stage, requiring executives and board members to engage in more profound discussions and tailored learning experiences aligned with their organizational nuances.

What crucial gap must boards address to achieve ‘ESG fitness,’ and how can they efficiently enhance skills in this area? What should Board Chairs prioritize to foster ESG competency among directors?

A significant source of strategic tension derives from a systemic conflict between traditional make-take-waste business models and ESG imperatives, and it calls for a reconsideration of practices, particularly in sectors like apparel, where a shift from linear to circular models is crucial. The challenge also involves the misalignment between financial incentives in capital markets and ESG principles, leading to decisions where financial interests clash with ESG perspectives.
Managing this tension falls to CEOs, who must present these complex issues for collective deliberation. Achieving complete alignment between ESG goals and financial objectives is a broad challenge requiring political attention, with the European Union’s regulatory initiatives seen as a potential model. For board chairs, the recommendation is to foster inclusive conversations across the organization, steering clear of siloed approaches. Integrating ESG considerations into the overall governance framework, whether through committees or alternative mechanisms, is crucial for a holistic and effective approach.

As 2024 approaches, what are the main ESG challenges for non-executive boards, and how can companies strategically address them?

The first imperative is fully integrating ESG into a company’s core strategy to avoid conflicting objectives, going beyond compliance to create a seamless integration into the broader strategy—a crucial safeguard amid evolving ESG landscapes.
A top challenge for multinational companies is to conform with emerging reporting requirements, including developments like the European Corporate Sustainability Reporting Directive . This is a substantial challenge for global companies grappling with various jurisdictional reporting requirements. While it entails significant investment and meticulous processes, it’s vital to perceive it as more than compliance—viewing it as a catalyst for progress and valuable strategic insights. This era compels companies to collectively comprehend and fulfil ESG commitments for transparency and accountability.
Then, as we approach 2030, the focus must extend beyond climate commitments to effectively implementing them. Despite substantial challenges, the innovation spurred by collective ESG focus, particularly in climate action, presents significant potential.
For governance, fostering innovation and welcoming solutions aligned with ESG goals, especially in climate-related initiatives, is a strategic imperative propelling progress and integration into the core of business.
Lastly, one emerging concern for boards is the emerging prominence of Biodiversity and Nature loss, with a “nature positive” movement addressing the alarming loss of biodiversity and the impending sixth extinction.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently sits on the boards of Polygiene AB and INSEAD’s International Directors Network.

ESG x Governance (2): Board Level ESG Readiness

This is the second of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, the we look at ‘ESG Readiness’ at non-exec board level, skill gaps, and how to close them.

Federik Otto, Sustainability Boards

Frederik Otto is the founding Executive Director of The Sustainability Board (TSB), an independent think tank that aims to advance sustainable leadership and governance. He has been a leader in consulting multinational companies on organisation and human capital strategy for over 15 years, with a more recent focus on sustainability and ESG. Frederik hosts the ‘Leadership Conversations by TSB’ podcast and further is a member of the Council for Inclusive Capitalism, and a fellow of Salzburg Global Seminar. Frederik has published multiple articles on the Harvard Law School Forum on Corporate Governance, and regularly writes for various other resources.

What is the importance of ESG considerations for a company’s governance and success?

While acknowledging ESG’s importance in corporate success and governance, I believe it doesn’t capture the entire narrative. To make it more tangible let’s capture sustainability by the acronym CHANGE:

  • C = Climate change;
  • H = Human rights;
  • A = AI and emerging technology;
  • N = Nature and biodiversity;
  • G = Geopolitics and conflict;
  • E – Equity, diversity, and inclusion.

All these issues illustrate that we have to go beyond ESG, and it is urgent to consider global impacts beyond our company’s sphere. Even if a business has a small environmental footprint, awareness of climate change and broader factors is crucial.
ESG, viewed as an organisational framework, is valuable for this purpose. It serves as a reporting tool, ensuring accountability and establishing a stakeholder governance framework. ESG criteria should be embraced for technical understanding, as they are essential tools to keep us on track. However, we must also remain mindful of the broader societal factors and dependencies that impact the business.

What is the main takeaway or key learning from this year’s findings in the recently published 2023 Annual ESG Preparedness Report?

Every year we evaluate whether boards have formalised an ESG policy, established a sustainability committee or delegated ESG matters to another committee. We also look at the materiality and quality of their charters, and we analyse board diversity and individual ESG engagement of directors of large, publicly listed entities.
This year our ongoing reporting initiative, in its 5th edition since 2019, reveals both familiar trends and new insights. Positive aspects include a rise in sustainability governance, though the messaging from boards in their disclosures is misaligned. Despite a gradual increase over the years, director engagement on ESG matters seems to be plateauing. The percentage of directors tasked with ESG oversight who are also engaged on the topic has risen from 16% in 2019 to 45% in 2022, and fallen to 43% in 2023 – a worrying trend.
Consistently, women directors play a pivotal role in driving sustainability governance, showing over 60% more engagement than male counterparts. A trend consistent since our first report, and a clear case for more gender equal boards.
We also found that management experience is as a key driver for ESG engagement, with directors leveraging their expertise implementing sustainability strategies in executive roles.
Another trend is the adoption of the increasing articulation of ESG in board policies, particularly among American boards, despite the current political polarisation on the ESG moniker.
In summary, awareness of the need to improve sustainability governance is rising, but engagement is fragmented, and skewed towards women.

What is the key gap in aligning boards with ESG standards, and how can Boards of Directors efficiently enhance their skills in this area? What are the key priorities for Board Chairs in this context?

