How can directors improve corporate sustainability?

Introduction

The concept of sustainability can now be seen as mainstream aim even in the corporate world. There is a growing understanding among the investors on corporate sustainability, meaning their performance on ESG factors, i.e. environmental, social, and governance, directly impacts the company’s long-term profitability. There is a more considerable emphasis on the ‘G’ governance element of ESG. That’s why the companies are steadily recognizing the ESG issues in forming their corporate strategy, turning the ‘investment’ into ‘sustainable investment’. While there is growing need for Corporate sustainability in place, there remains a stubborn holdout in this revolution from the board of Directors.

The Board of Directors is an essential constituency in a company that oversees the business conduct, direct and manages operational tasks. However, it is undeniable that the directors, whose primary job is to secure the corporation’s future, are often holding back it with an outdated emphasis on short term value maximization. It will harm the company’s growth, and thereby the directors are strongly recommended to adopt corporate sustainability performance based on ESG factors for a successful future. They have a fiduciary duty to influence the company’s risk and management system to meet stakeholder’s changing expectations. There is growing evidence that sustainability factors significantly affect the financial returns and drive long-term value to the stakeholders.

The present article gathers detailed information on how directors can improve corporate sustainability, why the current scenario calls for such a move and its benefits. Let’s head over to the main content.

Why the current scenario calls for CSR Governance

The present corporate governance model is based on outdated ideas and needs reform to get in line with the evolving changes that demand the adoption of sustainability reforms. The corporate leaders can bring some updated reforms such as sustainable finance that can be brought in complementarily to some necessitated changes in the company law that will require boards of directors (BODs) to develop, disclose, and implement a corporate sustainability strategy.[1]

CSR Governance

Board of Directors has now started to recognize that the effective management of ESG risks can improve their business performance. The recognition has led to increased oversight by the board of directors over how the corporation manages its environmental, social, and Governance performance as part of their fiduciary responsibility. This oversight is known as CSR; Corporate Social Responsibility governance. CSR is measured in terms of its impact on the company’s internal and external stakeholders. CSR governance needs to be incorporated in the present corporate model to ensure that long-term shareholder and stakeholder interests are wisely protected and promoted.

Benefits of adopting Corporate Sustainability Performance

Undoubtedly, there are significant benefits to the company from adopting corporate sustainability that will support its profitability and viability in the long-term. The Board of directors must consider the following benefits to strengthen the corporations’ performance with the growing demand.

The experts argue that CSR governance enhances market and accounting performance of the enterprise. It fosters revenue growth in the company when an approach is channelled toward innovation, lowers the cost of capital, and improves business reputation in the market. As the ESG issues tend to have real and quantifiable financial impacts on the business performance, emphasizing on corporate sustainability becomes necessary to mitigate the risks that may occur due to growing climate change, depletion of natural resources, etc. Considering the risks we are at, it is wise if the board develop and implement innovative solutions like CSR governance to improve the business performance in rising environmental and social problems. The board should ensure that the corporation’s sound environmental performance to prevent the company from being exposed to unnecessary fines, regulatory exposure, lawsuits, or increases operation costs.

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Moreover, the governments are also getting involved in regulating CSR related activities to mitigate ESG risks for a better future, which means the companies, are also required to converge the CSR and corporate governance and expand the scope of their compliance operations.[2]

Strategies to improve Corporate Sustainability

Corporate leaders have a fiduciary responsibility to act strategically on dealing with risk management matters, and the board of directors certainly plays a crucial role.

he Directors of the company can be the reason for a change in shift of the practices being adopted in their business activities. With the need for sustainable change in society, the directors must adopt specific key strategies to inculcate sustainability in their decisions. They can connect sustainable development with corporate purpose and establish the sustainability practice to meet stakeholders’ and shareholders’ values.[3]

The Board must contemplate a broad and diverse array of stakeholder’s expectations, their conflicting interests and demands to arise at times which require clarity on the company’s purpose and strategy. The role of directors has notably evolved over time but it surely depends on company’s maturity as well. Despite acting in a passive and formal manner, the boards are expected to showcase prominent corporate strategy and management inclusive of both ethics and sustainable ESG concerns.

To provide long term profit to key stakeholders, directors must develop a targeted, balanced, and a comprehensive action plan to improve corporate sustainability.

The action plan should comprise of three critical approaches[4]:

Assessment approach that will help the board identify the current practices and gaps.
Phased approach that will provide a roadmap to the board in order to develop a strategic CSR governance methodology. The board needs to establish a standing board agenda on sustainability and define the responsibility of the board committee on the mandate.
Analysis approach that will include questions for directors to understand the enterprise’s approach to CSR management.
Observation approach to follow the leading examples in the successful implementation of CSR governance.

