How the Human Trafficking ESG Risk Could Impact Your Business

Of the many things that keep board directors awake at night, human trafficking is probably not high on the list. But when you consider that more than 40 million people (a quarter of them children) are trafficked for forced labor and sexual exploitation, the magnitude of human suffering cannot be ignored by corporations. Human trafficking is the fastest-growing form of international crime and one of the most lucrative of criminal activities in the world.

In the United States, many people think of human trafficking as something that primarily happens overseas, but that’s not the case. The National Center for Missing and Exploited Children receives daily reports of child sex trafficking in all 50 US states and in every type of community throughout the country. It could be happening in your neighborhood.

Several industries are more susceptible to these sorts of crimes, such as financial services, airlines, travel agencies, hoteling, and the short-term rental industry. Regulators are starting to demand more accountability from companies to look for red flags that might indicate possible criminal activity.

Financial Services, Travel, and Hospitality

Financial services firms may encounter suspicious activities when human traffickers attempt to use legitimate firms to conduct illicit financial transactions. An analysis of documented trafficking in the United States showed how financial services firms provide banking and money services business to several industries known to have some degree of human trafficking risk. Some are obvious, such as escort services, illicit massage parlors, and strip clubs. However, many others are not, such as restaurants and food service, agriculture, construction, landscaping, cleaning services, manufacturing, forestry, and even health care.

The hospitality industry is particularly vulnerable to traffickers, especially sex trafficking. Trafficking victims have sued hotels, but historically most of these cases have been dismissed. There are signs that the courts are beginning to hold hotels to a higher standard of accountability for the actions of criminals within their establishments.

Other critical players include airlines and travel agencies, which can use their data to identify red flags. Training and general awareness are important for employees, such as flight attendants, ticket counter staff, and booking agents, to understand the signs of human trafficking, forced labor, and forced sex trafficking.

How Your Board Can Address Risks

Besides the impact on the lives of those directly affected by it, human trafficking creates business risks for those industries that are exposed to it—both directly and through the financial system.

As traffickers become more sophisticated, companies must employ new data-driven measures to prevent, detect, and respond to human trafficking. The following steps will help any company—and its board—become more prepared to fight human trafficking and reduce its risk of exposure:

Educate yourself on how human traffickers might use your industry and specific company to commit their crimes.Update your risk assessment and internal controls to address the risks.Collaborate with the industry and organizations like the Anti-Human Trafficking Intelligence Initiative and others.Use existing industry and company-specific red flags.Train your employees to recognize the signs of human trafficking and forced labor.Know your data and develop human trafficking analytical detection scenarios and escalation procedures.Establish law enforcement liaisons to facilitate reporting of red flags.Incorporate human trafficking litigation or disclosure scenarios into your crisis communications planning. The financial impact of a potential incident is likely to pale next to the cost of reputational damage if you are not prepared.

In addition to the direct business risks, investors are now more aware of social issues. Even institutional investors are more issue-focused, and specifically very conscious of human rights and human dignity issues. Human trafficking allegations or adverse court decisions could impact how investors view the company.

As environmental, social, and governance (ESG) issues are increasingly viewed as serious business risks, companies could face concerns from investors over whether the company remains a good investment, and publicly traded companies may even find themselves in proxy fights with activists over their board seats.

Ken Jones is a senior managing director, Ozgur Vural is a managing director, Edith Wong is a managing director, and Suzanne Blanton is a director at FTI Consulting. FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk, and resolve disputes: financial, legal, operational, political and regulatory, reputational, and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate, and overcome complex business challenges and opportunities.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

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Creating Healthy Societies and Transforming People Risk in the Post-pandemic Workplace

As COVID-19 and its variants continue to disrupt society, business, and commerce, boards have expanded the scope of their risk oversight to include a broader, “people risks” agenda. Directors responded swiftly to the pandemic, supporting management teams as they faced new challenges to the health and well-being of their workforces. At the same time, there is a rising awareness of the role organizations play in addressing societal concerns at the board level. The intersection of these two issues is where the notion of creating “healthy societies” emerges.

The creation of a healthy society incorporates equitable access to affordable, quality health care, providing healthy environments to live and work in, and creating financial security and a more equitable workforce across race, ethnicity, and gender. These aspects all play a role in our collective and individual health outcomes.

Boards that take on managing these “people risks” with the right balance of empathy and economics will be better positioned to secure the organizations’ future during this accelerated period of sustained change.

