key: cord-0060698-iudtx9cw authors: Wolfe, Jennifer C. title: Environmental and Social Governance date: 2020-08-30 journal: Disruption in the Boardroom DOI: 10.1007/978-1-4842-6159-0_6 sha: 7af8eaf7dfd156aeb9b1ac813498aa61c9d2c38f doc_id: 60698 cord_uid: iudtx9cw Environmental and social governance, referred to now as “ESG,” has become a hot topic in boardroom education. In brief, ESG means our society as a whole expects corporations to be responsible and accountable to not just shareholders but all stakeholders (employees, vendors, customers, strategic partners, and the community as a whole). It means boards may be held to a standard in the future for how well the corporation cares about the stakeholders impacted by it vs. just financial value to shareholders. This means boards must care about what matters to stakeholders – “Stakeholder Values.” In 2018, Larry Fink, CEO of BlackRock, wrote a letter to other CEOs to pursue a purpose beyond profits and consider all stakeholders. He called for purpose and profit, exemplifying a new era for corporations in an era of corporate social responsibility. CEOs from Apple, JP Morgan, and many other high-profile companies chimed in to agree. This chapter will briefly address what these issues are and how the board is expected to address them. Most of these issues deal with the concept of "tone at the top," meaning the board along with the CEO help set the tone or culture of the organization. All of these ESG issues deal with culture. What is valued in the company? How do people treat each other? How do you succeed and get ahead? While some argue this is all about "political correctness," it's really about the workplace environment. It's also about how your company leads in a digital age where any off-color comment caught on camera can go viral and ruin your personal reputation along with damage to your company's brand. It could be a senior leader or even a counter worker at a location, regardless it reflects badly on the whole company when it goes viral. Remember in 2018 when a Philadelphia Starbucks employee kicked out two African Americans waiting for a friend but who hadn't purchased anything? The Starbucks CEO shut down all stores in the United States for racial bias education as a result. Was that overkill or an important connecting point with the public? Was the outcome a more favorable outlook on Starbucks by customers? It's a difficult time to manage these issues at the top. Failure to address perceived failures anywhere in the organization can illustrate a lack of sensitivity to issues important to many of your stakeholders. And, yet there is a point where leaders must be practical and realistic about succumbing to an angry Twitter mob and the dangerous precedent that can set. This is not easy for leaders. For almost all of the ESG issues, there are divergent viewpoints and research and statistics on which those viewpoints rely. In the boardroom, there is a responsibility to hear all of those viewpoints, but then make appropriate decisions about the culture of the company to best meet the needs of your stakeholders: employees, customers, vendors, strategic partners, shareholders, and the community you serve. Let's look at a few of the bigger issues, and then I'll close with an exercise boards can do to develop their own point of view around Stakeholder Values. On April 10, 2017, after a paying customer was dragged off a United Airlines flight in Chicago kicking and screaming with a bloody head, the CEO of the company tweeted: This is an upsetting event to all of us here at United. I apologize for having to accommodate these customers. Our team is moving with a sense of urgency to work with the authorities and conduct our own detailed review of what happened. We are also reaching out to this passenger to talk directly with him and further address and resolve this situation. He was blasted immediately on Twitter for not recognizing the gravity of the situation or taking responsibility for the fact that a paying passenger was dragged off of one of his airplanes so his flight attendants could get to their next flight. The airline had prioritized their own logistics problem over passenger needs and safety. In his tweet, Munoz thought he was defending his employees and their position. In the viral social media world, he was seen as a jerk out of touch with what it is to be an average passenger on his planes. Two decades ago, there would not be a way for that message to circulate the flying public so quickly. If a reporter didn't report on it, it would simply go away. But today, this story and others can live on in social media purgatory. CEOs need to be careful about their use of social media when we live in a time where someone somewhere will likely be offended about almost anything. Some do it right. Tim Cook, of Apple, for example, has been praised for how he interacts with Apple customers and tweets about it -showing genuine concern for his customers and prioritizing customer service. Virgin CEO, Richard Branson, also focuses on engaging with his constituents vs. selling. Elon Musk has also been effective at answering complaints or responses to customers. Airbnb CEO, Brian Chesky, has been known to ask for ideas and crowdsource new ways to do things through Twitter. Social media can have strategic purpose and achieve important goals, carefully managed, but the downside must always be considered. You would not give a press conference without carefully scripting your remarks and being prepared for