Board and investors talk ESG: Views on governance

ESG is becoming a way of doing business

Business and society today are being put to the test. Crisis after crisis—global outbreaks, climate challenges, social uprisings—have made disruption, volatility and uncertainty a permanent part of daily life.

As these crises continue to evolve, so too does the demand from different stakeholders for a response from corporate leadership. Company leadership—and equally importantly, boards of directors—are being asked to address ESG (environmental, social, and governance) issues strategically. And these demands will only continue to grow in scope and complexity.

ESG, in the other words, is becoming a way of doing business rather than a short-lived fad.

Key takeaways directly from board members about what is happening in ESG

Recently, Korn Ferry sat down with board members and investors, representing about 100 organizations that serve seven industries around the world, to hear in their own words what is happening in the ESG space.

The reality is that to stay competitive public companies must identify their material ESG opportunities and risks. Many boards and senior leaders are asking: What do investors really want? How can we satisfy all stakeholders? What should the board’s role be relative to oversight or accountability, if not both? The interviewees were candid, transparent, and representative of the fact that there is still more work to be done.

Governance is front and center for investors

While investors may prioritize things differently among themselves, good governance, they say, continues to be a “must have.” Indeed, half the investors we interviewed say the ‘G’ in ESG (governance) is their top priority because it provides the accountability framework for the board’s work on material ‘E’ (environmental) and ‘S’ (social) factors.

Whether the investors chose to focus on E, S or G, the board’s fiduciary responsibility was a common thread. Investors emphasize fundamental governance issues such as shareholder rights, including fair treatment of minority shareholders. Although investors want boards to continue to focus on maximizing shareholder value, they also want—and expect—boards to take into account the needs of all stakeholders.

They also want board members that reflect a broader swath of stakeholders. Nearly a quarter of investors also commented that they want clear alignment between lobbying and business strategies, as policies around political spending, and disclosures of these policies, are being scrutinized.

Governance is a work in progress for boards

Interestingly, when we spoke to the directors, they acknowledge good governance is mandatory, but many still view it as a compliance exercise rather than a strategic priority. In fact, several directors went on to state that good governance is not a useful differentiator for their companies.

Board members, our experts say, think they can satisfy investors by disclosing how they provide oversight of ESG in the boardroom even though the two parties have different views of what good governance means. Board oversight of ESG also tends to vary quite a bit at this moment. In some cases, boards have consciously spread different aspects of ESG across committees.

Other boards have chartered a single committee to lead on ESG. Board members confirmed they are trying to figure out what is the best approach for the companies they represent and admit it will continue to evolve. We found these insights to be very similar to results out of Fortune’s recent survey on the World’s Most Admired Companies.

Investor approaches to voting and ESG vary

Based on our conversations, it seems investors take quite different approaches to voting in regard to firms meeting ESG goals. At one end of the spectrum, some investors say they will only vote against a company’s directors in exceptional circumstances, such as mismanagement of extreme risk—and more specifically, they would vote against an entire board, rather than a single member.

In sharp contrast, other investors told us they see voting as an undervalued tool to indicate the importance of ESG issues and will vote against the responsible board member who leads on ESG, or the board chair, to signal dissatisfaction with ESG strategies or outcomes. This too, is an area that we expect will continue to evolve as ESG disclosures are evaluated.

The ESG disclosure playbook is still in early draft

Nearly three-quarters of board members interviewed had strong views about disclosures and metrics. There are clearly accepted global standards but choosing the right—and best—metrics to disclose by company is a different challenge altogether. It is clear that no real consensus has been reached on how to do the work:

• Investors recognize there is a learning curve for organizations. Some recommended using accepted standards such as those produced by the Sustainability Accounting Standards Board (SASB) as a starting point. But investors also say boards should tailor the metrics for their organization.
• The quality of data is important. Investors want to see high quality information about material ESG risks.
• Investors are interested in seeing progress against meaningful, relevant goals. But they publicly scrutinize gaps in information and face challenges in comparing across companies when different reporting metrics have been used.
• Meanwhile, companies are wrestling with metrics. There is the natural tension between metrics with long-term outcomes and the demand for short-term progress from different stakeholders. Many companies have historically focused on one aspect of ESG reporting. Now, they are being expected to report across all areas of opportunity and progress. Determining the right balance of using and disclosing metrics versus overburdening management on the reporting of metrics is something many companies are wrestling with, and as such, boards, too. Lastly, our experts say, there is still a level of confusion about what is management’s role and what is the board’s role in identifying metrics and monitoring progress.
• A variety of communication methods are being utilized. Board directors mentioned publishing annual ESG or sustainability reports, sharing information directly with investors, or posting KPIs (key performance indicators) on their website quarterly, among the current disclosure practices. For investors, the multiplicity of communication channels is unhelpful when what they really want is one source of up-to-date information and to know where that is located.

A new paradigm of ESG performance

What we heard across the interviews is that the risk of not making ESG a strategic priority is a liability. In the future, it will be increasingly difficult for companies to hire great talent, attract investment, manage liquidity, optimize their supply chain, and bring in customers if they are not actively tackling their material ESG opportunities and risks.

This need for ESG strategies and measurement is real, but appears to be still relatively immature in the boardroom and C-suite compared with the work being done by investors in their own firms.

Done well, ESG requires both short- and long-term strategic thinking, short- and long-term accountabilities, and short- and long-term solutions that are intrinsically bound together.

This truly is a new paradigm of performance against which companies, boards, and even investors will need to measure.

Additional contributors:
Annamarya Scaccia, Writer and Editor, Korn Ferry Institute and Sarah Hezlett, Senior Director of IP and Assessment, Korn Ferry Institute.