Boards Can Drive Science-Based and Risk-Aware Climate Lobbying

Amid the many shocks rocking our society and economy right now, directors may have missed some disturbing new research. In July, the World Meteorological Organization estimated that that the Earth’s average temperature could rise to 1.5-degrees Celsius above pre-industrial levels—considered the tipping point for the planet’s climate—during at least one of the years between now and 2024. This is years ahead of previous projections.

Climate risk is taking on entirely new significance. Accepted as a financial risk, understood to be a material risk, there’s an increasing consensus among central banks and other financial regulators that climate change is now also a systemic risk.

Why should boards and corporations care about this? When a risk is systemic, it affects the very stability of financial markets and there is no avenue to diversify from this risk. The current pandemic offers a useful analogy. Climate change could have such wide-ranging and compounding effects that everyone participating in global financial markets will be impacted.

Given this understanding and the rapidly shrinking window to act, a new Ceres report calls for all corporate action, including lobbying, to take into account the systemic risk of the climate crisis and therefore be aligned with the latest climate science. It calls for “risk-aware” climate lobbying. It asks the following questions: Does your lobbying, especially on climate change, fully consider the risks that global warming poses for your business? And is any of that lobbying actually contributing to creating more risk for your company or industry?

Investors are particularly conscious of how this disconnect between climate science and climate lobbying could create an investment risk.

In 2018, institutional investors with $2 trillion in assets under management called on the 55 top greenhouse gas-emitting European companies to “ensure any engagement conducted on their behalf or with their support is aligned with our interest in a safe climate.” As a result of this investor focus, Royal Dutch Shell, BP, and Total have conducted assessments on the extent to which their large trade association memberships align with their positions on climate change. Building on the success in Europe, in 2019, 200 institutional investors with a combined $6.5 trillion in investments asked 47 of the largest US publicly traded corporations to specifically align their climate lobbying with Paris Agreement goals.

But investors aren’t just asking—they’re acting. In a big win, 53 percent of shareholders at Chevron Corp. voted this summer for a resolution that would push the oil firm to ensure its lobbying activities around climate issues align with the Paris Agreement. This marks the first time a climate proposal won a majority of the company’s shareholder votes. Other climate-related lobbying proposals won support elsewhere this proxy season—at Duke Energy Corp. with 42.4 percent in favor, Exxon Mobil Corp. with 37.5 percent, Caterpillar with 34 percent, General Motors Co. with 33 percent, Delta Air Lines with 45.9 percent, and United Airlines with 31.4 percent.

What role can boards play in helping the companies they serve better align their lobbying activities with climate risk? Directors can do the following:

Assess. Understand your company’s risk management efforts on climate change, including whether and how climate change is assessed as part of enterprise-risk management. Boards could ask management whether that assessment considers the latest climate science and the evolving notion of climate change as a systemic risk. Companies are already starting to conduct climate change-scenario assessments, which could be a great avenue for integrating such thinking.

As a part of this, boards could also encourage management to assess whether their direct and indirect lobbying is aligned with the latest climate science. Ceres calls on companies to use “science-based climate lobbying”—or policies that align with the latest climate science—as the new north star and identifies a number of resources that provide updated details on what this could involve. These assessments should encompass direct lobbying and indirect lobbying done through trade associations.

Govern. Boards should look to see if their companies have the right systems in place to ensure that risk monitoring, sustainability, and government relations are cross-functional and collaborative, particularly in relation to climate lobbying. Boards should also engage management in conversations about how decisions around climate lobbying have the potential to mitigate or exacerbate the risks that a company faces.

Encourage action. Finally, boards should encourage management to act. These actions could include providing disclosures that affirm climate science and directly lobbying on policies that support climate science. Management should be encouraged to engage major trade associations on their own climate lobbying with a view to ensuring that these efforts are also aligned with climate science.

The pandemic shows us the critical value of leadership that combines a clear-eyed assessment of risks with the understanding of the very latest science. It is time to apply this lesson to climate lobbying.

Veena Ramani is the senior program director of Capital Market Systems at Ceres. She leads Ceres’ work on board governance.