how you will answer questions. The same diligence, if not more, should be applied to social media because it can be amplified so quickly and is never really erased. Additionally, almost anywhere we go, cameras are watching, cell phones can be turned into recording devices, and everyone wants to post a popular video. If you are a high-profile CEO or director, be careful what you say and do in public. It can easily be used against you. This is simply the time in which we now live. A heightened level of awareness is critical. The bottom line: be careful what you say and do in public and in the boardroom, monitor your own social media, and track what your CEO and other executives are doing on social media. Companies are responding to demands to be good stewards of the planet, be conscientious about environmental issues, and think about their use of energy. From a marketing perspective, "being green" has been popular since the 1980s. McDonald's, for example, stopped using styrofoam boxes and instead switched to environmentally friendly cardboard boxes. Also, in the 1980s, Chevron launched a series of expensive television and print ads to convince the public it was environmentally friendly. Today, marketing about "green" or environmentally conscious initiatives certainly is a winner and sometimes required. BP spent nearly 100 million in advertising in just four months following its 2010 oil spill in the Gulf of Mexico to reshape public opinion. But it's more than just public relations, the demands by the public at large to be environmentally conscious are very real. This means the conversation in the boardroom about the environmental impact of the company has become increasingly important. As referenced in Chapter 3, Microsoft's announcement at Davos 2020 that it would "erase" its carbon footprint by developing technology to reverse the effects sends a clear message that companies are striving to demonstrate their commitment to not only reduce their impact on the environment but erase it. Yet, just a few weeks later, it became clear fulfilling on that promise may be difficult. When a facility in North Dakota ran short of energy from its local provider, Microsoft flipped on diesel generators to power its campus on a very cold day. In response, Microsoft's chief environmental officer, Lucas Joppa, said "no one should have their head in the sand about the difficulty of the energy transformation for a global economy." Many other companies like Johnson & Johnson and Pernod Ricard have made public pledges to achieve goals for emissions reduction or use of renewable energy. Goals might include use of energy, water, reducing the carbon footprint, sustainable production practices, and waste reduction, among others. Directors should discuss these issues and develop clear points of view around the company's position related to climate change and what steps, if any, it is taking to address demands from the public or respond to government treaties and policies addressing climate change. And, if it makes pledges for public relations reasons, there needs to be a clear strategy to achieve those goals. Despite the many speeches at the annual World Economic Forum about Climate Change, companies have not yet changed their policies when it comes to private jets or flying employees around the world. A Swedish university study called out celebrities who call for the need to address the climate crisis but are themselves "super emitters" owning and traveling on private jets. Microsoft founder, Bill Gates, took 59 flights in 2017 traveling more than 200,000 miles on a private jet. Jeff Bezos flies a Gulfstream G650ER that seats eight people. Mark Cuban owns three jets plus two 757s to fly around his Dallas Mavericks team. He also charters out a private 767. Elon Musk flies a Gulfstream G650ER. And Google founders, Sergey Brin and Larry Page, own a fleet of planes through a holding company. Take Davos 2020, for example. For this four-day conference, nearly 600 private jets arrived to bring in the billionaires and world leaders, a number that does not take into account public figures such as presidents and prime ministers. The World Economic Forum says it offsets the carbon emitted by funding projects that seek to reduce emissions. However, this logic falls flat. It's a nice talking point, but that practice does not eliminate the carbon emitted from each private jet. This type of scrutiny is front and center on boardroom behavior. This is the fundamental example of needing to "practice what you preach." So far, high-profile companies and their leaders aren't ditching the jet lifestyle. With the increased attention on climate change and how companies are stewards of the planet, expect to see more scrutiny of personal use of jets and how companies make decisions to put people on the road vs. using technology for meetings. As boards address environmental issues, they need to be prepared for a realistic look at what the company is doing and what senior leaders and board members are doing that could be called upon as hypocritical. None of this means you can't still use the company jet, but recognize that if you do, you need to be careful how you message the company's environmental initiatives because in an environment that quickly calls out behavior of those with wealth and power, you need to be prepared. Likewise, in the aftermath of the 2020 Coronavirus Pandemic, companies will be evaluated for how they stepped up and did their part to support employees and the health and wellbeing