Last month, 181 CEOs of the US Business Roundtable committed “to lead for the benefit of all stakeholders”.
Surprisingly, this reopened a debate on what I thought was an already passé dogma of shareholder dominance—and it came from the US. But rather than more discussion, we should all now support these CEOs and make sure they walk the talk. The social and environmental crisis is a collective responsibility and it will not be alleviated without radical action from businesses.
But how to do that?
With indisputable scientific evidence that continuing on a path of endless growth is suicide, we urgently need ways forward. Accountancy Europe‘s publication, 10 Ideas to Make Corporate Governance a Driver of a Sustainable Economy, offers steps for boards to guide CEO action. It offers a constructive perspective by suggesting:
- changes in boards’ roles and practices
- legislative and non-legislative actions by EU and national policymakers and regulators.
In this article I will focus on the ideas that help businesses undertake the necessary changes to make sustainability the cornerstone of the decisions they make.
Corporate governance and a sustainable economy
Markets have proved to be a great transformative force: we need to leverage their power to move towards a sustainable economy. Boards can take the following actions to start transforming business toward sustainability:
- Recognise their public interest responsibility to make business sustainable
All boards must take their responsibility to put their businesses on an accelerated path toward sustainability and ensure the survival of the business. From a practical business standpoint, sustainability encompasses many matters that fall directly under the board’s strategic responsibility, such as: access to raw materials, energy efficiency, supply chain resilience, social license, attracting talent and contingency planning.
- Transform the business model
We will not be able to absorb the waste and pollution that our current economic system creates unless we rapidly move to a circular economy. At the micro level, it means transforming the business model. The board’s agenda must reflect this priority and monitor its progress. The board will need to broaden its approach to risk management including, e.g. the impact of stranded assets, environmental litigation and reputational risk. Boards also need to anticipate regulatory reforms that address climate and environmental challenges.
- Make board composition fit for (renewed) purpose
A new purpose requires new skills and a new approach. The people and processes in business decision-making will have to change to shift the agenda and drive it forward. The board will need to define a collective profile for its work as well as to evolve individual board members’ roles. It has been suggested that the chief financial officer should evolve into a chief value officer, who can evaluate the company’s value creation beyond financial success. Many qualified accountants can already fill this role. Boards should also seek to diversify professional competences and ways of thinking. Knowledge of sustainability issues relevant to the business has become critical. Most importantly, boards need members with the capacity to think laterally, challenge and speak-up. To this end, it is useful that different cultures, genders, social backgrounds and generations find their way into the boardroom.
- Regularly (re)assess functioning and processes
Board efficiency starts with putting effective processes in place to constantly assess the board’s functioning. In light of the vital sustainability challenge, Boards need to reinforce or develop:
• objective director selection and recruitment procedures
• ad hoc on-boarding and development programmes
• balanced reward and retention policies
• regular individual performance assessments
• full board assessments.
Each of these processes is instrumental to change and must integrate sustainability considerations. To help prevent complacency and groupthink, these processes need to have the necessary degree of independence and objectivity.
- Think in an integrated way
Boards need to integrate environmental and social considerations at all levels of the business and to take a fully integrated approach to strategy, management and reporting by:
• a comprehensive approach to strategic planning including scenario analysis
• managing change inclusively and efficiently through experimentation, decentralisation and empowerment
• adopting the integrated reporting (IR) framework to measure transformative progress and share experience on issues that are of public interest.
- Transcend the business’s boundaries
The board needs to comprehend the entire supply chain, stakeholders and ecosystems of the business, at least to manage reputational risk from a narrow self-interested perspective. Appropriate due diligence needs to be conducted throughout the entire supply chain. Impacts on markets need to be analysed and measured, including full lifecycle assessments of products.
Act now, act swiftly
Making our economic system sustainable is a collective responsibility. In their different capacities, professional accountants play a key role at all stages of corporate governance. Good business decisions start with reliable information. As businesses change their benchmarks for success, accountants contribute by: measuring impacts, disclosing information and providing trust.
The EU has been showing outstanding leadership. We encourage it to continue, including in multilateral forums, and taking decisive action even if others hesitate. Competitiveness is important, but without a viable planet it doesn’t matter anymore. The time is now to choose a more sustainable future. A first step for policymakers is to create coherent regulations for a level playing field so that frontrunners in sustainability are not disadvantaged compared to those that lag behind.
Corporate governance needs to take a holistic approach, considering all aspects of doing business and prioritising the transition to a circular economy as this appears to be the only option in a finite world. Change starts today.
This article and our publication aims to inspire debate, so we welcome your feedback. Read 10 Ideas to Make Corporate Governance a Driver of a Sustainable Economy and send your thoughts and opinions on how corporate governance needs to evolve to email@example.com by 1 November 2019.
Olivier Boutellis-Taft is CEO of Accountancy Europe.