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A View from the Front Line: Boards Need Agility Now

The ability of organizations to survive periods of tremendous upheaval lies not in their relative size, strength of their balance sheet, or competitiveness as determined by their current market definitions. Rather, it is the ability and willingness of a business to adapt its current governance protocols and processes while at the same time building on its core governance structures and responsibilities that truly differentiates those firms that emerge successfully from a crisis from those that struggle or fail. Using the COVID-19 pandemic as a lens through which to explore this perspective, firms may consider adapting their governance models using the following series of opportunities and their implications.

If you thought the onslaught of COVID-19 happened quickly, think about this: The world will never be slower than it is today. Implication: The speed and resiliency of a company’s governance structure and business model to adapt is more important than ever.

Environmental, social, and governance (ESG) issues are now table stakes for a firm’s long-term sustainability. The rise of stakeholder capitalism over shareholder capitalism is real and ties back to the critical fact that a firm needs social license to operate—not just a business license. Things that governments used to do, such as act as stewards of the environment, provide health care for the vulnerable, or combat homelessness and racism, now need to be part of enterprises’ ESG mandate. Failure to align the business with ESG goals will result in other consequences. Implication: Successful boards have the resolve to intervene to ensure that progress is made toward meaningful and clear ESG metrics. If this is not a priority, some firms may very well not be able to retain their best employees, attract top directors, or maintain their ability to finance the business.

Similar to adopting the International Organization for Standardization’s safety standards, boards and companies will evolve to adapt to virus-sensitive protocols around how they conduct business and governance operations. If some board meetings are digital, it reduces the board’s physical exposure and travel footprint in a material way. Implication: COVID-19 is not a temporary phenomenon. We now live in a world where learning how to govern and operate safely despite the presence of dangerous, contagious viruses is essential to ongoing business viability and an opportunity to differentiate a company’s value to stakeholders, all while reducing risk.

From a risk and opportunity assessment perspective, customer relationship management systems (CRMs) need to place more emphasis on global issues and their ties to local operations. Implication: Companies that have evolved their ability to become preemptive in their actions due to “over the horizon CRM-ESG radar systems,’ will stay ahead of trends instead of struggling to catch up.

The business strategy and balance sheet must through all phases of the business cycle be disciplined enough to invest in new growth. With the narcotic of low interest rates and an unprecedentedly long bull market, many firms’ business models have been exposed as they were only viable under then-current market assumptions. Implication: Directors need to be healthy skeptics and ask the question: Is our strategy designed to excel under current conditions or can it also propel us to create or enter new markets so that when change occurs, we are less dependent on our current paradigm?

Governance processes (not responsibilities) need to adapt to the times they are in. Implication: Governance is not passive. The board has a responsibility to stay engaged, especially during unprecedented periods like this, and needs to find the right balance between “nose in” and “fingers out.” Some options to consider include the following:
Shift to short monthly meetings instead of quarterly meetings (if you haven’t already).
 Meet virtually with directors the evening before board meetings to regain some of the social interaction that is lost absent in-person dinners and on-site gatherings.
Stay out of management’s way of running the firm if the business continuity protocols are working.
Offer shareholders, proxy advisors, and credit-rating agencies digital access to the board instead of traditional face-to-face meetings.

Business life is not going back to the way it was. Take advantage of the opportunities volatility can create to accelerate innovation. Implication: Fight the tendency to have the organization snap back to the way it was. Lock in the innovations, cost reductions, and process improvements that management has achieved through this period of upheaval.

Executive and board compensation must be aligned with stakeholder interests. In volatile times it is prudent to forego any sort of immediate compensation adjustments unless they are absolutely necessary. Implication: Whatever the compensation treatment may be, it better align with how shareholders, employees, customers, and other key stakeholders experienced this event. The board’s ability to apply discretion while conveying trust and thanks to management and front-liners is especially important at this time.