The Expanded Role of Employers in Supporting Wellness

Before the pandemic, organizations and their boards framed the relationship with their employees through the lens of the workplace environment. Policies were created to help guide the organization and its employees in conducting the work relationship. Organizations often developed benefits, compensation, hiring, and workplace procedures from this perspective.

In just a few months in 2020, the pandemic shifted this paradigm. As many organizations went to remote work arrangements, the line between what happens inside the workplace and outside the workplace dissolved. This shift created a new level of oversight for boards as organizations needed to quickly develop strategic approaches to ensure the health and safety of their employees inside and outside of the workplace.

Boards Take on New Challenges

As boards continue to tackle the ongoing issues related to COVID-19 and its variants, health becomes a new driver in charting the future of an organization. The concept of “healthy societies” offers a means to create a sustainable organizational culture that benefits people, the organization, and the communities in which the organization operates.

The healthy societies concept advocates for the health and well-being of everyone through sustainable means that protect people and the planet. This means providing a safe, professional, and personal work environment that enhances an employee’s well-being, both physical and emotional.

Emotionally and physically healthy employees are better positioned to manage their work and home-life balance, leading to increased productivity. Long-term value can be achieved when organizations and boards take a healthy society approach to developing processes and procedures that impact employees with this shared vision for the future in mind.

Creating a Safe Work Environment for Today and Tomorrow

Providing employees with a safe working environment remains a top concern for most organizations. Changes to the physical design of workspaces, plus the use of masks, sanitizers, physical distancing, temperature checks, testing, and other safety measures, are now almost normalized in the physical workplace. These changes give employees who need to be physically present to perform their jobs the confidence that they are protected. A consistent and sustained safety policy will help make the transition from the home office less stressful for those returning to the workplace.

But a larger question remains for boards and management to now consider: when we emerge from the pandemic, will organizations try to revert to pre-pandemic “business as usual,” or will they create new operating models to ensure flexibility and agility in response to future outbreaks or other disruptions? Boards that advocate for contingency planning that factors in the health and safety of those in the workplace will enable companies to swiftly pivot and maintain productivity in the face of unforeseen circumstances.

Understanding the Emotional Well-being of Employees

The health and safety of employees goes beyond the physical workplace. According to the American Psychological Association, a mental health crisis has emerged as instances of stress, anxiety, and depression are on the rise. This can lead to lower levels of employee well-being and productivity, as well as increased organizational costs. Now, as many companies are asking employees to return to the workplace, new mental health stressors have emerged, as many are reluctant to leave their home offices.

Boards that respond with empathy and take into consideration the mind-set and needs of employees will be better positioned to support leadership in managing this situation. “This was a very human crisis, and that’s a different dimension compared to most business or financial risks,” noted one director who commented on this topic for this article. “Boards had to become more people-focused than they have ever been before.”

Organizations are already responding to the pandemic-related mental health crisis among employees. In the 2020-2021 Global Talent Trends Study by Mercer, 45 percent of US human resources executives reported adding benefits to address mental and emotional health issues. A continued focus on employee well-being will take time and resources, and conversations at the board level about these critical issues will help keep the needs of employees front and center as new policies are proposed.

Reshaping the Paradigm for Talent Acquisition

Talent acquisition and retention continues to be a top challenge facing organizations, according to Mercer’s survey of human resources professionals and risk managers. That challenge is not only finding the right talent to fill the positions, but also creating a diverse organization that works together to contribute to the overall health of our society and contributes to an employee’s sense of inclusion and belonging.

Society and employee populations, especially younger generations, are more culturally aware and awakened in an era of #MeToo, George Floyd, and Greta Thunberg. While the immediate global health crisis took precedence over sexual harassment, systemic racism, and climate change concerns in many ways, they remain at the forefront for leadership and employees. In a tight labor market, employees want to have a strong connection to purposeful organizations that demonstrate strong environmental, social, and governance (ESG) values, and they are more likely to stay at and be more productive for these kinds of employers.

In addition, new technologies, changing demographics, and the pandemic are creating other challenges for employees as they seek not only to find satisfying work but also to work in a manner that contributes to their well-being. This changing nature of work also requires new considerations for talent management. For example, boards should be aware of the legal and operational issues associated with flexible working, gig workers, and technology adoption. As more of the workforce opts into flexible working arrangements, organizations will need to examine investing in digital technology and designing work experiences and benefits that demonstrate a deep understanding of the needs of their people. These topics belong at the board table, as directors can support talent development that leads to healthy and sustained organizational growth.

