U.S. Boards Lag on Sustainability

The TakeAway: Conference Board Study Says Most US Boards Still Pursuing Random Approach to Sustainability

With rapidly changing financial regulations, the emergence of coherent global standards for disclosure, and a record breaking year of sustainability shareholder resolutions, you’d think that corporate boards would be paying close attention.  But you’d be wrong, according to a new report from The Conference Board, which finds that most American firms fall short when it comes to instituting a structural framework for board oversight of corporate sustainability.

Research conducted for Sustainability in the Boardroom revealed that, “most companies are still at the early stage of developing an integrated, enterprise-wide sustainability program.”  Author Matteo Tonello, director of corporate governance research, says, “In particular, what appears to be largely missing is access to independent sources of information as well as the detailed procedures and metrics for effectively integrating social objectives into daily business activities.”

Working under the auspices of the Research Working Group on the Integration of Corporate Governance and Sustainability that The Conference Board formed in February 2009, Tonello conducted a survey of corporate secretaries of fifty-four companies from different sectors and revenue size groups from September 2009 to January 2010.  Among the findings:

• Most surveyed organizations do not employ any of the widely endorsed standards existing today in many areas of social and environmental concerns (p. 9);

• Often, companies resort to their own definition of sustainability, therefore preventing the development of a level playing field for performance assessment by investors and other constituents (p. 9).

• The majority of companies reviewed do not assess the impact of their sustainability activities on the organization’s financial performance (p. 10).

• Shareowner activism and resolution-filing on sustainability and governance  issues ranging from climate change to political spending and from board diversity to pay disparity have risen in the past several years, increasing pressure on Directors to understand the rationale of such requests for change and adapt corporate strategies to evolving market trends and emerging standards (p. 13).

In a post written for Harvard Law School’s Forum on Corporate Governance and Financial Regulation, Tonello summarized the study by observing that “Directors mostly rely on reports by senior executives (89.2 percent of respondents) and almost never use additional sources (including peer-company benchmarks, environmental reports, director education programs, and consultants) that would help them critically verify and analyze any internally produced information on these matters.  For most companies, sustainability discussions with the board only take place in reaction to emergency situations like the oil spill in the Gulf.”

The question we have is, what will boards do:  wait for mandatory requirements or another corporate catastrophe, or be proactive and develop suitable structures?

Some would say that the international standardization of sustainability reporting has matured into a tacit requirement, but this Conference Board report shows just how far US companies fell behind global trends under the lackadaisical Bush administration approach to modern economic thinking.  Reporting on climate and sustainability issues is a critical first step, something that is necessary but not sufficient to progress.  Real change occurs when companies embed these vital issues into corporate strategy, risk management, and business operations—and then make them a legitimate part of board oversight.

As the report shows, it is clearly up to US investors and the public to call on corporate boards to meet the new demands and expectations of global capitalism.