Tag Archives: shareholders

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

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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.

The Unintended Consequences of Corporate Governance

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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

The Evolution of Trust in the Era of Stakeholder Capitalism

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The Evolution of Trust in the Era of Stakeholder Capitalism

By Beatriz Pessoa de Araujo and Julia Hayhoe

Enduring and sustainable corporate success hinges on trust. But trust is hard won and easily lost. This series of articles will explore the evolving “Trust Continuum” and how organizations can meet new expectations in the era of stakeholder capitalism [1]—not only of their shareholders and investors but all stakeholders—and build long-term trust based on purposeful, transparent and consistent actions and interactions.

We will examine global governance and the rule of law, the changing face of leadership, ethical technology and more in this series—uncovering the strategies that will enable corporations to become and remain trusted organizations. The purpose of business in society has not changed—the creation of wealth and job opportunities and making things or providing services people need. What is changing is the “how”.

In this post, we explore the evolution of trust in the seven years since Baker McKenzie’s last report on the state of trust in business. We find that efforts to build trust have continued, but the challenge today is greater and more complex as companies try to respond to the new demands of a complex ecosystem of customers, employees, shareholders, regulators and society at large, as well as externalities such as climate change and the ever changing political landscape.

In an environment where activism comes from all stakeholders, each with high expectations from boards and leadership, not only is trust a timeless concept, it is a continuum—where constant adaptation is a must for a corporation to build and retain its trust coefficient.

In Brief Way Forward
Trust will determine long-term sustainable commercial success. There are established links between trust, business performance and customer and employee loyalty. If trust is not already on your board agenda, ensure that it is now.
We are operating in the era of stakeholder capitalism in which society demands more from corporations and awards valuable trust based on actions and promises met. Whether your corporation is appropriately balancing the needs for a broader set of its stakeholders will determine the strength of its license to operate. Understanding your stakeholder ecosystem and meeting their expectations is critical.
Acting in accordance with business values and reporting transparently on performance underpins trust. Values are not a static set of promises. Ensuring they are aligned to organizational purpose, integrated into decision-making, reflected in compatible actions and that performance is transparently reported are the most effective ways for corporations to build trust.
Corporations need new strategies and systems to embed values, measure and report on matters of trust. Leaders need to look beyond the balance sheet and demonstrate a good governance framework, effective decision-making in the boardroom and across the organization and progress in their stakeholder engagement and action.

Why trust will determine success

Trust matters today more than ever before. In the era of fake news, online animus and political polarization, trust is the lens through which people make decisions about what they believe in and value. Research has also proven the connection between trust and commercial success—the most trusted organizations experience better financial performance [2] and build particularly loyal customer bases [3] and workforces. [4] Trust is currency—valuable, measurable and actionable.

In this environment, society is demanding more from corporations, leaders and investors on critical issues such as the climate emergency and rising global inequality, and its members award their trust based on whether companies are “doing the right” thing at this critical moment. This is the new contract of trust with business—its license to operate—and has given rise to the notion of stakeholder capitalism, in which organizational purpose balances the interests of customers, employees and communities with those of investors and shareholders. As people are using their voices, capital and the law to advocate for more ethical and inclusive business practices, they are pushing corporations to be more transparent as to how they honor their commitments. We have clearly moved from an era of words to one in which supporting actions are essential.

From implementing environmentally-friendly manufacturing processes and bringing clean energy to communities in need, [5] to creating inclusive workplaces and helping people to overcome barriers to economic opportunity, [6] corporations are seeking to deliver for a broader set of stakeholders. Similarly, the world’s largest corporations have rallied around a shared responsibility to people and planet as well as profit in the Davos manifesto and Business Round Table. [7] At the same time, guidance is shifting to legislation on issues including sustainability, pay, diversity and climate risk and opportunity reporting, as can be seen for example in the form of a “Green New Deal”. Yet indicators show that trust in business remains elusive. [8]

Turning values into trust

Business decisions and actions are increasingly visible through reporting obligations and via social media, making it easy to be called out for inconsistency and thereby eroding valuable trust. Society now demands that corporations play a positive leading role in addressing critical issues. The significant task for businesses in the coming decades will be to employ new strategies to embed values, measure and report on matters of trust. With trust and a strong supporting corporate culture, businesses can better balance the demands of all relevant stakeholders, including shareholders and investors.

An essential step for demonstrating consistency and transparency will be developing robust internal and external “logic”—a way of demonstrating how decisions are taken and clear lines of responsibility that aligns governance, employees, customers, technology and regulation. This is where corporate values become cultural and systematic norms—where consistent action and transparent reporting will be key to retaining and building trust. Leaders will need to look beyond the balance sheet to measure and demonstrate how they are progressing in their stakeholder engagement and action. This means deciding how to measure, collect and understand key nonfinancial data. Values-driven assets can include corporate culture, D&I measures, executive pay, and environment, social and governance (ESG) indicators. These and others are all potentially valuable assets that should be considered for inclusion in corporate reporting. Encouraging statements have also been issued by investors, indicating that these items will also be valued by them when they consider which companies to invest in and exit.

The way corporations are currently structured and organized can make this difficult to achieve. Ensuring corporate purpose, values and standards are integrated across large multi-national workforces, complex supply chains, vast networks of subsidiaries and outsourced interests—and that these are reflected in compatible actions, interactions and decisions—is perhaps the greatest challenge businesses face in relation to trust. While accomplishing this may create legal and reputational vulnerability for corporations, today’s radically transparent and rapid social media world mean that simply complying is not enough—how compliance is achieved is equally important. With aligned and effective governance, leadership, employee engagement and ethical sourcing alongside “green” investment decisions and responsible tax policy, business purpose will become an applied enterprise, not a static set of promises.

What’s next for trust?

Trust is no longer static or singular and there remain real challenges and practical considerations to retaining and building trust. Among the important questions we will explore in this series are:

How can non-listed companies build a higher governance standard for themselves to support values-driven action—in the absence of the strict frameworks that govern listed organizations?

As workforces, processes and interactions are increasingly augmented by technology, can they assure its ethical code? What is the changing face of leadership needed for the future success of the corporation?

Do incentives align with expected behaviors?

How can businesses effectively assess what if any risks and opportunities climate change brings for their organization?

As organizations balance shifts in globalization and protectionist trends with the rise of stakeholder capitalism, how can they establish practical global corporate governance frameworks which allow them to become more responsible and at the same time more nimble and efficient?

The organizations that survive and thrive sustainably in the long-term will be those that tackle these complex questions head on and seek to understand and operationalize trust: The Trust Continuum.

The financial imperative to do so is clear—trust translates into long term sustainable financial performance. But the societal imperative is also strong—companies’ license to operate is contingent on securing the trust of all their stakeholders, both internal and external.

Beatriz Pessoa de Araujo IDP-C is a partner and Julia Hayhoe is Chief Strategy Officer at Baker McKenzie. This post is based on their Baker McKenzie memorandum which can be found here, and has also been published by The Harvard Law School Forum on Corporate Governance.

Endnotes

1 Davos Manifesto, 2020 (go back)

2 Harvard Business Review, 2016 (go back)

3 Edelman Trust Barometer, 2019 (go back)

4 Edelman Trust Barometer, 2019 (go back)

5 Ikea Foundation, 2018 (go back)

6 LinkedIn, 2019 (go back)

7 World Economic Forum, 2020 (go back)

8 Edelman Trust Barometer, 2019 (go back)