Indeed parts of our research focus on assessing individual board member engagement on ESG. Using a simple checklist across all of the past five years, we find three key criteria for ESG engagement.

  1. Firstly, business experience, like executive or non-executive involvement in sustainability strategies or governance.
  2. The second criterion is personal or non-business experience, such as engagement with relevant non-profits.
  3. The third point is formal education or certification in sustainability, or being a thought leader on the topic.

No hierarchy exists among these criteria, and in our opinion experience can be gained through various avenues. ESG engagement signifies personal commitment, either visible through public engagements like conference and round table attendance, thought leadership on social media, or communicating the business strategy actively in board disclosures or on capital markets days. The level of formal education required depends on the board’s complexity.
As for the role of the chair leading on ESG engagement, jurisdiction surely matters, with American chairs still often doubling as CEOs. Here the role of the Lead Independent Director is just as important. This said, assigning too much accountability on one person should be avoided. The chair, especially if independent, is vital in holding the board as a system together, facilitating resource allocation, enabling committee formation, and overall governance of sustainability. The key is ensuring cohesive board operations with checks and balances for effective sustainability governance.

How do sustainability practices of privately owned or family companies compare to large publicly traded companies, considering the report’s emphasis on the latter?

I’m also an investor in a fast-growing, private UK startup in the food industry, and can see the different governance dynamics very closely in comparison to large public enterprises. For a start, private entities, unlike public companies, have fewer and more personalized interactions with stakeholders, especially investors. The accountability is simply to less people and entities, with private companies generally smaller and less rigorously regulated. That also makes gathering data on sustainability more manageable. Structurally, most private companies aren’t burdened with the same disclosure and reporting requirements as public counterparts. However, they can learn from ongoing standardization efforts and voluntary adopting sustainability governance practices.
Family businesses have a unique opportunity to drive sustainability, especially during generational succession. Newer generations are attuned to sustainability concerns and aim to build a positive legacy. Family businesses can leverage their organization’s might beyond philanthropy, acknowledging and reconciling with, say, environmental impacts caused in the past. Decision dynamics within family businesses, public or private, allow faster implementation of sustainability initiatives compared to non-family controlled companies.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently sits on the boards of Polygiene AB and INSEAD’s International Directors Network.

ESG x Governance (1): The Pulse of EU Regulation

This is the first of a series of interviews intended to help our IDN members grapple with the ESG topic. Given the recent  importance of EU regulation in the area of ESG, and reporting specifically, we chose to conduct the first such interview with a truly long-standing expert in the matter.

Pascale Moreau, Ohana Public Advisory

Pascale Moreau is a seasoned professional with over 15 years in public affairs across diverse industries including textiles, ICT, and healthcare.
As an active citizen and nature enthusiast, she specializes in sustainable development strategies and adeptly navigates complex legal landscapes. Throughout her career, Pascale has excelled in facilitating discussions, bridging differences, and guiding stakeholders toward common goals, driving positive changes. In 2019, she founded Ohana to help companies formulate sustainable development strategies tailored to their markets’ challenges and opportunities.

In your view, drawing on your experience, what is the essential role of a board of directors in public affairs and policy engagement?

In the realm of public affairs, the pivotal role of shaping strategy is essential for aligning agendas with business needs, extending its impact to associations and multi-stakeholder initiatives. The Board of Directors plays a crucial role in navigating this landscape, bridging internal workings with external dynamics. Larger organizations in familiar sectors often designate roles within the Board for public affairs, while in newer sectors, its introduction is met with urgency and the need for preparedness.
In my experience, organizations attuned to public affairs quickly respond to its nuances, ensuring the Board is well-versed. During the 2017-2019 transition, this was evident in the textile industry. In multi-stakeholder initiatives, boards may appoint a specific individual for public affairs, but their effectiveness relies on influence and the ability to drive recommendations, contributing substantively to boardroom decision-making.

You mentioned the unique default structures in different industries, particularly noting the relatively recent engagement of the textile industry. From a European standpoint, which industries have historically been firmly established in public affairs, and, in broad terms (excluding specific businesses), which ones generally demonstrate a greater inclination for such engagement?

In sectors like ICT and electronic equipment, a sustainability lens is integral, driven by long-standing regulation. Leadership in these industries comprehends the importance of sustainability investments. Similarly, food, beverages, and agriculture, well-represented in Brussels, showcase heightened awareness and robust organizational structures. Operational roles handle day-to-day tasks, but top executives from these sectors take the lead in significant events like COP 28, indicating maturity in global sustainability engagement.
Conversely, some sectors, like textiles, historically lagged in sustainability but are now catching up. This observation highlights a proactive stance in regulated industries, contrasting with a slower initial embrace in sectors like textiles.

How can boards of directors augment their capabilities, particularly in the context of public affairs and policy development, building upon our recent discussion?

In organizations with dedicated public affairs teams, fostering collaboration is crucial. Spending quality time with the head of public affairs and national teams in key markets ensures a nuanced understanding of legislative landscapes, focusing on areas like sustainability, trade, and digital domains. Regional nuances in public affairs, whether in the US, EU, or Asia, underscore the importance of engaging with governments, even where public affairs practices may be less prevalent, as such engagements yield tangible business impacts.
Promoting dialogue between business and public affairs professionals, especially in the same room, facilitates mutual education on legislative changes’ financial and strategic implications. For organizations without a dedicated public affairs team, integrating this perspective into MBA programs ensures early recognition of the broader business advantages of engaging with stakeholders. Seeking insights from organizations with established public affairs functions or hiring specialized consultants becomes invaluable in navigating an evolving landscape, emphasizing collaborative stakeholder engagement for a sustainable future.

