What’s Stopping Boards from Turning Sustainability


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What’s Stopping Boards from Turning Sustainability Aspirations into Action?
By N. Craig Smith, INSEAD and Ron Soonieus, Camunico

What’s Stopping Boards from Turning Sustainability Aspirations into Action?
By N. Craig Smith, INSEAD and Ron Soonieus, Camunico
As environmental and societal challenges increase, company boards have a fiduciary and moral duty to arm themselves with the people, the knowledge, and the tools needed to promote long-term sustainability.
“Get the board of directors on board” was a key recommendation for driving sustainable business practices in a major report from MIT Sloan Management Review in 2017.1 Board engagement with sustainability has been urged by organizations with a focus on sustainability, such as Ceres2 and the UN Global Compact3, and by organizations focused on corporate governance, such as the National Association of Corporate Directors (NACD)4, as well as in academic research5. Simply put, if an issue is not on the board’s agenda, it’s unlikely to be at the heart of an organization’s strategy. Although board engagement is increasingly recognised as key to ensuring sustainable business practices, there is evidence that only a minority of boards give the subject sufficient attention. A 2018 Ceres survey found that only 31% of 600 large, publicly-traded U.S. companies had board oversight of sustainability6. A 2014 United Nations Environment Programme Finance Initiative report (based on 2011 Bloomberg data for 60,000 companies) found that “the governance of sustainability is still at an embryonic stage… most companies still have not taken responsibility for sustainability issues at the highest governing body of the corporation.”7 While a 2014 survey of over 2500 executives from around the world found that 86% agreed that boards should play a strong role in sustainability, but only 42% reported that their boards were substantially engaged8. This lack of board attention to sustainability is short-sighted. Arguments aside about the inherent importance of sustainability, good governance alone would seem to demand it be given more attention. It is a fiduciary responsibility of board directors to enhance firm long-term value and mitigate business risk9, and surveys suggest investors care about sustainability — and more than executives believe10.
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Company reporting and other disclosures necessitate that many boards do engage with sustainability, but this is often at the margin and may be all they do. At minimum, fundamental questions need to be addressed of what sustainability means for the business and what the future holds as sustainability increasingly impacts business inputs and outputs.
Organizations with a focus on sustainability, such as the UN Global Compact11, and those that focus on corporate governance, such as the National Association of Corporate Directors (NACD)12, have long championed the need for effective board engagement to produce tangible results on company social and environmental impacts.They ground the rationale for action in the fiduciary duty of board members to enhance firm long-term value and mitigate business risk, and in moral obligation, given the pressing sustainability issues facing humankind.
Their claims of the need for board engagement are supported by academic research which has found that if an issue is not on the board’s agenda, it’s unlikely to be at the heart of company strategy. In other words, if a company is to fulfil its sustainability aspirations, the board of directors must be engaged and supportive if not driving sustainability as a prime consideration in business decision-making.
A new Board Agenda (BA) and Mazars survey, Leadership in Corporate Sustainability – Europe Report 2018 13, developed in association with the INSEAD Corporate Governance Centre, shows that while boards are increasingly conscious about the need to incorporate sustainability into broader business practice, they struggle to get the right information, expertise and processes in place to deliver on their commitments.
In this report, we look at how well, and indeed whether, sustainability issues are being understood at board level. Drawing on the BA findings and on 25 interviews with non-executive board members, we focus on three key aspects of the problem: What are boards really saying about sustainability? What are the obstacles to them taking more effective action? What changes should be made by boards so that their companies respond more effectively to sustainability challenges?
Looking past the ‘low-hanging fruit’
In 2019, shareholders generally recognise that the integration of environmental, social and governance factors into business practice is vital to managing risk and creating long-term value for the company. While the business case may vary from firm to firm (or even within a firm) there is broad agreement that thinking sustainably makes financial sense.
Unfortunately, with social and environmental challenges escalating, we have now reached a tipping point where market-led actions are no longer enough. Just how widely recognised this is, and whether business leaders have the knowledge and means to take effective action, is still up for question.
The BA report clearly shows that for the majority of boards and business leaders, sustainability has become a key factor to contend with, measure and address. However, there is also evidence of a growing divergence between businesses which integrate sustainability into the heart of their organisation’s activities, and those that take a more on-the-side and tick-a-box approach. There are companies which feel they are already doing the right things and those who recognise that as the challenges escalate it is no longer sufficient to target and meet year-on-year improvements in areas such as social responsibility and eco-efficiency. To maintain the momentum and ensure real change occurs, businesses must look
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past minimising carbon emissions and other ‘low hanging fruit’ and make the difficult decisions necessary to integrate sustainable practices throughout their core business processes and that of their, often complex, supply chains.
Board engagement requires more than good intentions
The BA survey suggests boards are very aware that the companies they govern cannot be successful in the long term without considering the communities they work in and the natural environment they depend on. Of the 234 business leaders polled (from various ranks and diverse-sized companies), three quarters believe that ignoring sustainability will affect their company’s ability to create long-term value (see Figure 1); 53% said they see a clear business case for sustainability; while 57% say they aim to meet their sustainability obligations.

