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21st century governance challenge

FT ODX panel confronts the 21st century corporate governance challenge

By November 30, 2020December 7th, 2020No Comments

What are the implications for corporate governance in an environment where firms are being looked to as “social institutions,” sharing with governments the responsibility to ensure elements of social welfare and well-being?

This is the question considered at a panel session moderated by the Financial Times’s Billy Nauman, entitled “New Models of Corporate Governance,” part of the FT’s Outstanding Directors Exchange (ODX), a platform that brings together sitting directors of public companies to discuss strategic boardroom issues. Panelists Chris Pinney, President of High Meadows Institute, Peggy Foran, CGO of Prudential Financial and a Director at Orion Group Holdings and Sheila Hooda, CEO and President of Alpha Advisory Partners and a Director at ProSight Global and Mutual of Omaha Insurance Company, explored today’s social responsibility challenges and how boards are adapting to meet them.

Pinney kicked off the conversation by outlining the 21st century global governance challenge, noting that the world today is a different place for business than it was 25 years ago due to the growing influence of globalization. With business accounting for 75 of the 100 largest economies worldwide, he said, large firms are now seen as social institutions responsible to all stakeholders, not simply shareholders, and are expected to provide leadership in addressing societal challenges from climate change to inequality. They play an increasingly prominent role in shaping society and in many ways are a part of global governance whether they want to be or not. He noted that in this context, companies are increasingly being scrutinized for their political activities, including where they are spending their lobbying dollars and what industry associations they are a part of.

“It’s a tough job for directors these days because they’re being hit from all sides,” said Pinney. “On the one side, we see business being vilified…and on the other hand, we see enormous expectations that business should take leadership.”

One of the central themes to emerge from the panel discussion was the need for boards to take a proactive approach and consider the materiality of ESG issues. Boards up until now have been very reactive to the sustainability agenda, Pinney said, when they should be taking a more active role in identifying the most material sustainability issues that their company has an impact on and how these issues relate to both investors and other stakeholders. Hooda echoed these thoughts, suggesting that for boards to be effective, they need to prioritize ESG issues in terms of materiality and then integrate these priorities into business strategy.

Another key focus of the conversation was the need for board accountability. It’s important for boards to not just prioritize sustainability issues and set targets, Hooda said, but to measure the results and communicate it to their stakeholders.

This emphasis on accountability is particularly highlighted by the recent focus on diversity and inclusion, with many companies making declarations about the BLM movement and setting diversity targets for their boards. Foran offered practical advice to boards to look beyond the story and objectives to the metrics, asking not only what the company is doing to develop a diverse workforce but how they know if they’re successful. She pointed to companies who have tied their bonus structures to meeting diversity goals as one way to hold executives accountable.

Panelists clashed over whether companies can be seen as political actors. Taking a narrower perspective of political activity, Foran suggested that companies are not political and in fact strive to maintain political neutrality. “ESG is not red or blue,” she said, explaining that addressing ESG issues is not motivated by political leanings but is material and purpose-driven. Pinney suggested there is a need for a broader definition, noting that because of their scale and impact, large firms now find themselves sharing with governments the “political” task of managing competing stakeholder demands for responsibility and leadership on social issues as well as providing returns to shareholders. As large firms respond to demands to protect the public interest and steward the commons, the choices they make can make them political actors, he argued, and the role of the board in overseeing the choices firms make on social issues is of growing importance.

All panelists, however, agreed on the importance of boards communicating and engaging with their stakeholders while maintaining a focus on strategy and materiality.

“You need a positive, affirmative story to tell about what you’re doing about what matters,” said Chris. “Otherwise, you’re going to be constantly trying to please all of the people all of the time and like government, you can’t possibly win at that game.”