What are your anticipations for policy trends in the mid and long term, both globally and within Europe? How do these expectations influence the role of a board of directors?

Navigating policy expectations, especially in the realms of digital and sustainability, proves challenging, signaling heightened regulations for industries like textiles. In the mid-term, the EU Green Deal holds significance, serving as a foundational benchmark. For businesses, compliance with voluntary legislation becomes a pivotal board-level decision, prompting a comprehensive reevaluation of processes and external communication to shareholders about the nuanced balance between profitability and compliance.
In the long term, the momentum for sustainability initiatives persists, albeit with a potential EU-level slowdown for implementation focus post-2024 elections. Businesses seek guidance for compliance, placing the Board of Directors in a central role to identify hotspots and manage risks during implementation. Globally, Europe’s lead in sustainability trends, such as extended producer responsibility, might influence global replication. The Board’s responsibility extends to understanding and supporting the entire supply chain, allocating funds for implementation, and advocating for a smooth transition, emphasizing a holistic, 360-degree perspective for a sustainable future.

In your view, what are the primary priorities for boards of directors in the short term, specifically in 2024? Given the ongoing developments within the EU and globally, what aspects should boards emphasize?

Key directives, namely the Corporate Sustainability Reporting Directive (CSRD) and the European Corporate Sustainability Due Diligence Directive (CSDDD), are currently at the forefront, emphasizing due diligence. Despite potential reductions in board liability in the CSDDD, companies must exhibit due diligence for responsible business recognition. The Board of Directors holds a pivotal role in shaping policies and driving transformative change in response to these directives.
The Taxonomy Regulation, initially perceived as relevant mainly to investors, extends its reach to companies, notably impacting the Board of Directors engaged with investors. Mandating reporting on investments, it requires the Board to establish proper reinvestment processes, accentuating its role in driving impactful change.
In 2024, a crucial year of transition in the EU, marked by elections and industry reevaluation, significant legislative changes are anticipated. The Board must proactively address this, allocating resources and initiating comprehensive compliance projects for short-term action. Obtaining insights from public affairs or legal teams is crucial for informed business decisions, not only within the EU but also globally, emphasizing the paramount role of the Board in navigating evolving regulations.

Concerning directors’ liability, particularly amid the ongoing deliberations on the European Due Diligence Directive, where does this aspect align within the broader European legislative framework you are navigating?

The Corporate Sustainability Due Diligence Directive (CSDDD) represents a significant move by the EU to hold businesses accountable for their social and environmental impacts. While the official text is pending, a crucial political agreement was reached in December 2023, with finalization expected in Q1 2024. The scope of the directive includes companies with 500+ employees or a global annual turnover of 150+ million and those with 250+ employees and a turnover of 40+ million in high-risk sectors like textiles, food, and minerals. The construction sector is also under consideration for inclusion. Parent companies of large groups and non-EU companies meeting turnover thresholds in the EU are encompassed, while the financial sector is partially included, focusing on “upstream” due diligence and climate-related obligations.

A key feature is the requirement for companies to adopt a climate plan aligned with the Paris Agreement. Compliance with the Corporate Sustainability Reporting Directive (CSRD) is linked to the adoption of CS3D climate plans. Larger companies, with over 1000 employees, can tie additional financial incentives, such as variable remuneration, to plan fulfilment. The directive introduces civil liability for damages caused by a company through intent or negligence, with a minimum 5-year limitation period. Notably, director duties have been deleted from the provisions. While these provisional agreements provide a framework, the final text is pending, and technical meetings are scheduled to address open questions, with the European Parliament voting in plenary in April and Council approval anticipated in April/May. The financial sector’s extent of inclusion and additional details may be refined in the final legislation.

You noted an anticipated release of a substantial volume of legislation at the end of Q1 or the beginning of Q2 2024. Could you offer an overview, at least by name, of the key legislations you expect to be significant?

In 2023, notable sustainability regulations reached finalization, including the Deforestation Regulation, EU Corporate Sustainability Reporting Directive (CSRD), and Empowering Consumer Directive. While the Empowering Consumer Directive’s final text is pending, an agreement outlines a framework for sustainability communication. Anticipated finalizations in Q1-Q2 before the EU elections include the Packaging Regulation, Forced Labour measures at the EU level, Eco-design Legislation, and the Right to Repair. However, advanced regulations like Green Claims Directive and the Waste Framework Directive are unlikely to be finalized.
The urgency to avoid disruptions before the elections is evident, even if subsequent guidelines and secondary legislation are needed for clarity and refinement.

How should the Board of Directors respond when companies see impending policy and legislative changes, particularly related to ESG, solely as compliance requirements rather than strategic opportunities?

The establishment of common rules marks a satisfying moment, potentially mitigating free rider issues. Anticipating stress among companies, a crucial response involves creating a compliance team and undertaking a comprehensive compliance project. This intricate exercise requires mapping sustainability, digital, and trade considerations, necessitating a dedicated individual reporting directly to the Board of Directors. The seriousness of compliance is underscored by its potential impact on the business’s existence, demanding a proactive stance and ongoing commitment, especially in allocating resources and enhancing IT infrastructure. Ensuring the board’s dedicated focus is crucial, with potential reconsideration of its composition if necessary, reflecting a commitment to evolving landscape expectations until 2028-2030.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently sits on the boards of Polygiene AB and INSEAD’s International Directors Network.