Figure 1:
Do you agree that ignoring sustainability will affect your company’s ability to create value in the long term

Neither agree nor disagree
7,60%

Somewhat disagree
1,75%

Disagree
0,58%

Strongly disagree
0,58%

Somewhat agree
16,37%

Strongly agree
46,20%

Agree
26,90%

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Almost a third indicated that their organisations aim to be market leaders in sustainability and a further 30% aim to be seen as strong performers (see Figure 2). More than a quarter said that sustainability was viewed as part of their firms’ obligations outside a purely business case, indicating a recognition of their moral responsibilities for incorporating sustainability into their business strategy.
Figure 2: Your company has a clear idea of where it is trying to position itself on sustainability
We keep up with developments to position ourselves among the best performers 30,26%
We aim to be a market leader using it for competitive advantage 28,72%
26,67% We aim to meet our sustainability obligations
as a responsible corporate citizen regardless of competitive advantage
We do what we can, but it doesn’t figure in how we position ourselves in market 9,74%
Other 4,62%
While this is encouraging, their awareness does not necessarily extend to identifying the policies which need to be in place, and information required, to meet growing environmental and societal challenges. Although sustainability risks and opportunities appear to be understood, the survey responses show that boards are only starting to recognise the complexity of sustainability and the difficulties their companies face in integrating and measuring it. Half the respondents could not say that their companies’ sustainability principles and intentions were delivered by effective business policies; a quarter could only partially agree that their policies served sustainability; while a worrying 15% indicated that their policies may not be up to the mark (Figure 3).
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Figure 3:

FiguTreh1e: sustainability principles and intentions of your organisation are delivered Dobyyoeuffaegcrteiveethbautsiingnesosripnogliscuiesstaainndaboiblijteyctwivilelsaffect your company’s ability to create value in the long term

Disagree
4,32%

Strongly disagree
3,78%

Somewhat disagree
7,03%

Strongly agree
15,68%

Neither agree nor disagree
9,19%

Somewhat agree
24,32%

Agree
35,68%

Need for greater board attention
Despite offering a degree of optimism about businesses’ ability to integrate sustainability into the management of their companies, the responses to the BA survey indicate a concerning lack of specific sustainability knowledge among board members:
• Nearly two thirds of respondent could not say that their company required sustainability expertise or mindset in appointing non-executive board members or recruiting executives who are members of the board.
• Only 50% said they believed their companies had the right information and measures in place for them to understand its position, ambition and progress with regards to sustainability.
• More than 20% indicated that board members struggled to see how sustainability fitted into their company strategy, or had no-one on the board with specialised knowledge or interest.
This lack of understanding, or even interest, is intriguing when considered against figures which show that sustainability opportunities and risk are explicitly considered in key business activities such as innovation and product development (70%), acquisitions (44%) and fixed asset investment (39%) (Figure 4).
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Figure 4: Sustainability opportunities and risk are explicitly considered as an integral part of investment decisions (select all that apply)
Innovation and product development 72,19%
Acquisitions 44,38%
Major fixed assets investment 39,05%
Divestments 23,08%
Debt financing 17,75%
Of equal concern were responses that indicated: • Less than 30% of companies have a head of sustainability who reports to either the board (either directly
or via the CEO) • More than half don’t have a head of sustainability • Only 17% of boards have a dedicated sustainability committee Given growing societal awareness and demand for companies to conduct their business sustainably – studies suggest 50% of customers are influenced by key sustainability factors14 – one must ask: why are boards not more engaged with sustainability? To better understand directors’ divergent attitudes to sustainability and the frequency and depth at which it is discussed during board meetings, we conducted in-depth interviews with 25 highly experienced European non-executive directors representing 50 large, well-known companies. In return for the promise of anonymity, they were refreshingly frank in their feedback.
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Five Archetypes of Board Behaviour
An analysis of the interview responses revealed five distinct archetypes of board members’ behaviour15 which go a long way to identifying why there is such a divergence in boards’ attitudes and why, in too many cases, sustainability issues are being buried. These archetypes are:
• The Deniers • The Hard-headed • The Superficial • The Complacent and • The True Believers
Our research profiles these types and identifies strategies for dealing with them. While the interviews revealed a tendency for directors to gravitate towards companies where they would be surrounded by likeminded board members — birds of a feather flock together — many found themselves on boards where members had very different ideas on how sustainability “fits” with their business principles and strategy. One board member we spoke to had been elected by employees, rather than directors, to speak out on environmental issues. She found herself on a board where she clearly did not belong. “I have been laughed at,” she confided. “Having the board take sustainability seriously has been a long and lonely battle.”
We offer suggestions on how sustainability might be tackled where boards are predominantly characterised by a particular archetype as well as, in conclusion, overall recommendations for turning sustainability aspirations into effective action.

