Having addressed in previous blogs challenges corporate boards face in selecting the board chair, succession planning, replacing the CEO, and measuring the effectiveness of the board, here I address the board’s corporate social responsibilities (CSR).
In Leading the Charge, General Tony Zinni comments on corporate social responsibility: “CSR has been interpreted in many ways. It can cover everything from businesses treating employees properly, to producing a quality product at a fair price, to looking out for the interests of shareholders to investing a portion of profits in the community, to making significant charitable contributions and preserving the environment. It’s clear that society’s expectations are moving beyond the legal minimums and that compensation, profits, and behavior are under much greater scrutiny.”[i]
From the perspective of a director, one of the greatest challenges is dealing with mixed messages, not messages from within the company, but messages coming directly or indirectly from shareholders. A current example is the emphasis on corporate boards embracing environmental, social, and governance (ESG) priorities in fulfilling their corporate social responsibilities.
How should a director respond to the mixed message: prioritize ESG versus prioritize financial performance? Directors are elected by shareholders who may or may not give higher priorities to ESG than to the company’s financial performance. Again, the Tyranny of OR surfaces; instead of treating the issue as either/or, why not treat is as both/and? Finding the right balance is the responsibility of management and directors.
However, governing board responsibilities extend beyond shareholders. Other constituencies include employees, consumers, suppliers, distributors, retirees, and communities within which employees are located. Peter Drucker rightly noted, for a company to cover CSR costs, it must first make a profit in fulfilling its mission.
ESG advocates exert pressure on governing boards through shareholder advisory services and by nominating directors who’ll prioritize ESG initiatives. Sensing a business opportunity, consulting firms developed ESG ranking systems; they’ll evaluate and certify your company meets ESG requirements—at a price, of course. In the end, governing boards must listen to all stakeholders and work with management to ensure its decisions achieve an effective balance of ESG and financial goals. As Drucker noted, the former cannot be achieved without achieving the latter. The keyword, of course, is effective. The objective is neither to maximize ESG performance nor to maximize financial performance, but to maximize a combination of ESG and financial performance.
In today’s political climate, corporate boards are faced with daunting issues involving the diversity of the board and the diversity of executive teams. Despite the advantages of having a diverse governing board and leadership team, politicians (riding on the coattail of the U.S. Supreme Court decision regarding admissions criteria used by universities) have weighed in on diversity, equity, and inclusion (DEI) to the point that consideration of diversity in selecting board members and executive team members is being questioned in some companies. When attorneys general from thirteen states sent a letter to Fortune 100 CEOs challenging race-based hiring decisions, it left little doubt that the spillover effect of the Supreme Court decision would impact governing boards.
As I stated in the opening paragraph of Why It Matters, “The adage ‘When the going gets tough, the tough get going’ was manifested during the COVID-19 pandemic. The fiery furnace created by the virus and its aftermath separated the dross from the gold. People’s true natures were revealed. Individuals we may not normally think of as traditional leaders stepped forward in the face of devastation and provided exemplary leadership—nurses, doctors, first responders, neighbors, family members, and friends. At a time of uncertainty, division, and social unrest, many people came together and worked to serve others. Conversely, many people holding leadership positions failed to lead when effective leadership was needed.’”
The DEI issue is an opportunity for exemplary leaders to step forward and ensure that political pressures don’t prevent the selection of governing board and leadership team members who are well qualified to serve and who bring to the board and leadership team the strength of diversity.
Next Week: Corporate Boards—Part 6
[i] Tony Zinni and Tony Koltz, Leading the Charge: Leadership Lessons from the Battlefield to the Boardroom, Palgrave Macmillan, New York, NY, 2009, p. 91.