The world is changing faster than it ever has. As a result, companies are increasingly facing numerous and complex challenges with both immediate and long-term impacts. Today, companies are facing a health crisis, a social justice crisis and a fallout economic crisis. The ongoing COVID-19 pandemic and the social justice crisis, calling for the end of systemic racism, have reinforced the need for more diverse boards.
Board diversity is no longer ‘a nice thing to do’, but rather an essential tool in ensuring sustainable long-term performance and quality leadership[1] [2]. As boards need to revisit their composition, it is important that investors play a role in this process. They need to engage with their investee companies, ensuring boards commit to accelerating their evaluation process, review their composition and appoint a diverse mix of genders, race, professional experiences and mindsets needed to take through their multi-year strategies.
ESG moving up the board’s agenda
Given the nature of both the COVID-19 pandemic and the racial injustice protests, we expect social topics of ESG conversation to move up the boards’ agenda in the coming months. As boards adapt to the new situation, the realization that social issues are material and are part of the investment decision is growing[3]. We expect investors to increase their focus on these topics and challenge boards on their social strategy.
The developments linked to the COVID-19 pandemic, although unprecedented in magnitude, are a perfect example of how unexpected, external events can test the resilience of companies’ business models. It will take months for companies to assess the pandemic’s full impact on employees, strategy, customers and operations. For many companies, the health & safety of their employees and customers has been the priority. But, as the crisis continues, being able to meet financial commitments has also become challenging. How robust a companies’ capital position has been severely tested. It is expected that some companies will not recover, and for those who do, their boards are now faced with having to deal with the vulnerabilities exposed by the crisis, while trying to develop sustainable strategies for the medium to long term.
Following the murder of George Floyd and the subsequent mass protests that have ignited around the globe, many public companies and their boards have taken a stand against racism and racial injustice issuing public statements in support of racial equality. In the U.S., almost half of S&P 500 companies have already appointed a chief diversity officer or CDO[4] [5]. These appointments are often seen as one element of the strategies adopted by companies to remedy potential shortfalls in the company’s culture and workforce diversity and inclusion efforts.
Broadening the diversity topic on the board agenda is now unavoidable. As most companies do indicate in their statements that their diversity policy includes various factors such as gender, ethnicity, area of expertise, industry, one can only expect companies’ boards to provide enhanced disclosure on the implementation of such diversity at all levels of their organisation. More companies are publishing specific targets for increased diversity across many dimensions over the near term. As companies around the world disavow systemic racism, investors, in turn, expect them to take concrete actions, be fully transparent and demonstrate that their efforts are having an impact[6].
The role of investor engagement
Increasingly, stewardship activities need to be carried out by investors to enhance and protect the value of their clients’ assets. The purpose of these activities is to encourage board and management of companies to develop practices that will support sustainable financial performance over the long-term through the integration of key non-financial factors into strategy, risk management and operations. Investors’ worldwide focus on climate change, for example, is a pertinent demonstration that continuous pressure and active engagement can lead to positive outcomes.
Increasingly, the board’s mandate has expanded to incorporate the reflection on ESG emerging risks and opportunities, including managing stakeholders’ demands and expectations[7]. As investors also expect from boards that they think beyond existing markets, technology and products, boards must find efficient ways to identify and manage both immediate and long-term ESG risks and opportunities.
The current climate has demonstrated that now is the time for boards, as stewards of companies and the executive managements that they appoint, to implement a strategy to show that they are fully aligned with the societies that they operate in, take care of their employees and stakeholders and become the moral compass of the company.
More than ever, the quality of leadership provided by the board of directors is key and will be tested. As companies need to adapt faster to these challenges, the board has an essential role to play in this process. Boards must not only ensure that companies with both sound financial practices and a robust approach to the ESG aspects of their businesses offer better returns over time. But increasingly, boards must be fully engaged and well equipped to step in to guide management in dealing with endless challenges and decisions and ensure short-term, often difficult, business decisions take into consideration the long-term implications for the company and its stakeholders.
Find out more about Sustainalytics’ Thematic Engagement, Tomorrow’s Board, which aims to promote this new vision of the board and help start a process today that will result in them being better prepared for tomorrow’s challenges.
Sources:
[1] https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
[2] https://www.fcltglobal.org/wp-content/uploads/long-term-habits-of-highly-effective-corporate-boards.pdf
[3] https://www.ft.com/content/bc988e0e-687c-4c72-98eb-ae2595e29bee
[4] https://www.russellreynolds.com/insights/thought-leadership/a-leaders-guide-finding-and-keeping-your-next-chief-diversity-officer?rm=Recent%20Articles
[5] https://footwearnews.com/2020/business/executive-moves/companies-chief-diversity-officers-2020-1202904934/
[6] https://comptroller.nyc.gov/newsroom/comptroller-stringer-and-three-new-york-city-retirement-systems-call-on-67-sp-100-companies-who-issued-supportive-statements-on-racial-equality-to-publicly-disclose-the-composition-of-their-workforce/
[7] https://hbr.org/2019/05/the-investor-revolution
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