The Duty of Care for Board Members Should Include Competence in ESG

It is becoming clearer to investors and corporate managers that material environmental, social, and corporate governance (ESG) issues need to be managed as part of an organization’s business strategy.   Climate change, racism, economic inequality, water scarcity, cybersecurity threats – these are just a few of the material ESG issues posing risk and opportunity.

Unfortunately, our research finds that board members may not be up to the task.  We analyzed the credentials of each of the 1,188 Fortune 100 board directors based on Bloomberg and company biographies in 2018 and found that 29 percent had credentials (such as board memberships and professional experience) relevant to ESG. That seems like a decent showing, but most of the experience is with the S of ESG: 21 percent of board members have relevant S experience, while only 6 percent have experience relevant to each of E and G (the total is more than 29 percent as some directors had more than one credential).  Looking deeper by industry and by company, we find that many companies with material ESG issues have very little relevant expertise on their boards.

In fact, company bios generally do not highlight ESG credentials, demonstrating a clear lack of prioritization. Home Depot, for example, provides a summary of the skills they believe each director brings to the board but not one mentions experience with ESG.  This despite the fact that Home Depot’s material ESG issues include sustainable sourcing and packaging as well as diversity and equity for their frontline workers.  And, they did have two board members with ESG credentials:  One board member had social credentials (health care, diversity) but has since left, and another board member is chairman of a recycled product company (an E credential).

Few directors had experience relating to S (social) areas with material impact for companies – human rights, human resource development, benefits and safety.  In the other hand, across all ESG topics, the topical and urgent issue of workplace diversity had the largest number of directors with relevant credentials (5.0 percent).  Mainly these directors were involved with boards or initiatives that focused on increasing minority leadership, such as Catalyst (supporting female leadership) and corporate diversity councils.  Most were focused on women’s representation, with others focused on Black and Latino representation.

The second largest S category (3.5 percent) in which board members had experience was health care, generally through seats on boards of medical facilities such as the Mayo Clinic or as physicians, medical researchers, or academics.  Most of this group served on health-care company boards.  Finally, 1.9 percent had experience with societal health challenges (addiction, AIDS) or advocacy through, for example, board seats on nonprofits such as Drug-Free America and AIDs groups.

Looking at the G of ESG: Just eight board members had expertise in cyber or telecom security, an issue of growing materiality. There were very few directors who had experience with issues involving ethics, transparency, corruption, or other material aspects of good governance. The third largest category across ESG, and the largest in the G category, was accounting oversight at 2.6 percent.  Board members with credentials relevant to this topic had auditing or accounting backgrounds or served on an accounting standards board.  The second largest area of expertise (1.0 percent) under governance was experience with regulatory bodies such as the SEC or FCC.

Two areas of material environmental importance to most companies and to investors, climate and water, had just three and two board members, respectively, with relevant experience. In general, there is very little director expertise with environmental issues. Only about 1 percent of directors have experience with any of the nine categories of environmental issues we looked at.  The largest showings, at 1.2 percent (14 individuals) each, were in energy and land/conservation.  The experience in energy was generally a background in renewables, nuclear power, and utilities, and with land/conservation, a board seat on a conservation organization such as the Nature Conservancy.  A few directors had public policy or regulatory experience.  Although energy is a relevant issue for most companies, it was generally only energy companies that had people with energy expertise on their boards.

Why does this lack of board ESG expertise matter?  Let’s take a case in point:  McKesson, which has been sued by various states for allegedly contributing to the opioid crisis and has material E (energy, materials, water), social (access to medicines, ethical clinical trials), and governance (misleading advertising, doctor incentives) issues, has no board members with relevant ESG credentials (though one board member who is general counsel to another company has ethics as one of the areas in his portfolio).  While the company bios paint a picture of accomplished business leaders, there are none that mention backgrounds in patient advocacy, addiction treatment, or promoting diversity or equity.

The Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), among other standards, have clearly delineated the material ESG risks for industries.  Corporate directors should build their own ESG competency through training and by recruiting ESG leaders to their boards.

This post comes to us from Tensie Whelan, clinical professor of business and society and director of the Center for Sustainable Business at NYU’s Leonard N. Stern School of Business. It is based on her recent article, “U.S. Corporate Boards Suffer from Inadequate Expertise in Financially Material ESG Matters,” available here.

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