Governance of Corporate Renewal and Sustainability

Sustainability is increasingly moving to the top of many company agendas. As a result, investors increasingly require reporting on their ESG (Environment, Social and Governance) agenda with concrete actions to follow. What is the board’s role in guiding companies on this new path? What are the better practices that are emerging?

By Karen Loon IDP-C and IDN Board Member

In an increasingly fractured world, many of the significant global risks which the world faces relate to sustainability risks. These risks include climate action failure, human environmental damage, biodiversity loss and extreme weather. These risks, in addition to other challenges arising from the increasing adoption of technology, the pandemic and geopolitical risks are having a significant impact on companies and their boards.

What is the role of company boards to guide their companies on this new path? Further, what are some of the better practices which are emerging?

In a session facilitated by Liselotte Engstam IDP-C and IDN Board Member, INSEAD Directors Network (IDN) members, together with members of the INSEAD alumni Community Impact Challenge recently learnt more about these areas from Mats Magnusson, Professor in Product Innovation Engineering of the KTH Royal Institute of Technology, and Ludo Van der Heyden, Emeritus Professor of Technology and Operations Management, and the INSEAD Chaired Professor of Corporate Governance at INSEAD.

Increasing pressures require boards to better guide companies to renewal

Companies need to renew themselves more and faster than ever before.

“This renewal [is not] actually about becoming slightly better at things – it’s about changing things quite radically,” noted Mats Magnusson.

These changes are not only due to digital – organisations also need to address new values, with sustainability being one of them.

Mats added that various studies by academics and consultants have shown that companies have reacted differently to these challenges, with some trying to innovate, and others struggling because of the present pandemic. However, what is common to most of them is that companies realise that if they just continue the way they have been doing things the last few years, they will not be successful in the future. As a result, there is a huge need for innovation.

“Actually, a large part of that innovation has to address sustainability”, he added, something which is not new to boards.

Sustainability and climate change require all companies to revisit their purpose, strategy and business model.

Based on research, most board members and directors agree that they spend a lot of time discussing governance about risk, regulation, and reporting, which is necessary.

However, there are several aspects that boards are not discussing enough. These includes sustainability, as well as culture and new technologies. Finally, boards need to spend more time on their strategy, value creation disruption, innovation.

These are not new findings; however, boards do need to improve their level of discussion on these areas to ensure that they are addressing them.

 

The importance of sensing, pivoting and aligning by boards

Three dynamic capabilities that boards can adopt are sensing, pivoting and aligning. Both sensing and pivoting have a positive correlation with innovation performance. Further, aligning positively impacts firm performance. However, pivoting can also harm firm performance.

Areas which boards can work on:

  • Sensing – Look at the external world and understand what is changing and impacting us, whether technology, business, customers or the environment. Become better at scanning the horizon for changes with an open mind. Observe changes in the broader environment, not only in your own industry but adjacent and completely different industries. For example, technology-wise, this may mean that companies need to consider completely new technologies that they have not considered before. However, Mats notes that “what we should not address is to focus on our purpose. If we focus on our purpose, then we’ll have some kind of limitation once we are actually looking.”
  • Pivoting – is about taking the right opportunities, taking action and daring to make strategic changes that include some form of innovation. Develop your company’s risk and opportunity profile by looking into the things disrupting your companies – perhaps new technologies, the new business models, or new companies. This information should be used to inform the company’s strategy.
  •  Aligning – This is about combining the new and the existing capabilities and business models. Find a good balance between the short-term value pressure – companies do need cash as well as longer-term value creation. It is essential to ensure that the innovation strategy is a key part of the business strategy.

 

Boards need to discuss their approach and capability to guide their company’s ESG agenda

Mats shared that more can be done by companies to integrate sustainability into their strategies. Of companies recently surveyed by SISU Boards:

  • Lack of integration of sustainability into strategy – Almost 45% actually do not yet integrate sustainability into their strategy. Companies need to become more granular – set goals for the sustainability action and find ways of evaluating if the things they are doing are the right ones.
  • Lack of board accountability for sustainability – As many as 60% of boards have not yet discussed how to engage and consider sustainability. For instance, should they have a committee focusing on this or several committees, and in what areas?

Boards can improve their sensing, pivoting and aligning capabilities

Boards can do more work to improve their capabilities when it comes to sustainability.

  • Sensing – 46% don’t have good processes to foresee changes and impacts on sustainability and business. Additionally, 48% don’t actively monitor new solutions that expedite their business sustainability towards their purpose.
  • Pivoting – 49% aren’t good at taking balanced risks towards ensuring corporate renewal. Further, 56% do not ensure that their strategy harnesses and reshapes the ecosystem for better sustainability and differentiation.
  • Aligning – 51% are not yet good at balancing short- and long-term value creation. In addition, 61% have not yet implemented a clear and effective innovation system, monitoring innovation activities and culture.

Board best practices to experiment with

Ludo Van der Heyden suggested some case studies and best practices for board renewal on sustainability around sensing, pivoting and aligning.

He also noted that it is important to select a modern, ambitious and humble chair, and board members. Boards should also rethink their role and focus, using Fair Process Leadership as support.

It is critical to structure the board and the organisation for sensing, developing the capability of timely pivoting, and continuously aligning and re-aligning.

Finally, it is vital to have collective leadership at the board level, and that it is proactive and engaged.

 

INSEAD Directors Network (“IDN”) – An INSEAD Global Club of International Board Directors

Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1,500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights with our LinkedIn and Twitter followers. We highlight our member through quarterly sharing of their new board appointments, and once a year, we give out IDN Awards to prominent board accomplishments. We provide a peer-to-peer mentoring and board vacancy service, and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.