Raising the Bar for ESG

ESG issues have taken on new meaning in the last ten years and efforts have accelerated globally over the past 18 months. Disparities made more visible during the pandemic triggered new levels of thinking and a sense of urgency to build more inclusive and sustainable economies. Younger generations have chosen to align themselves with brands that demonstrate socially and environmentally conscious values. Climate change, diversity of thought, inclusiveness, wealth disparities, and more are no longer issues that live outside of the boardroom. Understanding the impact of the organization on social and environmental issues and guiding leadership toward sustainable and conscious solutions will go a long way toward building truly healthy societies.

Looking Ahead

After threatening public health and ushering in unprecedented disruptions, the COVID-19 pandemic has uprooted daily life and fundamentally transformed values for companies, employees, and society. Boards that adopt a people-first and healthy society mind-set can help leadership in developing sound strategies for the future. And that future begins with recognizing and embracing the expanded role employers can play in the health and well-being of employees inside and outside the workplace.

Martine Ferland is president and CEO of Mercer and vice chair of Marsh McLennan. She was named to the NACD Directorship 100 in 2021.

Marsh McLennan and NACD thank the following NACD members for sharing their insights for the development of this blog series on risk oversight: Anthony Anderson, Sam Di Piazza, Roy Dunbar, Cynthia Jamison, Shelley Leibowitz, Sara Mathew, Jan Tighe, and Suzanne Vautrinot.

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Increasing Board Agility Is Critical to Risk Oversight

“You’re on mute.” 

This must have been one of the most spoken phrases over the past 18 months as many organizations moved to online meetings and video conferences. The mobility restrictions associated with the COVID-19 pandemic created opportunities to innovate and, in many instances, offered a crash course in being agile—a critical requirement of boards.

As a result of the pandemic and other events of 2020, the scope and scale of issues on the board risk agenda have fundamentally changed, as have many aspects of governance processes. Going forward, boards must build their agility to enable organizations to navigate the new cadence of the business and risk environment.

As a previous NACD BoardTalk post noted, an agile board can “identify and respond effectively to rapid and unexpected changes in the internal and external environment. It is characterized by a forward-looking and exploratory approach that challenges and nurtures both current and future business, enables quicker decision-making, and supports the organization to be more adaptable and innovative when confronted by change.”

To gain insight into the practices adopted and lessons learned from 2020, including on board agility, NACD and Marsh McLennan worked with the Global Network of Director Institutes (GNDI) to conduct a wide-ranging survey of nearly 2,000 directors. The research team also conducted eight accompanying interviews with seasoned directors to provide rich context for our findings in this article.

Overall, 89 percent of the surveyed directors feel their boards have been able to effectively govern during the pandemic—indicating an ability to adjust to the demands of virtual governance, such as increased or even weekly full-board meetings during the height of the crisis. Further, 34 percent are planning to alter their board operating model (including with changes to meeting agendas) based on experiences and learning from the pandemic and responding to other challenges in 2020 and 2021.

Delving further into the findings, we can see that three key elements of an agile board have emerged:

First, the agile board is hybrid. Directors have upskilled themselves and gained comfort with virtual meetings over the course of the pandemic, and 89 percent of GNDI survey respondents agree that digital board engagement would be a helpful tool for board operations moving forward. Additionally, 78 percent expect that at least one in five committee meetings and some full-board meetings will be virtual post-pandemic. As one director that we interviewed for this article noted, being “virtual-first is a great way to rethink the rhythm of board meetings and allows the board to quickly connect on issues as opposed to waiting for board meetings.”

Virtual meetings have many benefits since directors can quickly meet to address fast-moving issues and they free up director time that can be applied to essential board and committee work. In addition, the virtual format requires a more structured and efficient committee agenda to fulfill fiduciary obligations. In one director’s pandemic experience, “The board quickly adapted to a communication structure that was not scheduled and was able to function much more intensely in a virtual world.”

While many directors agree that virtual board meetings are as effective as in-person meetings, there are serious challenges. In the future, boards need to explicitly implement approaches to ensure fully engaged directors in a virtual world. More than two-thirds of GNDI survey respondents (68 percent) noted the negative impact of reduced nonverbal communication among directors during virtual meetings. Board chairs may also need to take additional steps to ensure that minority views are represented, which may be more challenging virtually. Finally, boards may need to reconsider how to apply decision-making techniques such as “red teams” or “tenth man” (where at least one person is appointed to serve as the loyal dissenter) in a virtual world.

As hybrid and virtual board meetings become the norm, boards will need to adopt better tools to support digital board governance, including those used to share secure governance documents, vote, or communicate confidential information.