A diverse and seasoned board of directors is valuable. Directors who have governed through major disruptions such as catastrophic weather events, technology upheavals, financial meltdowns, and so forth are the ones you want on your board all the time, not just in adversity. The board should also seek out not only diversity in decision-making experience but in gender, age, race, and ethnicity to minimize myopic decisions. When recruiting directors, ask them to share something from their leadership experience that went truly awry and what, from a governance perspective, they learned. Implication: We all are good captains in fair weather, but the storms truly bring out the best of leadership in both boards and management.

The secret sauce that makes a firm’s strategy resilient is the quality of leadership at the CEO and board level, coupled with clear and timely communications to stakeholders. The CEO is the linchpin that connects the board to management and sometimes the chair with the board. Implication: Absent leadership and effective communications, this can all be for naught.

Don Lowry is chair of Capital Power Corp., a Canadian power-generating enterprise committed to environmental stewardship. He previously held various C-suite and board-level positions at the likes of EPCOR Utilities, Hydrogenics Corp., Stantec, and more.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

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The Leading Advantage: Leadership Agility in Latin America

Hosted by Robert Newland, CEO of Newland Associates, a CPI Firm, this is our first Spanish language episode.  Claudia Rosales of CPI Peru joins the show to discuss leadership agility and team engagement in times of change and uncertainty.
Listen on Spotify Here
Listen on iTunes Here
The post The Leading Advantage: Leadership Agility in Latin America appeared first on CPIWorld.

Rapid Reinvention Thought Leadership Series

Wilcox Miller & Nelson has just released the last piece of content in our Rapid Reinvention series, a volume of podcasts and articles related to current leadership issues. A big thank you to our Career Partners International offices for creating the content.

Webinars

  • Leadership to Navigate the Future of Work – 5/28 – Ahria – Link
  • Supporting Wellbeing and Resilience – 6/11 – Working Transitions – Link
  • Reskilling: a Learning Revolution – 7/2 – The Career Insights Group – Link
  • Re-Onboarding – 7/16 – The Ayers Group – Link
  • Leadership Agility – 8/6 – Waldron – Link

Articles

  • Leadership to Navigate the Future of Work – Ahria – Link
  • The Importance of Personal Resilience – Working Transitions – Link
  • The Learning Revolution, Reskilling – The Career Insight Group – Link
  • There is No new Normal, Now What? – The Ayers Group – Link
  • 5 Essential Adaptive Practices for Agile leaders – Waldron – Link

Podcasts SpotifyiTunes

  • Adapting to the Unknown – Keystone Partners – SpotifyiTunes
  • Seizing Strategic Opportunities in Chaos – CCI – SpotifyiTunes
  • Making Space for Mental Health in the Workplace – CCI – SpotifyiTunes
  • Redefining Resiliency – Greene & Associates – SpotifyiTunes
  • Driving Employee Engagement – CCI – SpotifyiTunes
  • Creating a Culture of Learning – Learning Dynamics – SpotifyiTunes
  • Reskilling: An Education Revolution – The Career Insight Group – SpotifyiTunes
  • The Art of Respectful Workplace Re-Entry – CPI Buffalo Niagara – SpotifyiTunes
  • Realignment and Re-Engagement – PowerConnections – SpotifyiTunes
  • Leadership Agility in Latin America – CPI Peru – SpotifyiTunes
  • Deliberate Agility – CPI Houston – SpotifyiTunes

Key Questions to Advance Racial Equity in Business Practices

In response to the increased and widespread call for racial justice in recent months, US companies have put out statements in support of the Black Lives Matter movement. While a good first step, management teams and boards need to ensure that companies are now walking the talk through their own business practices. Corporations can be a significant force for good in society, and they must work to advance racial justice by challenging and, when needed, changing practices inside their organizations that may contribute to institutional racism. With this in mind, NACD recently released Key Questions to Advance Racial Equity in Business Practices.

In this new guide, we outline considerations for boards in their review of specific business practices and norms that may inadvertently institutionalize racial inequities.

Role of the CEO

NACD’s recent conversations with directors have revealed a universal component: The role of the CEO makes or breaks a company’s diversity, equity, and inclusion (DE&I) goals. Boards must ensure that they are not only providing oversight of the CEO’s actions on DE&I, but that the full board is making their expectations around diversity clear and known to the management team.