INSEAD Corporate Governance Centre (“ICGC”)

Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance

 

The Unintended Consequences of Corporate Governance

The ethical and legal drivers of stakeholder primacy

As an independent director, to whom are you accountable? Should law or ethics be defining your decision-making position at the board?

By Karen Loon IDP-C and IDN Board Member

Over the past 18 months, the debate between shareholder versus stakeholder primacy has come under the spotlight.

With a heightened emphasis on the collective well-being of stakeholder communities worldwide, corporate boards are under intense scrutiny to find a delicate balance between maximising shareholder and stakeholder value.

The COVID crisis has revealed that focusing on shareholder value alone is no longer a viable option. Business leaders and corporate boards have a critical role in creating sustainable value for economic performance and societal progress. While stakeholder capitalism is the key to unlock inclusive sustainable growth, corporate boards must not overlook the associated risks involved in stakeholder governance.

Why is this important to independent directors?

Directors who operate in common law countries would be fully aware of their “fiduciary responsibility,” and use it broadly when discussing their responsibilities as independent directors.

However, not all countries have principle-based laws, which impacts the role of independent directors.

With the rising need for companies to focus on sustainability and digital resilience, board members need to consider whether their companies can afford to wait for regulatory and legal frameworks to be implemented (reactive). Alternatively, should market-driven strategies be based on stakeholder expectations and ethical considerations driving decision making (proactive)?

IDN members recently discussed these critical topics in a session led by Helen Pitcher OBE, IDP-C and IDN President, and Cleopatra Kitti IDP-C and IDN Cyprus Ambassador held on 8 September 2021.

New realities for businesses, governments and societies

Climate change, the pandemic, social inequality and digitalisation have ushered new realities for businesses, governments and societies.

Helen Pitcher OBE noted that in the past 15 months, there has been increasing and wide-ranging debate about the unintended consequences of corporate governance.

“Up until, maybe five or six years ago, the view was boards were there, basically to look at, and ensure that the investors were being appropriately safeguarded … It [was] very much [focused on] fiduciary duty,” Helen noted. This is the reason why, in the past, there were more former CEOs and accountants joining boards.

“Now days, it’s a much broader agenda,” she highlighted.

The pandemic has now accelerated all of this, with the need for companies and their directors to address all of the environmental, social, and governance issues, as well as fiduciary issues.

Helen mentioned that some have debated whether boards could say that they are only there to look after shareholders.

There has been a change in views towards companies thinking much more broadly about their culture and values and doing the right thing for the environment, society, etc, within an appropriate governance framework.

Further boards have a fundamental role in overseeing the sustainability of their organisations instead of just the here and now.

Adding to this, she said, “the executive is there for the here and now, within the context of the longer term. But typically, board directors serve for longer than the average CEO or CFO, so they are custodians of the future.”

“There was a recognition that there needs to be a change in how we link remuneration to these goals, to make sure that attention is being paid to them because we know what gets measured gets done usually. [A question is] how we still take account of the fiduciary responsibilities within the broader context of all stakeholders, and not just investors.” (Helen Pitcher OBE)

Areas for boards to consider

  • Sustainability is no longer a choice – it is an imperative.
  • Shareholder and stakeholder interests are not an “either, or” option. It is an imperative.
  • The Business Roundtable has set its mission towards the welfare of all stakeholders (not just shareholders). How is that welfare defined? How is long term value defined?
  • How do boards reframe the agenda for executives in order to ensure “sustainability and stakeholder welfare?
  • Should regulation drive the agenda, or should leaders lead by values that frame strategic decision making in doing what is right for business and society?
  • What is the methodology for making trade-offs (decisions that serve the interests of shareholders vs stakeholders?).
  • Are some stakeholders more important than others? Who decides and by what criteria?
  • How does the board ensure the dividend and the long-term value for sustainable societies?
  • How does the board align executives’ compensations/incentives and interests towards what determines “sustainability”?
  • How do accounting rules adapt towards sustainability, and how does the regulator enforce disclosure on ESG rules?
  • Who does the board owe fiduciary responsibility to? Does “fiduciary responsibility” apply to all countries in all legal systems?

 

Increasing focus by larger investors, and other stakeholders on ESG and longer-term sustainability rather than shorter-term returns mean that boards need to openly and frequently discuss what this means for them.

Cleopatra Kitti added that boards also need to consider that stakeholders have increasing expectations of transparency. So, an important question for directors is how their companies track what they define are the right things to do, considering, for instance, the tensions between shareholder value and stakeholder value, sustainability and profitability, or cashflow preservation and sustainability.

She also noted that the upcoming COP26 (UN Climate Change) Conference in November 2021 is likely to increase investors’ focus on transparency and robust accounting mechanisms, leading to more clarity on how companies explore these areas. Further, the expected European Central Bank taxonomy on banks’ risk of capital may increase the cost of capital for certain types of industries.

Not every legal system recognises fiduciary responsibility as a board obligation or responsibility. So, it brings us back to the point that this is about ethics and culture, and setting the tone at the top, more than a compliance or regulatory, for a regulated decision-making process. So, it’s up to the board to define in practice values of what is sustainable and the right thing to do.” (Cleopatra Kitti)

Areas which IDN members discussed included:

  • Companies should do the right thing – pursuing sustainability and profitability and support shareholders and stakeholders need not necessarily be a trade-off.
  • It is crucial to get ESG into the mainstream board agenda. Responsibility for this rests with both the board and management.
  • Set the right KPIs as the wrong ones could lead to unintentional consequences. Some leading organisations now have integrated their ESG ambitions into their company ambitions and aligned this to the bonus system of executive committees.
  • Reset remuneration levels for non-executives, given the increasing levels of responsibility and accountability they hold.
  • Stakeholders will likely ask many more questions including on ESG at AGMs in 2022. Again, these are more likely to be in person rather than virtual.

