The Handbook of Board Governance: Part 7

The Handbook of Board GovernanceI continue my review of The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Member. With the current post, I provide comments on Part 7 of the bookGovernance of Sustainability. This is why I got into the field as an NIMH Fellow in the late 1970s studying what forms of corporate governance would be best for corporations AND society. This part of the Handbook is worthy of a separate 100-page book by itself, probably with broader appeal to the general public.

See prior introductory comments and those on Part 1Part 2Part 3Part 4, Part 5 and Part 6. As I have indicated before, The Handbook of Board Governance should be the most popular collection of articles of current interest in the field of corporate governance, if it isn’t already. Rank 47 at Amazon within the entire field (fluctuates daily). If even just priced by the page, it is a real bargain. However, the authors are at the top of their field, so you know you are getting the best advice possible. 

The Handbook of Board Governance: Responsible Boards for a Sustainable Future

Dr. Y1lmaz Argüden, of ARGE Consulting in Turkey, lends this chapter a truly international perspective. Of course, that is appropriate, since any single company or country alone cannot solve climate change and other problems. Yet, the implications for businesses are profound. “Future investment will need to be compatible with a zero-carbon world.”

Argüden provides a great overview of sustainability initiatives, which are mostly global in origin. However, he also includes an impassioned plea:

The real issue is the global governance structures, the way the incentive systems are organized, and lack o credible leadership on global issues that has the authority and ability to impost remedies…

Dr. Yilmaz Argüden

Dr. Yilmaz Argüden

Therefore the first agenda item for all these meetings should be how to consensually delegate sovereignty to global institutions and how to make these global institutions have real legitimacy and jurisdiction over key global issues…

The second agenda items should be to change the way we teach to prepare the next generations for a more collaborative world… ensure people fully understand their mutual dependence… People should have a say in shaping their own future and be able to contribute in the global decision-making processes that influence their lives.

The third agenda item should be how to reshape our incentives systems, in particular taxations schemes.

Dr. Argüden goes on to describe measures that corporate boards can initiate and to describe examples from Philips, Unilever, Microsoft, Google, Apple, ING, Puma and others. He concludes with a useful self-assessment tool for board members. There are plenty of tools in this chapter alone to help refocus your company on its long-term survivability, as well as that of a sustained salubrious environment for the planet.

The Handbook of Board Governance: Responsible Boards for a Sustainable Future

For those worried that ‘sustainable’ means sacrificing profits, Douglas Y. Park dispels that myth with references to the Sustainability Accounting Standards Board (SASB). SASB is, as Park notes, “unique in using a rigorous, evidence-based process to identify a small number of industry-specific topics and metrics (collectively, standards) to account for and measure performance across five categories of sustainability or non financial topics.”

Douglas Y. Park

Douglas Y. Park

  • Environment
  • Social Capital
  • Human Capital
  • Business Model and Innovation
  • Leadership and Governance

SASB develops industry standards only where there is not only evidence of investor interests and evidence of financial impact but also a high degree of consensus from investors, market intermediaries, etc. that the topic is likely to constitute material information for companies in a specific industry.

The median number of metrics per industry is 13, so collecting and analyzing the data should not be a major burden, especially since doing to will allow boards to use key performance indicators (KPIs) to set executive compensation strategies that will enhance the long-term value of the firm.

SASBComparing a portfolio of top quintile of firms using SASB metrics to the bottom quintile portfolio yielded an annualized alpha 5% higher. Top quintile firms experienced higher increases in return on sales, sales growth, return on assets, and return on equity. Despite this strong link, a study by NACD and EY in 2014 found only 32% boards at the largest US companies surveyed formerly oversaw sustainability performance. That was up from 28% two years earlier, but you would think use of SASB standards by boards would show more explosive growth, given the likely payback.

Park explains how it is done through action steps, examples form committee charters, and several examples of how companies have been moving in this important area. It isn’t rocket science. It isn’t even complex accounting. Your company can move to the top quintile.

The Handbook of Board Governance: Board Governance for a Better World

If you have not already read Alice Korngold’s A Better World, Inc.: How Companies Profit by Solving Global Problems…Where Governments Cannot, then here is your chance to read a heavily abridged version with example after example of cautionary tales and companies that are getting it right. 