Second, the agile board uses a range of insights to support decision-making. An engaged, responsive, and agile board is a vital sounding board for the CEO and their management team. Providing fresh perspectives on difficult issues is critical.

Agile boards are implementing new processes to provide informed input and challenge decisions around strategic issues, as well as to improve risk oversight. For example, 70 percent of survey respondents said they will make greater use of outside experts in scenario planning, strategy, and risk decision-making processes. Sixty-six percent expect to incorporate a broader set of risks into the board information dashboard. Boards may need to adjust their agenda to allow more time for such exercises and exploratory discussions, putting an even greater emphasis on the need for efficient and effective committee processes.

Sixty-three percent of surveyed directors also report that they plan to increase the use of data analytics in the board decision-making process. This may include incorporating digital and analytical tools that assess the risk environment and organizational performance—tools that scan publicly available information to create dashboard summaries of employee sentiment or tools that conduct an outside-in scan of cybersecurity, for example.

Information tools provide board members with efficient access to a much greater range of insights, key metrics, and benchmarks, generating deeper understanding—all of which can support a necessary focus on emerging trends and strategic issues.

Finally, the agile board embraces continuous learning. “Board members do not need to be expert at everything but need to be able to constructively challenge and question management,” one director said. “That requires a certain kind of board member—someone who is in continuous learning mode.”

Agile boards embrace continuous learning in two key areas: organizational strategy and business model, and the expanding spectrum of events and trends driving changes in an organization’s business environment.

Directors are more engaged and involved in robust dialogue across various levels of management than ever before—without impinging on management’s operational role. This enables the board to actively debate and challenge management on their risk assessments, decision-making processes, and conclusions. Many directors noted that these debates are vital to helping management “see around the corners.”

Boards are also turning to directors from a range of professional backgrounds to increase cognitive diversity in the boardroom and to tap expertise on evolving issues such as cybersecurity, digitalization, and environmental, social, and governance (ESG) topics. Increased boardroom diversity across all vectors has many benefits. Still, onboarding a cybersecurity or an ESG expert does not relieve other board members from developing a robust understanding of the interaction between evolving risks and trends. Most boards have about 10 members, and as organizations face a widening array of issues, no board can have an expert on each topic. Since they cannot be “know-it-alls,” boards must become “learn-it-alls.”

Each director must commit to a boardroom culture of continuous learning and inclusivity of diverse experiences, expertise, and insights on evolving topics to support an active and effective boardroom.

With this mandate, board and director agility is vital to supporting management and ensuring that organizations move nimbly through a challenging risk landscape.

Margarita Economides is an engagement manager in the Organizational Effectiveness practice at Oliver Wyman. David Gillespie is an Organizational Effectiveness partner with Oliver Wyman and leads the UK and Ireland businesses.

Marsh McLennan and NACD thank the following NACD members for sharing their insights for the development of this article: Anthony Anderson, Sam Di Piazza, Roy Dunbar, Cynthia Jamison, Shelley Leibowitz, Sara Mathew, Jan Tighe, and Suzanne Vautrinot.

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Data Show Boards Are Taking Steps on Diversity, Equity, and Inclusion

We are in a state of evolution when it comes to tracking, reporting, and goal-setting for diversity, equity, and inclusion (DE&I) measures.

A recent Pearl Meyer On Point survey (to be published at the beginning of October) asked more than 400 directors and C-Suite executives if and how they are tracking and reporting DE&I factors, and to what degree DE&I goals are reflected in executive incentive plans.

The survey clearly indicates that most companies are focused on tracking DE&I, which makes sense given that EEO-1 reporting was introduced in 1965 and includes total number of employees by gender and by race. As a result, companies have historically placed importance on “matching” the overall demographics of the labor market. More than 92 percent of our survey respondents say they track overall diversity, as well as the diversity of their management teams and senior leadership.

However, what companies track is broadening in scope, as is what they do with that information. In addition to traditional lagging measures, such as basic diversity demographics (95 percent of respondents track these), turnover rates (79%), or engagement (78%), which look at things that have already happened, more companies are beginning to follow “activity” measures. Examples include tracking new hires (77%) and promotions into management (52%) and top leadership (55%) ranks. These metrics can indicate what is happening currently within an organization so that action can be taken when situations are out of sync with strategic goals.

There is also growing interest—although in the early stages—in tracking participation in activities that can influence the achievement of DE&I goals, such as leadership and development programs to increase internal promotion rates or employee affinity groups that increase inclusion and belonging. Finally, some companies are giving thought to using more detailed or nuanced measurements (such as turnover, a traditional lagging measure) in ways that provides more insight, for example at the employee level or by job function.