In conclusion, as Helen Pitcher OBE summed up, “it is a hard topic but it’s not a topic that boards can avoid. It should be part of the strategic imperatives of the organisation.” It is a constantly evolving journey instead of a static situation on which boards need to go on.

Cleopatra Kitti added, “it’s an innovation journey. There is not a one size fits all and there are not prescriptive indicators or decision-making processes.”

 

Recommended reading and viewing

So Long to Shareholder Primacy

https://corpgov.law.harvard.edu/2019/08/22/so-long-to-shareholder-primacy/

Directors’ Oversight Role Today: Increased Expectations, Responsibility and Accountability—A Macro View

https://corpgov.law.harvard.edu/2021/05/10/directors-oversight-role-today-increased-expectations-responsibility-and-accountability-a-macro-view/

The Future of the Corporation: Moving from balance sheet to value sheet

http://www3.weforum.org/docs/WEF_The_Future_of_the_Corporation_2021.pdf

Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Value Creation

http://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf

Measuring Stakeholder Capitalism: Full List of Revised Core and Expanded Metrics

https://weforum.ent.box.com/s/ieauc14olfozu1k8d4i6qovscu42a4dz

Webinar – “The End of Shareholder Primacy?”

https://video.insead.edu/playlist/dedicated/122053032/1_l1rr6r52/1_utyenvtn

 

 

INSEAD Directors Network (“IDN”) – An INSEAD Global Club of International Board Directors

Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1,500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights with our LinkedIn and Twitter followers. We highlight our member through quarterly sharing of their new board appointments, and once a year, we give out IDN Awards to prominent board accomplishments. We provide a peer-to-peer mentoring and board vacancy service, and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.

 

INSEAD Corporate Governance Centre (“ICGC”)

Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance

Board best practices in an era of hybrid corporate governance

What are the current board best practices across different governance situations, different ownership forms and jurisdictions, and different industries and maturity of companies?

By Karen Loon and Pamela Ravasio, IDN Board Members

On 26 April 2021, over 100 INSEAD Directors Network (“IDN”) members had the opportunity to share their international experiences of best practices of hybrid corporate governance in a webinar facilitated by Liselotte Engstam IDP-C and IDN board member.

What were some of the current corporate governance best practices which our global members have observed?

 

The increasing importance of ESG and sustainability

Sustainability and ESG are increasingly hot topics in the boardroom.  It was highlighted that organisations that have so far embraced and succeeded in making good progress in ESG and sustainability have a track record of being more purpose driven.  For organisations with a different history and have not been predominantly purpose driven from their inception, it is much harder, and they have to ‘learn’ or even reinvent themselves to make significant progress in this area.

This is a challenge that not only businesses face. Even many NGOs and not-for-profits who have so far fared well focusing on single issues (for example, animal rights and veganism), have to update their ‘raison d’etre’. Adjusting to a world where not single, but complex and multi-dimensions ESG and sustainability challenges need addressing is something novel for many of them.

It can hence be said that, for organisations, the process towards embracing and embedding ESG and sustainability needs to be viewed as part of change management and culture change exercises, as it will have significant implications on new business, reporting, disclosure and future success, none of which can easily be templated.

Associated with this, some believe that ESG and sustainability discussions at the board level are taking place at a relatively high level (30,000 feet level) and have concerns that there may be a disconnect between board discussions and what is happening at the ground level.  It has been pointed out that best practice board members are visiting facilities or possibly even have independent conversations with on-the-ground members of their network to ensure they understand what sustainability means at the working level, and to feel the organisation’s temperature.

Luckily it becomes also increasingly common for ESG dashboards to be used within organisations. Such tools, assuming that appropriate and relevant metrics are being used, allow for a quick change of altitude and effective deep dives if and where required.

The evolving role of the board and the chair

In an environment where regulators, the investment community, and stakeholders are focused on the purpose and strategy of companies and board performance, directors need to become increasingly curious and ensure that they have the right lenses on the future of their organisations.

In a hybrid corporate governance environment, the role of the chair is essential to invigorate open discussions, create safe spaces and ensure that the board has sufficient time to reflect.  The chair also needs to ensure that he/she doesn’t “broadcast” and that boards operating virtually do not compromise on the quality of debate, become too tunnel-visioned and functional, and have short-sighted discussions.

Board meetings are getting shorter; however, there may need to be more discussions on important topics such as innovation, some of which may need to be away from the board room.

Finally, with an increase in the number of start-up boards, boards and their directors are focusing on best practices in pulling together start-up boards, finding the right directors, and professionalising them.

Board composition – Bringing new perspectives into the board room

With new pressures on companies and their directors requiring them to bring new perspectives into the board room, most boards have been looking at how they can find the right talent.  Expectations on nominating committees to increase the value that they add to their organisations are rising.

In line with increasing recognition that not all expertise needs to be on the board, many companies have established advisory boards to advise management, which allows for talent gaps to be filled more quickly and supplement internal resources.  Some are including people with innovation, digital and ESG expertise on these boards.

Boards are also looking for directors to bring more contrarian views.  Examples include having younger voices in the boardroom, obtaining employee points of view (to understand well-being and resilience) and inviting customers to speak to boards.  The composition of the board needs should take into consideration the need for generational and other diverse views, as well as experience.  Others are looking for expertise beyond their borders. For example, some of the leading practices concerning digital are from Asia (specifically China) and Africa.