Don’t wait for legal mandates. It didn’t work for climate change; it won’t work for your company either. Korngold quotes Michael Liebrich, Founder of Bloomberg New Energy Finance, discussing the success of COP21:

Slowly, unrealistic, top-down absolutism was replaced with pragmatic, bottom-up flexibility. An understanding that the only framework that would be accepted by the world’s most powerful nations, developed and developing, was one which was essentially voluntary: pledge and review.

Korngold informs us that more than $21 trillion (30%) of total assets managed professionally incorporate environmental, social and governance (ESG) factors. The growth of ESG business at Bloomberg reflects this increasing interest. The number of its customers using ESG data grew from 2,415 in 2009 to 17,100 in 2014. And why not? Almost 80%, in a review of 200 pieces of research, found “solid ESG practices result in better operational performance of firms.” My own conclusion is that not paying attention to these factors could be a breech of fiduciary duty.

Alice Korngold

Alice Korngold

Three billion people in emerging markets will enter the middle class over the next two decades. Women will control 75% of discretionary spending in the next five years. Yet, they average age of S&P 500 board members (80% men) is increasing. Only 8% of directors at top 200 S&P 500 boards are from outside the US… and almost none are from emerging markets. Even women and minorities from within the US are vastly underrepresented. This, despite studies that find boards with gender diversity generate a higher return on equity; lower net debt to equity; higher price/book value, better average growth; better risk management; and stronger connections with customers, employees and business partners.

While investors say the top impediment is that directors don’t want to change, directors still say there is a lack of awareness of qualified candidates. After Mitt Romney’s 2012 I think just about everyone recognizes there are binders full of women and minorities, all well qualified. Excuses for non-action ran thin years ago.

Korngold presents case studies and compelling arguments. Still, only about a quarter of even the largest companies have boards with formal oversight of ESG issues or tie ESG measures to compensation packages.  A better world won’t happen from the top down. We have to initiate action on all levels to create it. Companies that get that message are already posting their progress on the Internet. Check out Aegon, KKR, and State Street, See also the Sustainable Stock Exchanges Initiative, as well as Korngold’s 2015 article in Directors & Boards.

The Handbook of Board Governance: Corporate Governance – Ethics and Legal Compliance, Risk Management, and Political Activities

I found this chapter by John M. Holcomb slightly out of place in the larger context of the Governance of Sustainability. Although certainly relevant to that topic, the chapter appears to focus on lawyerly concerns in comparison to the other chapters. Perhaps in the second edition of The Handbook of Board Governance, Leblanc might consider this helping form the nucleus of an entire part of the book focused on law. Perhaps chapters by Nell Minow and Holly Gregory should also be included there. Maybe he should add chapters by Lynne Stout, Steven Bainbridge or? Of course, that would probably take us over 1,000 pages at it would make it more difficult for me to walk around our little lake while reading it. I might need some sort of sling to hold it for me. Too crazy?

Holcomb discusses compliance and ethics; reputational risk, legal incentives; board and committee structures; as well as corporate political activities. While the whole chapter was solid, I found the last part dealing with political activity most interesting. One minor correction: Holcomb writes that average support for shareholder resolutions in this area have exceeded 30% support. “Only resolutions for shareholder nomination of directors typically receive votes in the range of 50 to 60 percent.” Declassifying the board and majority vote requirements for directors also receive high levels of support.

I thought I knew what was going on in the area of shareholder resolutions on political activity after Citizens United, but I had only scratched the surface. Yes, the number of such resolutions has gone up dramatically. I have thought about filing a few myself. What I hadn’t realized was the “danger of establishing a check-the-box mentality for corporate political responsibility” by using the Center for Political Accountability (CPA) and Zicklin Center for Business Ethics approach.

John M. Holcomb

John M. Holcomb

Apparently, the 24 question approach used CPA could use improvement in at least the following five areas:

  1. Corporations spend 10 times more on direct lobbying (year around activity) than political campaigns but the CPA instrument doesn’t ask about it.
  2. CPA includes no questions on corporate contributions to political conventions.
  3. CPA excludes contributions to nonprofit organizations and foundations connected to candidates, such as the Clinton Foundation.
  4. Includes no disclosure of contributions to state judicial candidates that are legal in 39 states.
  5. CPA also misses issue of bundling campaign contributions.

These look like important gaps. If CPA isn’t working on them, they probably should be. If companies think these areas aren’t also headed for reform, think again.

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