of the country and the world. At its 2019 annual meeting, Amazon's board recommended a vote against a climate change proposal calling for the company to report how it is "planning for disruptions posed by climate change, and how Amazon is reducing its company-wide dependence on fossil fuels." The proposal, put forth by roughly 8000 employees, received just 30% support from shareholders, but the issue remained of paramount importance to Amazon's workers. In September, after Amazon employees prepared to join a large protest over the tech industry's perceived inaction on climate, the company announced that it would join an effort to reduce climate impact. Broad groups of stakeholders will likely continue to make ESG demands of management and director "mindshare" in 2020 and immediately beyond. Boards should ensure that their companies have identified the most relevant stakeholder groups and that they have a robust strategy to engage with them. What is your policy on being a good steward of the environment? Beyond talking points, how do you back it up with consistent actions? And, when you can't, how are you prepared to defend or communicate your position? #MeToo, Sexual Harassment, and Related Issues The last few years have seen the fall of powerhouse media moguls such as Harvey Weinstein, Matt Lauer, Less Moonves, and Charlie Rose, to name just a few. The gauntlet has been thrown down that women will no longer tolerate sexually hostile work environments or harassment from top bosses. Boards, too, have responded by firing these powerful men, signaling a zero-tolerance policy. While many women have celebrated this long sought-after success and are thankful the light has finally been shined on egregious and bad behavior, it has now left some important questions for both men and women in the workplace. How do we create a safe space to build important friendships and collegial relationships that are important to career growth? The reality is that many women need relationships with more senior men (as well as women) to ascend to higher positions. It's important to discuss the board's viewpoint about some of these issues and the position on critical matters that will be faced in the future. While the light was turned on to this, there remain concerns of volatile or uncomfortable work environments. Uber employee, Susan Fowler, wrote a blog about the "frat boy" culture at Uber, which was addressed through a cultural study and has now become a vocal advocate for women in the workplace, working at The New York Times. Google employees protested its handling of sexual harassment claims in November of 2018 saying that one of Google's leaders, Andy Rubin, walked away with $90 million in an exit package despite finding the sexual misconduct claims against him credible. Nearly 20% of their workforce around the world walked out in protest. The demand by women for a zero-tolerance approach to senior executives who abuse their power is not likely to go away. But what really matters is addressing the culture that allows this to continue. All of the ESG topics relate to culture that is set at the top. In the boardroom you decide whether the senior executives are held to the same standards as everyone else. You decide if they are given golden parachutes amid evidence of abusive behavior. There may be good contractual or other reasons to allow an executive an easy way out, but the impact on the culture must be considered. As you address these issues, there are surely policy positions you can put in place to ensure everyone has an anonymous channel to voice concerns and for claims to be properly independently investigated. The HR and legal departments need to work together to provide that framework to ensure employee safety. It starts with candid conversations among board members and the senior executives, continues with arriving at clearly defined viewpoints, and ends with policies that are fairly enforced. Consider these questions: • How do you ensure you have a corporate culture where women are not directly or indirectly pressured into sexual relationships with men higher on the management chain? Or, for that matter, anywhere in the company? • To be fair, how do you ensure women don't abuse their power toward more junior men in the organization as well? • How do you protect whistleblowers? • Do you monitor social media and recruitment sites for indicators that your workplace could have a hostile work environment? • How do you create a safe space for all employees to report inappropriate behavior? • Do you have cameras to capture workplace interactions and verify the veracity of statements made? • Do you have clear policies about travel by coworkers to eliminate the propensity for an inappropriate relationship to form? • How do you ensure that there are positive and productive mentoring relationships to help both men and women develop important connections to more senior people and advance their careers? Diversity Diversity in the workplace has been a hot topic for the last two decades. At the boardroom level, there continues to be a drive for more parity among women and men and minorities during board refreshment to ensure diverse perspectives are heard. Most companies embraced this concept years ago and have built important programs to provide workplace diversity employment and retention practices, as well as cultural awareness. The Women's Advocacy Group, 2020 Women on Boards, said that by the end of 2019, women held more than 20% of the board seats at the top 