Risk, Sustainability & Responsibility

In the 21st century, corporate health and success are inextricably linked to the adequacy of security management. Poor security management can lead to operational disruptions and financial losses. For this reason, boards of directors need to take ownership of security in the same way they take ownership of other critical aspects of the business. To achieve long-term sustainability, security should be integrated into daily management activities and elevated to strategic concern… Investment in security can pay rich dividends to the organization in many ways, not only by enhancing reputation and market share but also by improving efficiency through operational cost reductions, minimized disruptions, and increased productivity.

Security as a Critical Component of Corporate Defense by Sean Lyons published as The Conference Board Executive Action Report, No. 330, July 2010, provides boards of directors, who tend to be removed from the conception and design of corporate defense management programs (CDMs), a top-down strategic approach that ensures a cohesive corporate culture attentive to defense issues. It aims to for reduce the typical silo-type mentality by promoting information-sharing procedures and collaboration across the enterprise through a four phase approach involving: Risk Identification, Risk Assessment, Risk Response, and Risk Monitoring.

Michael R. Young offers advice in The Board and Risk Management (The Corporate Board, July-August/2010). At the board level, risk management “best practices” have yet to be written. Although every company is different, “Expertise and sophistication can be strengthened by having a Chief Risk Officer report directly to the risk committee as well as to the CEO… such an approach might be the best way to capture the desired expertise and sophistication, while integrating information and perspectives.

From Transparency to Performance: Industry Based Sustainability Reporting on Key Issues, co-authored by Steve Lydenberg of Domini Social Investments, Jean Rogers of Arup, and David Wood Hauser of the Center for Nonprofit Organizations at the Harvard Kennedy School of Government, to devise a method to identify ESG factors that are most relevant to the full range of stakeholders, and can best promote improved corporate performance on vital social and environmental issues.

The report develops a system to identify key performance indicators (KPIs) by industry sector, with the goal of creating a regulatory regime with concise, comparable metrics that set a mandatory floor for sustainability reporting. The report applies this method to five sample industries to demonstrate how such a system might hypothetically be implemented within a US reporting context. These KPIs are based on three core principles — simplicity, materiality, and transparency.

To meet the dual challenges of comparability and practicability for establishing KPIs by industry and sector, the authors developed a six step method as follows:

1. Assemble a broad universe of sustainability risks or opportunities that could apply to all industries.
2. Select an industry classification system.
3. Establish a definition of materiality to address non-financial issues.
4. Apply the materiality test to the sustainability issues potentially applicable to each industry sector.
5. Rank the materiality of these issues within each industry and establish a threshold that defines those issues that are key.
6. Create a tailored set of key performance indicators for the most material issues for each sector.

The authors then apply the approach to six industries, chosen in order to represent a diversity of business practices. Five categories of impact were then evaluated at the sector or sub-sector level:

1. Financial impacts/risks: Issues that may have a financial impact or may pose a risk to the sector in the short-, medium-, or long-term (e.g., product safety)
2. Legal/regulatory/policy drivers: Sectoral issues that are being shaped by emerging or evolving government policy and regulation (e.g., carbon emissions regulation)
3. Peer-based norms: Sustainability issues that companies in the sector tend to report on and recognize as important drivers in their line of business (e.g., safety in the airline industry)
4. Stakeholder concerns and societal trends: Issues that are of high importance to stakeholders, including communities, non-governmental organizations and the general public, and/or reflect social and consumer trends (e.g., consumer push against genetically modified ingredients)
5. Opportunity for innovation: Areas where the potential exists to explore innovative solutions that benefit the environment, customers and other stakeholders, demonstrate sector leadership and create competitive advantage.

Among the report’s key findings are:

• Mandatory reporting regimes create better disclosure, which, when incorporating key sustainability performance indicators, can lead to better performance in those areas most crucial to stockowners, other stakeholders, and society.
• Defining a limited number of KPIs that relate to core business activities can help contribute to a balanced reporting regime that serves the dual demands of comprehensiveness and practicability.
• A method for identifying KPIs for all industry sectors that is simple, material and transparent can be developed and implemented with a reasonable degree of effort by oversight bodies.
• Mandatory reporting on a basic of set of KPIs is ultimately necessary to fill varying disclosure needs of our diverse society and complete the convergence of financial and sustainability reporting.

Although both British Director accountability and American CEO primacy tackle the fundamental principal-agent problem, a basic comparative analysis of the British Codes and the American Sarbanes-Oxley Act reveals a relevant normative asymmetry. While the British regulations have been historically more prescriptive with the responsibilities of Executive and Non-Executive Directors, the American norms seem to point more clearly at the CEO and CFO as those ultimately responsible for corporate governance liabilities. (British Directors’ Accountability vs. American CEOs’ Primacy by Simon Kinsella, and Giampiero Favato)