Thus, the board must treat goals around diversity just as they would treat any other business goals. This means they should consider asking management to develop a few critical metrics to track the progress of the company’s workforce diversity against specific goals to evaluate the company’s culture, values, and inclusiveness. Finally, the board should consider tying compensation to DE&I; doing so will encourage the CEO and broader executive team to focus on DE&I.

Specific questions the board should ask itself and management include:

Are we expecting and incentivizing the CEO to create and maintain a racially diverse executive team and workforce? How does the company define diversity in their hiring strategy? Do our hiring decisions drive racially equitable outcomes?Human Capital Management

Human capital management and talent have been growing priorities in the boardroom. Talent must be considered through many lenses including racial diversity. The board should consider the company’s current employee diversity makeup and understand where and why they may have weaknesses.

Is diverse talent only present at the bottom levels of the organization? Is the turnover rate of diverse employees higher than that of non-diverse staff? The board should have a direct line of sight into the company’s talent and performance management approach to assess the effectiveness of recruitment, development, and promotion aimed at diversifying all employee ranks.  

Questions the board can ask itself and management include:

Is there pay variance between people of color and other employees?Do our current compensation practices contribute to or aggravate pay inequities in the organization? If so, what’s the risk of reputational harm and how would we address these inequities?Have we probed whether management has minimized the risk of racial bias in promotion and advancement decisions for staff?Suppliers

Boards can make important demands to evaluate and improve third-party diversity, including of suppliers, vendors, and contractors. Oftentimes, simply posing questions to management on the racial or gender diversity of third-party suppliers can bring awareness to the issue of inequity. It can also force suppliers to reconsider their own practices regarding diversity, equity, and inclusion.

Boards can ask the following questions to garner a deeper understanding of supplier diversity issues:

Does our company have any internal corporate policies regarding the racial diversity of our suppliers?What percentage of our company’s suppliers and third-party providers are minority-owned? Have targets been set on our percentage of minority-owned and -operated third-party suppliers (including financial services companies, law firms, ad agencies, and manufacturing plants, among others)?The Board

While the board’s oversight of the business’ DE&I efforts is imperative for progress, none of these efforts can succeed without the board looking inward as well. Boards must consider their own makeup and culture as they work to assist in navigating that of their businesses. This is the time for directors to evaluate what skillsets they may be lacking on their boards, and if the culture in the boardroom fosters inclusion.

When looking at succession planning, or during active director recruitment, boards must consider the following questions:

Do we typically look for or favor traditional executive experiences, such as serving as a CEO or a chief financial officer? Are there skillsets that our board is missing that could be filled by a diverse director?How do we identify, recruit, and onboard new directors? If we are working with a search firm, is the nominating and governance committee insisting on racially diverse candidates?Momentum around racial justice has risen and receded many times in history. To stop this ebb and flow, and instead create lasting change, now is the moment for boards and their companies to not only take a visible stance against racial injustice, but to take real action to dismantle institutional racism.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

Become an NACD member today.

NACD: Tools and resources to help guide you in unpredictable times.

Has COVID-19 Made It Essential to Have a Crisis Executive on the Board?

Harvard University professors and crisis experts Arnold Howitt and Herman “Dutch” Leonard have been researching and teaching crisis management in a series of Executive Education Programs at the Kennedy School of Government for decades. In a 2012 crisis seminar, they made the following statement which is apropos to our current national health crisis:

“Devastating crisis events of massive size, which we refer to as landscape disasters, have been occurring with distressing regularity…. What kinds of behavior are most valuable and effective in the moment—that is, during rapidly unfolding, urgent, and high consequence events…?”

Although Leonard and Howitt’s emphasis has been on executive education for senior government officials, every organization, both public and private, will encounter an enterprise crisis at one point or another. COVID-19 is that current “rapidly unfolding, urgent, and high consequence event.” In real-time, companies across the globe are realizing a successful response is critically dependent upon their board of directors and senior management working in concert to affect a positive outcome.  