3000 publicly traded companies. The number is a significant increase from 15% in 2016, when Equilar began tracking the metrics. Sixty percent of women in board positions took the job when new seats were created by expanding boards, not by replacing male directors. However, one-third of companies still only have one woman on the board. According to the NACD annual report, more women are joining boards; however, progress is slow. There is no shortage of groups and organizations dedicated to helping women get their seat at the table with a goal of parity among male and female directors. California and Illinois have passed legislation requiring companies to appoint women to their boards or face fines. In Europe, the EU Commission approved a 40% quota of female nonexecutive directors on company boards by 2020. While there isn't any federal legislation currently pending in the United States, recruiters say there is definitely a push for it right now. The reality is what is mandated gets done, but some are concerned that's not the best way to do it. Some fear that the women on those boards will not be treated the same or have the same power as the men on the board. And others just feel quotas are insulting. "This legislation is, to me, insulting," Lucy Dunn, President and CEO of the Orange County Business Council, said in a statement after the vote. Others cite that what gets measured and tracked gets done. In 2019, Forbes issued its list of innovative leaders that included only one woman. They were quickly blasted for that misstep. Whether this is making a difference or not is also debatable. In France, Germany, and the Netherlands (all of which have a quota a system), the percentage of senior management jobs held by women has not really changed and the pay gap did not decrease either, according to Forbes. Whatever your opinion may be on this issue, it is likely that more quotas will come until there is parity of women and men on boards. Diversity of the workforce will not go away as the workforce of the future shifts and changes. Like all of these cultural issues, it is important to have a clear viewpoint as a board and continually revisit your position. Another important element of diversity that is emerging in the boardroom is diversity of thought. According to an ISS (Institutional Shareholder Services) study, critical director skills are missing from company boards. For the last few decades, most boards seek out a CEO or CFO of a similarly sized company to serve on the board. While that made sense two decades ago, it simply doesn't anymore. There are too many new issues that require specialized knowledge and experiences; all of which have been discussed in this book: changing business models, new technologies, cybersecurity, the future of work, societal shifts, and environmental, political, and social issues that require more than just expertise as the CEO or CFO. Most CEOs are charismatic leaders who rise to the top through adept relationship building and savvy decision making. CFOs understand the complexities of finance and audit. Both skills are certainly still needed in the boardroom. But not every seat should be filled with that profile. When it comes to diversity of gender or race, the practicality is that there is a small pool of individuals who check the gender or race box desired while also checking the ex-CEO or CFO box of a similarly sized company. Accordingly, this contributes to the lack of diversity of race, gender, and thought in the boardroom. The push to add new skill sets in the boardroom as well as gender and racial diversity will continue in the decade ahead. By changing the skill sets sought after, boards may inherently widen the pool to allow for more gender and racial diversity. Political Polarization and Activism in the Workplace Decades ago, the general rule was to not discuss politics in the workplace. Policies might be discussed if relevant to the matter at hand, but personal politics was, well, personal. That is no longer true. In fact, employees become so vocal about their politics that at some companies, they revolt if the company takes a political position they don't like. Many employees believe it is their duty to hold their company accountable when the actions differ from their personal political views. There is a sharp departure on this philosophy between Millennials and the prior Baby Boomer and Gen Xer generations. Google, for example, had an employee protest over the company contract with the Pentagon to develop artificial intelligence for drone video analysis. Senior executives said that it was a $9 million project that could lead to billions of dollars in cloud work for the company. More than 4000 staff signed a petition to stop it and some actually quit. Thousands walked off the job worried that the technology could be used to kill people. Many argue the technology would save lives by improving the functionality of the AI. But the project was a public relations nightmare and the company ultimately caved. Google is still, however, working with China on artificial intelligence, known as Dragonfly. The program could help the Chinese government censor broad categories of information through the government-censored Internet, particularly those in categories related to human rights, democracy, health, religion, and peaceful protest. Employees also protested this project, but it was not cancelled by executives. So, Google continues to help China censor the Internet and violate human rights, but it is no longer