Ideas & Debate

Why company boards must now lead from the future

boards

Summary

  • A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions.
  • When a social or environmental force poses material risks, directors need to consider those risks in decision making in order to adequately discharge their fiduciary responsibility.

Directors of companies are increasingly getting challenged by investors and other stakeholders to be proactive in evaluating competitive threats, opportunities and understanding disruptive market trends such as environmental and societal concerns.

For instance, the supervening effects of Covid-19 on businesses were evidence that environmental and social issues have the potential to impede corporate plans, performance and even business models. Boards that had put in place mechanisms to adjust to the pandemic saw their companies recover faster from the effects of the pandemic.

A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions.

When a social or environmental force poses material risks, directors need to consider those risks in decision making in order to adequately discharge their fiduciary responsibility.

Most often, the board spends time reviewing the past and the present in quarterly reports. It is, however, important that a board finds a balance between overseeing the present state of affairs and preparing for the needs of the future of the companies they lead.

Over time, there has been increased understanding by investors that a company’s performance on pertinent environmental, social and governance (ESG) factors has a direct correlation to the long-term profitability of the business.

With this understanding, investors are now, more than ever, focusing on board sustainability-competence while making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, investors are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy and putting pressure on boards to show themselves as competent in ESG issues.

While most business leaders recognized that ESG issues should inform their corporate strategy as important factors, the transition from the “knowing” to “doing” still remains a stubborn holdout in the sustainability revolution.

It is therefore important that the board steers the “doing” part in matters of sustainability by having the ability to engage thoughtfully on material ESG issues as one cohesive deliberative body and to integrate sustainability into broader board conversations and functions, effectively making sustainability a part of the fabric of board oversight, integrated into decision making.

A company’s board can perceive sustainability as a business opportunity or as a costly inconvenience. The way a company perceives sustainability, and how it decides to incorporate it in its business strategy and in its relationships with stakeholders will eventually determine whether sustainability can become a competitive advantage, reduce costs and risks and lead to an increase in revenues and intangibles, such as reputation and customer loyalty.

It is largely up to directors to determine how this competitive advantage can be achieved, and indeed how to define the company’s success, which has in the past, been premised primarily on financial performance. Today, a company’s success will include addressing ESG matters and integrating them into the company's strategy and business model.

For sustainability to become a competitive advantage, it needs to be present in the boardroom, discussed as strategy and transformed into concrete actions to be implemented and followed up by management. Board oversight is central to investor trust and confidence in a company’s future performance.

Directors can enable more effective engagement with investors by fostering proactive identification, measurement and disclosure of ESG risks and opportunities and provide insights into how their companies are integrating sustainability and changing stakeholder expectations strategically.

While it is clear that policymakers and regulators are in a strong position to drive change, what is more powerful is for the change to come from the top-down within companies. The board therefore needs to play a major role as the primary stewards of risk and guardians of long-term enterprise value, through setting clear ESG policies and giving strategic direction to the business operations, as well as overseeing the ESG roll-out and implementation throughout the process.

Having the strong commitment, collaboration and strategic direction from the board is an essential first step for a company as it starts its sustainability journey.

A clear and compelling mission should be at the heart of every company’s efforts to enhance the company’s positive impacts on the environment and society. Without such a purpose, a company cannot have a sustainable corporate strategy, and investors cannot earn sustainable returns.

Wangui is Chief Officer – Regulatory Affairs at the Nairobi Securities Exchange