A bombshell dropped on corporate America this summer. It was just over 300 words long, but it has challenged the fundamental purpose of business.
Looking beyond the bottom line, 181 chief executives from organizations such as Amazon and Apple to Walmart and Xerox set out a vision for their companies to pursue social impact alongside profit.
Issued by the Business Roundtable, a lobby group composed of many of the most profitable companies in the world, the statement upended the idea that a company’s sole responsibility is to maximize returns. These executives want corporations to consider their impact on customers, employees, suppliers, local communities and the planet. If new business practices follow the statement, companies could move the needle on everything from income inequality to climate change — but the C-suite alone can’t get this done. They need their boards of directors to lead the way.
The chief executives behind the Business Roundtable run the day-to-day dealings of massive corporations, commanding vast wealth and influence. But they don’t set the wider agenda. A huge shift in vision requires buy-in from boards, who represent the shareholders.
While CEOs zoom in on daily operations and issues covered in quarterly reports, boards zoom out, thinking in years or even decades. They establish a high-level strategy and provide oversight. They hire the CEO and, at times, other major executives. The CEO determines the culture of a business, but the board shapes the DNA. They can embed sustainability into a company’s genes.
Without buy-in from boards, this new mandate from executives is more of an aspirational vision than a road map to action.
Executives know this. The average tenure of a CEO in America is just five years. The position comes with high burnout rates, and when public changes need to be made, the CEO is an easy scapegoat. An Accenture study found that 93% of the 800 CEOs surveyed think that boards should take a lead on sustainability initiatives. Another study of more than 60,000 businesses found that less than 10% of boards actually live up to this expectation.
There are real hurdles to boards getting hands-on when it comes to sustainability. The first is the stubborn myth that companies have a fiduciary responsibility to maximize profits at all costs. Considering the sustainable impact, the reasoning goes, would jeopardize the bottom line. The Business Roundtable’s statement is the latest in a long line of critiques of this idea. Even within a strict interpretation of fiduciary responsibility, the best interests of a corporation are served by long-term thinking and a broader view of stakeholders.
The second hurdle is a lack of expertise. Boards are overwhelmingly drawn from the worlds of finance, law and management. In addition to the laudable push for gender and ethnic diversity on boards, there is a need to ensure a greater diversity of professional training and expertise. To address this knowledge gap, boards can establish outside advisory committees. Boards planning for the future would do well to gain knowledge of impact measurement and validation, ethics, social climate and geographic experience in developing countries.
Boards need to overcome these hurdles, not just for the planet or general population, but for their own success. Typically, boards oversee governance and risk, audits, compensation and strategy. But sustainability efforts can also help alleviate threats. A social purpose can mitigate risk by ensuring companies are resilient to volatility and inured to the social pressure of consumer boycotts, labor action or government legislation. Good corporate citizens attract and retain top talent in an increasingly competitive job market. Finally, according to findings from a Boston Consulting Group study, companies with ethical operations consistently see higher returns.
In recent years we’ve seen powerful examples of what happens when boards expand their mandates.
Novo Nordisk was an early signatory to the UN Global Compact, which includes a Board Programme that calls for sustainability to become a pillar of corporate leadership. The pharma giant has an ambitious sustainability initiative that is set and overseen by its board, including its transition to a zero-impact model. In 2016, Novo Nordisk was named the most sustainable pharma company by the World Economic Forum.
Deutsche Telekom has gone one step further. The German parent of T-Mobile has assigned each individual on its board a different principle from the UN Global Compact to oversee. Operating as a checks-and-balances system, the board members are responsible for ensuring compliance with human rights, environmentalism and transparency guidelines.
This is what board leadership looks like. If you’re a board member, you can bring this culture to your company (and if you’re a shareholder, you can push your board representatives to move in this direction). First, define environmental sustainability and social impact in terms of what they mean for your business, looking at specific issues relevant to your sector. This could involve assessing how much waste your organization is creating, the impact your company has on the local community or the knock-on effects of your supply chain. From there, craft a purpose statement, and embed it within the company culture, from onboarding new employees to performance reviews and incentives. Next, set targets for sustainability in the same way you would for revenue. Some boards assign these metrics to designated committees, while others ensure that all committees are responsible. To gauge these targets, consider integrated reporting, combining sustainability targets and financial performance in one single report.
When corporate boards shift their thinking from quarterly reports to sustainability and longevity, there’s an immediate business win, but there’s also a long-term benefit to shareholders, according to Harvard Business Review (registration required). The CEOs behind the Business Roundtable haven’t had a change of heart. They aren’t setting out to save the world. They’re simply looking to the future, recognizing that the same issues threatening the planet also put their companies at risk. They see the business case for doing good. Now boards need to see it as well.
Source: Forbes – Leadership