This raises a question: After the dust settles from the current pandemic, will shareholders expect that a company’s board of directors include an executive with a crisis management background, or should that remain within the company’s business continuity management portfolio?

The “Right Stuff” for the New Normal

Amid any crisis, it’s difficult to predict what the new normal will look like, but it can be agreed upon that there will be changes and corporate governance won’t get an exemption. We’re not arguing for or against the inclusion of a crisis executive to a governance board, but rather initiating a discussion on the topic. We recognize that one of the key rules of good board governance is, “Noses in, Fingers out!” But good management requires solid experience. And now is the time to address the possibility of new experience needed in the board room.

Let’s examine more closely what qualities you’d expect an executive with a crisis management background to possess and how that could impact a board of director’s and corporate management’s response to a global crisis such as COVID-19. The Top Ten Essential Qualities of A Crisis Manager, authored by Mohammed Chughtai for Forbes magazine, describes qualities one could argue are relevant to any leader, not just a crisis leader. That said, academics seem to universally agree that these essential qualities are specific and critical to crisis management:

an excellent communicator who understands the business;decisive leadership; andcalm, proactive, committed, creative problem solving.A board of directors’ approach to overseeing the management of a crisis consists of being able to recognize the three major attributes of a crisis: threat, decision time, and uncertainty. What is the threat to the employees or shareholders, or to the financial stability of the corporation, and what is the uncertainty that needs to be reduced as soon as possible? These skills do not need to reside in one individual, but they are needed to recognize the dimensions of a crisis and to develop a coherent strategy to address the issues that need to be changed in the early stages of a crisis warning. (See Warren Phillips and Richard Rimkunas, Crisis Warning, Gordon and Breach, 1983).

Directors of companies need to recognize that these three attributes are present in every event that a company faces in a crisis. Some events come with high threat, short decision time, and high uncertainty (surprise). COVID-19 would seem to be one of these types of events. Deliberative situations characterized as ones with high threat over an extended time and with surprise, like shareholder demands for change, are a different type of event requiring quite different skills. The military and most hospitals practice extensively on response routines for these challenges. Companies do not normally do so. The challenge to a board of directors is to identify the most likely events, to recognize the nature of their corporate culture, and to identify how to recognize these events and how to oversee the management of each type.

Good corporations recognize the most likely challenges like shareholder demands, accounting errors discovered in an audit, or the loss of a major asset in the company. They are well prepared for these issues both in the board and in management. They turn to expert advice from outside the company and usually run regular exercises to make sure everyone is up-to-date on crisis responses.

A company’s reputation and financial success is dependent upon how it responds to a crisis—but all crises are unique. As nominating and governance committees consider the composition of a board of directors in a post-COVID-19 environment, they should consider which skills they need in house and which they can or should contract from elsewhere. The key here is to ensure that skills in house are able to deal with the high threat, short-term time demands, and uncertainty until the dimensions of a crisis are well-defined and the need for response is agreed upon.

We add one more suggestion. The need to buy time to protect the assets and the culture of the company will vary with the dimensions of the crisis. This means that a broadly experienced board, with solid dialogues with management on how to respond to challenges, must begin long before anything erupts.

In order to be ready for any emergency, boards must invite area specialists to review the company’s economic stability, information technology risks, potential for corporate buyout offers, culture, and human resources health, among other challenges, for diagnosing potential weak spots in the corporate management philosophy and posture. We also advocate regular exercises on potential crisis hotspots to keep everyone ready, willing, and able to get their hands dirty when a crisis emerges.

CACI International, like so many businesses around the world, is laser-focused on successfully managing its response to the COVID-19 pandemic. The CACI board of directors and management, in coordination with other defense and aerospace firms, have and will continue to engage the executive and legislative branches of the US government as it responds to the pandemic. The goal of these engagements is to inform and influence executive and congressional actions in response to the crisis to ensure that the critical national security work of the defense industry continues without disruption.

Warren R. Phillips is lead director on CACI’s board, and Daniel P. Walsh is senior vice president and strategic advisor at CACI.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

Become an NACD member today.

NACD: Tools and resources to help guide you in unpredictable times.