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21st century governance challenge

Political corporate social responsibility creates new challenges for bank boards

By November 7, 2023No Comments

If we are to make serious progress on the journey to address systemic challenges such as climate change and manage the transition to a sustainable low-carbon economy, the active support of the global banking industry is essential. Called systemically important financial institutions for a reason, global banks now manage an estimated $370 trillion in worldwide assets, which are expected to grow to between $500 trillion and $550 trillion in the next decade. It is not surprising in this context that there is now an expectation for global banks to play a greater role in addressing a wide range of social, political, and environmental issues.

The challenge for banks, like other large corporations, is that many of these systemic challenges fall well beyond traditional definitions of corporate responsibility, focused on operating responsibly within the corporate fence line. Today, banks are expected not only to operate responsibly, but also to engage with and act on broad public policy issues, ranging from major global challenges requiring sustained collective action, such as climate change, to geopolitical issues, such as the war in Ukraine, to sensitive political issues, from abortion rights to gun control and nuclear power.

These expectations for what is now referred to as political corporate social responsibility create a new set of challenges for banks and in particular, for their boards. In addition to governing on behalf of the interests of shareholders, they must also exercise oversight and judgement over the firm’s “political” strategy to manage the concerns and demands of the firm’s stakeholders, from employees to customers to activist shareholders. In today’s world, the support of these stakeholders is now a critical part of maintaining the bank’s reputation, license to operate, and business success.

For the past two years, working with Tapestry Networks, we have engaged with board directors and executives from some of the world’s largest banks, as well as leading institutional and pension investors, regulators, and other stakeholders, to explore how bank boards can best address these challenges. In our recent report, Responding to societal challenges: A framework for bank boards and their directorswe summarize our findings and set out a framework for how bank boards can most effectively and strategically manage the expectations of this new era of political corporate social responsibility. Key to this is changing directors’ mindsets when it comes to oversight of their banks’ approach to social issues. Rather than view these issues through the lens of public relations management and address them on an ad hoc basis, they need to be comprehensively integrated into risk management and strategy and seen as potential business and social impact drivers for the future. As one director put it, “We are spending too much time talking about data, about measuring the bad stuff instead of what we can do as a company to make a difference.”

We welcome your thoughts on the framework we propose and in particular, the changing mindsets challenge.