helping the US government improve AI accuracy in drone technology that could save lives in the future. Employees at Amazon, Facebook, Google, and Microsoft also all pledged to walk out in September of 2018 in a climate change protest in order to pressure their companies to do more on climate change. Most of these companies cite some changes they are making as a result. While it can be argued that these companies have a largely liberal employee base and these were essentially liberal positions, it raises an important question, "how do you manage political polarization in the workplace?" Google was facing a class action lawsuit by former Google employees claiming discrimination on political bias against conservative viewpoints. The judge allowed the case to move forward, but the employees ultimately dismissed the case without a clear reason why. Facebook has been targeted under the "cancel culture" of celebrities because they believe their policies on political ads support conservative agendas. The board will have to address the culture and the policies of the organization to handle the political polarization and activism of employees. Whatever your personal position, the board needs to clearly determine how it understands Stakeholder Values and when and if it will cave to "cancel culture" pressure. Will this type of employee revolt be tolerated, encouraged, successful? I have talked to many CEOs who understand that all political viewpoints need to be heard and understood to make savvy decisions. Shutting down any one viewpoint does not lead to better outcomes, particularly if you alienate half of your customers in the process. It is dangerous for boards to respond to extremist demands from their employees without a clear strategy behind it. Do you allow or encourage employees to voice their political views? Do you encourage respect among differing viewpoints and suggest that employees focus on work while at work? That unless their job is to address a policy issue, that they focus on what they are doing? Will that work when we have two generations that very much want to feel they work for a company they believe in and is doing the right thing? Would it harm you if a big part of your workforce walked out because of a company position on a political issue? Some companies may not be facing these extreme issues like Google or Facebook, but it's worth a conversation over your next board dinner. What is your policy on politics in the workplace? To understand how you may have to adapt to address this issue, you need to fully understand your company's stakeholders. Not every company will be the same, so there is not a one-sizefits-all solution. To evaluate how you engage stakeholders, take time to talk with your fellow board members. Use the following exercise as a guide: Taking time to understand your stakeholders will become a critical role of the board in the future. This isn't something you can outsource to a consultant, you need to take the time to discuss these issues and listen to stakeholders in order to make the sage decisions that will be required of boards in an increasingly complex time. This is one of those issues where we will need moral courage from our leaders. It's easier to just give in to an angry mob, but not always the right thing to do. Having principles driven by ESG pressures is important. But the real test is whether as a board you stand by those principles when it is not convenient or easy. To make tough decisions, you need to understand your stakeholders before you find yourself facing a disruptive event. What do they value, what matters to them, what concerns them, how do you meet their needs and values? How do you meet the needs of your stakeholder values? 4. How do you incorporate this into your boardroom discussions? When making decisions, do you ask how this impacts your stakeholders and what matters to them? Do you survey your stakeholders through an outside party? a. Consider using a 360-survey approach with customers, employees, and vendors to better understand what issues they face and how your actions impact them What happens if you anger these groups? Disruption in the Boardroom Discussion Questions for the Boardroom Additional ESG culture questions to consider: 1. What is your company policy about the CEO and directors on social media? How do you ensure the culture provide a safe space for all employees free from unwanted sexual advances, particularly by senior executives or those who have more power in the organization? What are you doing to achieve more diversity and parity among your executive team and board? Is there a company position on climate change? 5. How do you address employee cultural concerns for recycling, sustainability in decision making, and purchasing power? How do you evaluate your use of energy and future energy? Are your buildings and facilities designed for the future? How do you create a culture of inclusion and watch for unintended bias? How are you considering diversity of thought and experience on your board? How do you ensure employees can safely report inappropriate sexual behavior or advances? 11. Do you have a zero-tolerance policy? What happens if it's a much beloved or successful executive? How do you manage extreme political views and activism in the workplace? In the boardroom, do you consider multiple political points of view when making decisions that are impacted by policies? How do you help set the cultural tone? 15. How do you assess risks of environmental and social issues?