1. The Deniers

These are the board members who see

sustainability as nothing more than a buzzword

or a fad that will go away. For their companies,

sustainability is typically (at most) a page in the

annual report. Or, as one respondent noted, “If

it does get onto the board’s agenda, it’s item

number 38”. As open hostility to sustainability is

largely unacceptable today, this archetype isn’t

Mike Lynch for INSEAD, © INSEAD

always so obvious. In fact, environmental and

social issues are most likely to be conspicuous by

their absence. “In the five boards I’m on, it’s almost never discussed,” one director noted. “Although most

have a section in the annual report,” he added.

Other board members in this category were reported to have referred to sustainability as the “the last wagon in the train” or “the CEO’s new toy”.

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“In my experience, sustainability in the short run is about value destruction,” one denying director told us. “There’s a natural order of things. For a corporation to be secure, it must be prosperous.”
Another interviewee summed up his company’s attitude to sustainability as ‘the technocratic approach’, admitting, “We are listed much higher on the Dow Jones Sustainability Index (DJSI) that we think we should be. Apparently, we have become very skilled in filling-out their 300-page questionnaire.”
In our experience, this is particularly dangerous, as it can lead to greenwashing – the use of PR, marketing or corporate communications to overstate the environmental benefits, or understate the environmental damage, of a company’s products and service.
Consider the Volkswagen Group. It was listed in the 2015 DJSI as the world’s most sustainable automaker, and marketed its vehicles as being environmentally “clean diesel”. History has shown this was far from the case, as the engine software had been programmed to enable millions of vehicles to pass emissions tests while emitting up to 40 times the permitted levels of pollutants.

Overcoming denial
Whether you find yourself on a board of deniers or merely reporting to them, it’s essential to meet them on their own terms. Approach sustainability - indirectly if necessary - through specific, concrete concepts like cost-reduction, business opportunity, consumer demand, or risk exposure, rather than abstract notions of “the planet” or “future generations”.
Also, choose your moment wisely. Never raise the issue in times of crisis. “That’s when companies resort to alpha-male behavior to fix things,” said one interviewee. Or, as another advised, “Never address these things at the end of the meeting, out of the blue.”
Patience is an essential strategy. The consensus from our small sample of sympathetic directors was that one-to-one conversations about sustainability were preferable to whole-board onslaughts. Once you have established an amicable relationship, it may be possible to bring denial out into the open. One interviewee recalled eventually asking fellow directors: “What drives your resistance to sustainability?” It was only after engaging in rational argument with his colleagues, that he was able to make headway. His ultimate advice was: “Never give up!”.

2. The Hardheaded
Mike Lynch for INSEAD, © INSEAD
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Unlike deniers, hardheaded board members are ready to talk about sustainability - and in positive terms. For them, it is definitely a factor affecting their business, but just one among many, so it tends to be reduced to strategic reasoning. How can the costs be minimized? Are there any market opportunities? If so, how can they be maximized? As one board member put it, “We do what we can, but our business is still gas.”
Hardheaded board members are particularly prevalent in organizations on the “dark side” of sustainability. Oil and gas companies, transport operators, and agrochemical giants all take a surprisingly keen interest in the environmental and human impact of their operations, as do businesses where health and safety are a major concern.

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What’s Stopping Boards from Turning Sustainability