Improving board effectiveness

In line with the need for boards to be more agile, more established boards are doing evaluations and gap analyses, which are essential given the speed of change and the need to quickly assess whether boards need new talent.  These are formal and informal, take place more frequently, and look at what to start, stop and continue, moving beyond a checklist approach.

Over the past 18 months, most boards have become more digitally savvy. However, some highlighted that having one or two board members with digital experience doesn’t translate to the whole board collaborating well using technology.  It is taking time for most boards to learn how to best use technology in the boardroom, with some needing to accelerate their progress in this area.  One tool that some boards are exploring is the use of electronic signatures.

 

IDN’s next webinar on Successful Family Business Boards – Best Practice Discussions will be held on Monday, 17 May 2021.

 

INSEAD Directors Network (“IDN”) – An INSEAD Global Club of International Board Directors

Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1,500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights also to our LinkedIn and Twitter followers. We highlight our member through quarterly sharing of their new board appointments, and once a year we give out IDN Awards to prominent board accomplishments. We provide a peer-to-peer mentoring and board vacancy service and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.

 

INSEAD Corporate Governance Centre (“ICGC”)

Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance

 

Cognitive Biases on the board & Corporate Climate Change Inertia

By Pamela Ravasio, IDP-C and IDN Board Member

The influence of decision bias is nothing new when scrutinizing corporate governance. For good reason a not insignificant amount of time during INSEAD’s International Directors Programme (IDP) is spent looking into decision biases as well as learning about how to remedy them in the board context.

Further, we all are aware: The consensus that climate change is having already huge consequences not just for the planet but also on corporate operations, risk profiles and profits. And yet: by and large businesses continue to fail to adjust their strategic decision-making processes to become more climate viable. At best they have just barely started on their journey.

Why is that? As we look deeper into the corporate discourse on Climate Change, it becomes evident that one of the silent yet crucial culprits behind the climate change inertia lies in the cognitive biases at play in corporate decision making.

A recap on decision biases: What is it, and what types exist?

There exist a plethora of cognitive biases recognised in psychology and decision making theory. Only a subset however seems to be of practical relevance for the decision process on boards. Some of the most frequently encountered biases in this context are the Anchor Bias, the Loss-Aversion Bias, or Availability Bias – all of which are being looked into during the IDP.

Equally drawing from the IDP: A good part of the Fair Leadership Process is also intended to neutralise such decision biases, or at the very least to make them explicit and challengeable.

Decision Bias and ESG: Cause and Effect

A 2017 California Management Review article found that in the context of corporate decision processes related to Climate Change – notably on boards – four bias types are of particular relevance: Framing Bias, Optimism Bias, Relevance Bias, and Volition Biases.

What are those biases, what do they mean for boards in the context of strategic Climate Change decisions, and what can be done about it?

Bias 1: Framing Bias:

  • Definition: “Framing bias occurs when people make a decision based on the way the information is presented, as opposed to just on the facts themselves. The same facts presented in two different ways can lead to people making different judgments or decisions.” (Source)
  • Board decision impact: Already framing the issue for example as ‘Climate Change’ rather than ‘Global Warming’ or ‘Climate Emergency’ disguises the urgency with which actions are needed, as well as the extremely tight timelines, and concentrated actions and investments needed. Framing is often decisive in identifying how urgent, critical, and bottom line relevant an issue is.
  • What to do about it? Language matters. Choosing wording carefully is a good start. Spelling out underlying assumptions is another good way to get to a more realistic picture of reality.

Bias 2: Optimism Bias:

  • Definition: People tend to overestimate the probability of positive events and underestimate the probability of negative events happening to them in the future. (Source)
  • Board decision impact: An example of the optimism bias in action is the assumption that advances in technology and innovation will allow us to revert Climate Change at a later date. Through such assumptions, responsibility is shifted away from the current context, and leads to inaction in the present.
  • What to do about it: Brutal honesty is necessary – and some significant efforts around spelling out what worst case scenarios could and would look like. Can a company successfully survive a worst case? And how exactly?

Bias 3: Relevance Bias:

  • Definition: Our subjective understanding of how important and critical an issue truly is, based on what we know or think to know. (Source)
  • Board decision impact: An example of this bias in action is that we all know that temperatures will rise between 2 and 5 degrees Celsius still this century. And yet – subjectively those temperature rises seem to be inconsequential. The reason being that as human beings – and as a consequence also in the professional roles we embody – we are already primed to ignore it.
  • What to do about it: Investigate how the information is anchored. For example in the above case, a 2 degrees temperature rise would be perceived through a subjective lens and set of experiences. Next, work on replacing those subjective views through a more objective, data driven but equally tangible (experiential, pictorial) description of the same, with the intent to replace the subjective experiences through those rooted in objective knowledge.

Bias 4: Volition Biases:

  • Definition: Broadly, these are errors in judgement that result from deferring responsibility (‘it is not my problem’), and can come in many forms such as through deference to authority or the ‘others do it as well effect’. (Source)
  • Board decision impact: Being reluctant to act because of an absence of a legal enshrined ‘level playing field’ is one of the most frequently cited versions of a Volition Bias. Another example is when companies finger point other players in their industry, say for not paying a living wage, and in this way justify their own behaviour and inaction.
  • What to do about it: Ask the question “What should the company (the board, the individual) do if the responsibility for change was theirs, and theirs alone?”