All of this data is important for companies to understand their current state and progress on this journey. But when it comes to setting goals, many organizations are hesitating. Of those that track DE&I metrics, the survey shows just 46 percent set goals.

Is there value in “just” tracking? In working with our clients, we do see that gathering information can lead to a better view of possible next steps and thus has merit. While certain companies aren’t setting specific goals, we see them becoming more nuanced in their data collection and creating a more holistic view of the DE&I landscape. They are actively communicating externally on the subject (46 percent of all respondents in the annual report, 44 percent in the sustainability report, and 39 percent on the corporate website, among other channels) and with employees (52 percent). Survey responses also show that these organizations are planning even more communication in the future.

Finally, our survey shows that while the specifics of plan design vary considerably, 35 percent of responding companies have DE&I represented in some way in their annual executive incentive plans. Another 28 percent indicate they are likely or very likely to include it in the upcoming year.

The data are consistent with the general outlook we hear when talking with directors about DE&I. There’s an overall willingness to do the difficult things that can drive change, but that’s often counter-balanced with concerns about disrupting the organization, spending “too much” time on it, or detracting from very real and urgent financial imperatives.

Despite the difficulty inherent in some of these issues, it is telling that among survey respondents, the strategic importance of DE&I and its support of the company’s talent management and development plans weigh more heavily than external pressures. While progress may feel slow at times, strategically focused boards are committed to achieving a more diverse, equitable, and inclusive organization and unlocking the value that derives from such a workforce.

Beth Florin is a managing director at Pearl Meyer and leads the Survey and Employee Compensation practice. She has specialized experience in the design, development, and implementation of broad-based compensation programs and total remuneration compensation surveys.

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Generally Neglected Accounting Principles

This is an abbreviated version of a more thorough Directorship magazine Viewpoint article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

Executive managers and board members could be forgiven for thinking that now that the International Financial Reporting Standards (IFRS) Foundation has entered the sustainability reporting space, the turbulence surrounding so-called environmental, social, and governance (ESG) disclosures will die down. After all, who could possibly be better than the foundation, the leading international administrator of financial accounting, to step in and quell the cacophony of competing frameworks for nonfinancial accounting?

Indeed, what has been missing the most in nonfinancial reporting for the past 20 years is precisely the kind of rigor and consistency that the IFRS standards possess. Along with the generally accepted accounting principles (GAAP) in the United States, the IFRS standards provide clear guidance for the preparation of financial statements around the world.

But everything the foundation intends to do—and ESG itself—falls well short of true sustainability accounting, thanks mainly to the disregard of core principles of the field. What will the core principles be in the foundation’s vision of sustainability accounting? Which of the competing schools of thought does it subscribe to, and is it the right one? Is it really time to pop the cork on all of this, or does the foundation’s arrival in the sustainability arena amount to a setback of some kind? Business leaders should brace themselves accordingly.

Sustainability Schools of Thought

Far from being a unified field, in the sustainability world there are at least two competing schools of thought. Depending on which ultimately prevails, the makeup of sustainability accounting could go in two very different directions in the coming years.

The first of the two is the sustainability accounting school, a doctrine that concerns itself with stakeholders of all walks and not just shareholders. This is the school most often associated with the Global Reporting Initiative. The challenge it sets out to address is how best to assess an organization’s inside-out impacts on vital resources of all kinds and the well-being of those who depend on them. In that regard, sustainability accounting is stakeholder-centric.

The second is the value creation school, most often associated with the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), which recently announced their merger to become the Value Reporting Foundation. The primary interest of the value creation school is how best to assess an organization’s ability to create value and then measure and report it—shareholder value, that is.

Embedded within the value creation school are two other underlying doctrines: risk management and impact accounting. Both of these sub-schools, which are associated with, for example, the Task Force on Climate-related Financial Disclosures and the Impact-Weighted Accounting Initiative at Harvard University, respectively, have long-term shareholder value creation at their heart. And contrary to the sustainability accounting school, the chief concern of the value creation school is the outside-in impacts of the world on an organization itself, and the effects they might have on its ability to create shareholder value.

It is the value creation school and its subsidiary doctrines where most of what passes for ESG issues lives. That makes ESG unabashedly shareholder-centric, though its frameworks occasionally include consideration of the impacts organizations have on non-shareholder stakeholders. Even then, it is only the effects such impacts might have on shareholder value that make them important or material in the value-creationist view.

To read the full article, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Mark W. McElroy is the founding director of the Center for Sustainable Organizations.

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