Why Boards Need to Change

Sustainability is an increasingly important business issue. There is a growing recognition that the long-term viability of corporations depends on how they impact the environment and society. In response, many companies have initiated sustainability and corporate social responsibility programs. Some of these programs represent good first steps toward improving the impact of their organizations on the environment and society. However, they are not enough.

For organizations to perform well financially, socially and environmentally, they need more than just a program. They need a fundamental change in their goals and how they achieve them. Instead of a sustainability program, corporations need a DNA change that must begin at the top.

Research on organization change programs shows that the initial gains they produce rarely survive unless they address the standard operating procedures of companies from top to bottom. In the case of creating a corporation that performs well socially, environmentally and financially, there is every reason to believe that this can be accomplished only if major changes occur in how corporate boards are structured and operated. Major change in the performance results that organizations achieve can only come about when leadership at the very top of an organization changes its performance goals. This requires action by the corporate board and by the senior executives of the company.

Unfortunately, most boards today are not able to provide the kind of leadership that is needed to move major corporations toward sustainable effectiveness. Instead, many corporate boards are designed, staffed and function in ways that are intended to “maximize shareholder value” — a goal that is singularly financial. As a result, when it comes to issues of corporate social responsibility and sustainability, boards are “OK” with programs, grants and projects that add to the bottom line. They are also “OK” with low-cost social and charitable programs that improve the corporation’s image. What they are not OK with or knowledgeable about is how to manage, organize and hold their organizations accountable for performance that is targeted at optimizing a combination of financial, social and environmental outcomes.

How do boards need to operate so that they can lead their organizations’ efforts to become sustainable corporations? Let’s look at three areas where change is needed: board membership, performance information and performance accountability.

Board membership Most corporate boards in the United States and other developed countries are staffed by individuals who understand both the financial performance of the organization as well as the products and services it offers. These board members are, however, generally less knowledgeable about how their organizations impact employees, society and the environment. This needs to change dramatically. Boards need to have members who understand the
impact organizations have on the environment, their employees and society in general. This stakeholder approach to board membership differs significantly from the membership model that most boards use today, which is oriented toward financial accountability.

Performance information For a board to lead and evaluate the effectiveness of a sustainable organization, it’s critical that the board receives information about the company’s triple-bottom-line performance — its performance as measured not only by profits, but also in terms of the company’s impact on society and the environment. Today, all too often, boards do not have good information about the environmental performance of their corporation or about its social impact. A number of efforts are currently under way to create better information. The Global Reporting Initiative is a promising effort to improve the measurement of the environmental and social impact of organizations. It is currently used by more than 50 percent of large U.S. corporations. GRI is increasingly improving its measurement approaches so that boards can get comprehensive longitudinal information about the environmental and societal impacts of their organizations.

Shareholders, too, need to get information about the impact of their company on the environment and society. This is an important aspect of assuring that boards and organizations will be held accountable for their social and environmental performance, as well as their financial performance. All three have to be held to high standards, and one way of doing this is to have public reporting of performance for all three areas. One organization that has made a lot of headway in the reporting area is Gap, Inc. Gap’s corporate website and annual
reports have continued to develop and expand over the past 10 years. Today, shareholders and the public can get detailed, well-organized information about Gap’s efforts to address a variety of social and environmental issues.

Performance Accountability The right board membership and the right measures are critical components that need to be in place in order for a board to lead a sustainably effective organization. But they are not enough by themselves. They need to be translated into performance goals that the board holds management and the rest of the organization accountable for achieving. Such performance goals enable a board to make tough, informed decisions with respect to business strategies and actions that drive their organization toward sustainable effectiveness.

Corporate boards have to make difficult trade-offs when considering actions that are not positive contributors to all three areas of sustainable effectiveness. To do this effectively, boards need to have well-developed guidelines concerning how decisions are made. This is particularly true for decisions that have major effects on sustainable effectiveness outcomes. For example, boards need to be clear about how much they are willing to reduce their organization’s financial results to improve its impact on the environment. They need to be clear about how the organization will make decisions that impact the well-being of its employees.

The toughest decisions that boards face are those where there is a significant negative impact on financial performance but a significant positive effect on either or both the social and the environmental performance of the corporation. Boards can’t be true to sustainable effectiveness if their decisions consistently maximize the financial performance of the organization at the expense of social and environmental performance. Unfortunately, in their decision-making today, directors often feel bound by their fiduciary responsibilities to maximize shareholder value.

In response to this tension, an interesting and new alternative has appeared. In some U.S. states, companies can now become benefit corporations. When an organization is incorporated as a benefit corporation, the board is legally required to consider other stakeholders in addition to shareholders in its decision-making. This frees the board, for example, to reduce the financial returns to shareholders in order to improve its company’s environmental and social performance. Perhaps the best known U.S. company to adopt this new form of incorporation is Patagonia, Inc., based in Ventura, California.

The Impact on Boards

The changes we are suggesting will make the role of boards more difficult. After all, decision-making is more complicated when you try to balance the performance of an organization so that it integrates three kinds of outcomes. Inevitably, board members will need to spend more time on corporate business. Decision-making is likely to take longer and involve intense debates as diverse board members discuss and work to develop decisions that integrate social, environmental and financial objectives. This is likely to be done effectively by a board only if it has positive decision processes and its members receive training in group decision-making and spend some time developing themselves as a decision-making team.

Change is also needed in the committee structure of boards. To develop effective strategies and bring to the overall board the right set of decisions to be made, boards need committee structures that reflect the sustainable effectiveness objectives of the organization. Unilever is a good example in this regard: It has a corporate responsibility and reputation committee that is charged with the oversight of Unilever’s social obligations and its reputation as a responsible corporate citizen.

Board Leadership

To lead sustainably effective organizations, boards will need to look, feel and operate very differently than they do in traditional corporations. The information they receive needs to be different and their decision processes need to be radically changed. Unless boards change, many of the good, initial sustainability efforts that have been launched in corporations are likely to be temporary. For organizations to achieve sustainable effectiveness, they need a corporate board that is designed to lead in a sustainably effective way. This means that boards need to change their way of operating so that they are focused on the integration of social, financial and environmental performance — just as they expect the rest of the organization to be.