Conclusion

Climate Change “is the predominant moral issue of the 21st Century” (James Hansen, NASA climatologist). And yet, a recent survey shows that only 17% of Board of Directors serving on Sustainability committees have sustainability expertise. (Source, page 12).

Hence, while we’re waiting for boards to get their sustainability literacy up to speed and at a level comparable to their financial literacy: taking concrete measures to recognise, and remedy existing cognitive biases and their impact on decisions related to Climate Change action, is an effective, reasonably simple to grasp and implement, low hanging fruit that no doubt bears a considerable harvest.

 

Webinar: Sustainability and Climate in Strategy and Board Agenda

By Karen Loon, IDN Board Member and Non-Executive Director

With climate challenges increasing, the board has a responsibility to assess the impact and define strategies to handle the risk.  Are we as board members doing enough?  Do we understand how to address the topic?  What are the challenges and opportunities here?

INSEAD Directors Network (“IDN”) members had the opportunity to listen to Lise Kingo, IDP-C, NED and former executive director at UN Compact and Novo Nordisk, Stig P Christensen, IDP-C and NED, and Silvio Dulinsky, Head of Business Engagement Latin America, World Economic Forum held on 18 November 2020 in an exclusive webinar for members which was facilitated by IDN Board Member, Liselotte Engstam based in Sweden with Q&A support from Hagen Schweinitz, a fellow IDN Board Member based in Germany.

Top left – Lise Kingo, Top right – Silvio Dulinsky.  Bottom – Stig P Christensen

In their introductory remarks, the panellists covered three areas:

Responsible business is now a board and senior management agenda however climate and social inequality remains far behind

The Sustainable Development Goals were issued out five years ago.  Whilst there is much broader recognition that responsible business is now a key board and senior management agenda topic, after five years, we are still very far behind in the whole climate area and also social inequality.

Due to the huge gap and climate emergency across the globe, the whole area of climate change has developed and is now one of the most mature areas in relation to how companies can control, manage and set good risk and targets.  In particular, the financial community has put climate risk as a key priority through how they are setting targets.  Another recent initiative is that investors want to know how companies put climate risk costs into their accounts.

Climate will continue to stay on the board and management agenda.  However, companies need to develop more holistic approaches to running their businesses when it comes to ensuring a successful transition to a net-zero economy. There are a number of tools and initiatives in place to support board members in this process, which means there’s no reason for boards not to stat working on a transition strategy.

We are beyond a tipping point in relation to climate.

  1. We are beyond a tipping point – We have no time to waste. Policy-makers and business leaders have to their best to rapidly implement new ways forward, as younger generations are demanding.  Investors are increasingly more supportive of these changes.
  2. Green and digital is core business – There is currently a risk for boards to get stuck on the compliance and risk agenda and not address opportunity agenda. It is often hard for boards to have strong and precise discussions and evaluation of the opportunity side.  Boards should push this agenda beyond climate.  The way forward requires innovation of the regulatory framework which is currently work-in-progress.
  3. Open the windows and doors – Look outside beyond the borders of your company and M&A objectives you are facing with a systems lens on. Create symbiosis between different companies and sectors.
  4. Listen to the crowds – They can’t be on the boards, but they have to be heard by the company.

Tools are available to support boards. A value chain approach should be adopted.

Tools are available to support boards in relation to setting up effective Climate Governance.  Specifically, there are eight climate principles outlined in the World Economic Forum White Paper “How to Set Up Effective Climate Governance on Corporate Boards – Guiding principles and questions”.  These are:

  • Principle 1 – Climate accountability on boards
  • Principle 2 – Command of the subject; boards need the knowledge to debate and stay informed re climate related decisions.
  • Principle 3 – Board structure; the board structure needs to be effective to embed climate in the decision-making processes of the board and senior management.
  • Principle 4 – Material risk and opportunity assessment; management should assess and manage short, medium and long term climate related risks and opportunities.
  • Principle 5 – Strategic integration; management should integrate climate considerations into their strategic and financial planning of the company
  • Principle 6 – Incentivisation
  • Principle 7 – Reporting and disclosure; reporting and disclosure should be undertaken with the same rigour as a financial report.
  • Principle 8 – Exchange; engage peers, regulators, investors and the whole value chain in the process.

All companies, including SMEs are crucial in relation to transforming value chains.  The role of the board is to support the broader value chain changes required.

A challenge is how can we bring on board others who are not yet convinced on the importance of the issue.  The Chair and CEO as well as a critical mass of directors play a critical role to put climate on the agenda of the board to support driving the change.

Top – Liselotte Engstam.  Bottom – Hagen Schweinitz

Following the opening remarks, the panellists and IDN members engaged in lively discussion in relation to topics including:

  • The importance of getting climate on the board agenda.
  • Being proactive on climate before rules becoming mandatory. Global requirements on climate are increasing rapidly.
  • Leadership agenda – Set goals which are not only financial, but also deal with other areas including climate, diversity etc. to drive the change agenda. The importance of the role of the board to drive this.
  • The increasing focus on climate being placed by investors in more recent times.
  • How do boards look at the risks and opportunities in relation to climate?
  • Sustainability reporting including accountability, accounting and valuation considerations.
  • Directors’ fiduciary duties in relation to climate.

As Liselotte Engstam concluded:

“There’s no question that we need to have increased focus from board directors, and it also needs to be more inclusive and holistic, and we are getting much more attention from investors… Don’t just look at this as negative it’s a fantastic time especially now to look at (it as) a source such as an opportunity to rethink and re-set”.

The next exclusive IDN webinar will be on Getting your First Board Mandate which will be held on 1 December 2020 at 1200 – 1300 CET.