Subsequently, the directors are required to follow some recommendations that are:

Form an expert committee in the company that will help in formulation of sustainability frameworks, system, and processes and their effective implementation to achieve best practices.
Communicate the values and benefits of corporate sustainability and its profit bringing the capability to the members. Based on that, keep a track on the company’s performance and utilize the sustainability vision to improve the result.
Strengthen a sustainability oriented work culture in the company by taking appropriate initiatives and define the separate roles and competencies of the people. This will help cultivate refined skills and procedures to adopt the best practices in the management of enterprise.
Encourage constructive dialogues and be updated with the evolving legislative and regulatory requirements so that there is timely delivery to the demand and expectations of the market.
Establishment of an integrated system to monitor, measure, and gauge the company’s performance on the targeted ESG issues. Accordingly, the directors should plan their strategies to improve their business operations. Consequently, increase the frequency of management reporting on sustainability risks at hand to the board.
Establishment of clear and well defined sustainability responsibilities for the management on different aligned functions such as legal risk, finance, investor relations, operations, and strategy.
A disclosure strategy to be established that will work specifically on prioritizing the stakeholders needs and applying leading sustainability standards to conclude meaningful disclosure.

Apart from the management model that align sustainability to business value, below listed are some of the operational recommendations that have to be inculcated in the regulatory framework and ensured by the directors in their corporate sustainability strategy:

The directors should include verifiable targets and commitments in their strategy to ensure availability of sufficient resources to the management.
The board should mandatorily discuss and sign-off on Company’s annual progress report in terms of sustainable performance.
The board must formulate a non-executive committee, comprising of independent experts in the field, a designated non-executive director who will monitor and review the content and implementation of the sustainability strategy.[5]
The non-executive directors in the committee should have a duty of care towards monitoring the effective implementation of the strategy.
The most important step is to include the ‘failure on effective implementation of corporate sustainability strategy’ as a breach of duty of care (accidental) or duty of good faith on executive directors’ part (deliberate). The breach if becomes reason for the long term loss to the company, then a derivative action could be enforced by the key shareholders.
A national regulatory body to be empowered to bring proceedings against the concerned executive directors on the non-implementation or failure of their duty in implementing corporate sustainable strategy that has resulted in serious implications to the environment or third parties.

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The duties and obligations of Board of Directors explain that they can be held accountable for their strategies in carrying out the critical corporate governance functions for the development of the company. As they have a major say in the company’s operation, they can use their discretion in the best interest of the company even in the pressure imposed from shareholders, financial markets, or hostile takeovers. The board can empower more effective risk management practices with the investors by proactively identifying, measuring and disclosing of ESG risks and accordingly implementing strategies to integrate the functioning of company as per stakeholder expectations.

On that the directors are recommended to hold a forward looking corporate sustainability strategy that has the potential to identify and address the ESG issues and their significant impacts in relation the company’s operations, supply chain, and business model.

Conclusion

Sustainability in a corporate world encompasses environmental, social, and governance (ESG) concerns that are increasingly located at the top of most board agendas. With growing trend for corporation to focus not just on their financial bottom lines but also expand their perspective on the ESG aspects for their businesses. Their position and capacity to respond to the arising Environmental, Social, and Governance risks, obligations, and opportunities determines their ability to sustain, increase, and improve their profit, and growth. To ensure sustainability in corporate governance, the directors play a significant role because of their unique position to adopt requires measures and practices while planning business strategies.

The aforementioned critical strategies for directors will surely help the directors improve corporate sustainability from long-term benefits. Whilst the role of directors is crucial, the lawmakers should also reform the company law to clarify the objective or requiring companies to adopt such a strategy that has integrated ESG considerations in all their business operations.

References:

[1] Eccles and G Serafeim, The Performance Frontier: Innovating for a Sustainable Strategy, Harvard Business Review, May 2013.

[2] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 22.

[3] Robert G. Eccles, Mary Johnstone-Louis, Colin Mayer, and Judith C. Stroehle, ‘The Board’s Role in Sustainability’ Harvard Business Review, (Sep-Oct 2020), last accessed Jan 5th 2021, at https://hbr.org/2020/09/the-boards-role-in-sustainability.

[4] CSR Governance Guidelines, last assessed Jan 5th 2021, at https://www.ic.gc.ca/eic/site/csr-rse.nsf/vwapj/Governance_Guidelines.pdf/$file/Governance_Guidelines.pdf.

[5] “Ensuring the relevance and reliability of non-financial corporate information: an ambition and a competitive advantage for a sustainable Europe (2019)”, p. 205. Last assessed Jan 5th 2021, at http://www.anc.gouv.fr/files/live/sites/anc/files/contributed/ANC/4.%20Qui%20sommes-nous/Communique_de_presse/Report-de-Cambourg_extra-financial-informations_May2019_EN.pdf.