The more time that people spend together, the more they tend to speak and think alike. That’s the danger of groupthink in the boardroom for static boards that have worked together for many years. Boards that fill their seats with a mix of women, ethnicities, career experiences, and thought patterns are more likely to make better decisions and less likely to miss new threats. Diverse boards are also more likely to identify opportunities that promote long-term growth.
According to Corporate Board Member’s 15th Annual “What Directors Think Survey” on the question of the benefits of corporate social responsibility policies, about 57% of board directors responded that they wanted to improve their brand image and reputation. On the question of wanting to attract and retain employees, about 56% were eager to accomplish this. Around 43% of board directors were interested in increasing social awareness of their mission.
Institutional Investors Prompt Companies to Make ESG a Priority
One of the most outspoken institutional investors on the issue of ESG has been CEO Larry Fink of BlackRock. He’s made public statements that BlackRock expects companies they work with to make ESG a priority. Fink has also been outspoken about the importance of diversity in the boardroom and greater transparency around long-term planning.
According to Fink, institutional investors are interested in more than financial success. They want to work with companies that are focused on diversity, those that have a vision for the future and those that want to make a positive contribution to society. From the standpoint of the investors, they’re most interested in companies that benefit all stakeholders, including shareholders, customers, employees and the surrounding community.
ESG and diversity are two of the hottest topics in the marketplace. T.K. Kerstetter, CEO of Board Resources, LLC and editor-at-large of Corporate Board Member, agrees that institutional investors are placing an emphasis on ESG, diversity and transparency issues. Kerstetter adds that their message is strong and clear — they want to know how ESG fits into the long-term strategy and they won’t support companies that don’t subscribe to their wishes. BlackRock indicates that companies that aren’t willing to incorporate ESG into their strategies could be seen as a liability.
Emerging Liability for ESG
According to an article by Latham & Watkins, “Real reputational, legal, political and financial consequences can arise from failing to align business practice with ESG statements and policies.” A PwC Global PE Responsible Investment Survey in 2016 showed that 40% of investors stated that poor ESG performance had led to a material discount in their valuation and had led them not to invest in a company. About 41% of investors agreed that they’d be willing to pay a premium for a target company that had a strong ESG performance.
The focus on ESG is not without new risks, and companies should be aware that there’s more to ESG than compliance. Statements and policies around ESG often have legal content and significance that could create misstatements that could create emerging liability for ESG.
Latham & Watkins are seeing increasingly active suits with claims generated by non-governmental organizations and lawyers where companies have made broad ESG statements and control structures. These issues have primarily affected global companies to date and could be precedents. British, Canadian and Dutch courts have already seen litigation against parent companies over human rights and environmental impacts. The litigation risk level for buyout firms is increasing with the heightened transparency and reporting of ESG matters. ESG reports for investors may create liability issues where the company has failed to meet standards. Latham & Watkins also caution against firms sharing information about such issues as modern slavery, anti-bribery and environmental factors with non-lawyer consultants or NGOs when these issues surface during due diligence. This type of information exchange isn’t protected by legal privilege and it could be used against a firm in future litigation.
Latham & Watkins recommend that deal teams assess prospective portfolio investments and monitor current portfolio investments in light of fund ESG commitments.
Companies with Diverse Boards Score Higher on ESG
Companies have taken notice of the push for ESG and are starting to respond. The “What Directors Think” survey also showed that a majority of boards have already taken some steps to improve corporate social responsibility. The survey indicated that about half of all respondents said that their company had a corporate social responsibility policy in place. Another 10% said that they were currently working on developing one.
About half of the companies in the S&P 500 realm (245 firms) already have at least three women board directors. Companies that have good gender diversity have higher ESG scores. Firms without diverse boards scored the worst ratings for ESG. The survey also showed:
- Companies with diverse boards in the S&P 500 performed better on ESG metrics than peers that didn’t over the past one-, three- and five-year periods.
- Gender-diverse boards manage risk better.
- Gender-diverse boards offer a more comprehensive understanding of key company stakeholders.
- Gender diversity increased board attendance and effectiveness.
Using Technology for Improving Board Diversity to Navigate ESG Liability
Anytime a company makes a change in their approach to strategy or the marketplace, risks are certain to accompany new opportunities. As companies work toward meeting the investors’ expectations for improving board diversity and focusing on ESG issues, new concerns about ESG liability are coming to the surface.
This is yet another reason why board diversity is important, as diversity should be an asset in risk oversight. Data supports the connection between diversity and ESG. Boards that don’t support ESG could be facing liability over the duty of care or other disclosures made during financial deals. As boards strive to improve diversity, they need to assess the board’s need for experts on ESG and ESG legal expertise.
On the surface, nominating committees may find this type of talent difficult to locate. That’s why Diligent Corporation designed the Nominations tool, where committees can conduct a talent search of over 125,000 profiles across the globe. The tool is a software solution that streamlines the process for identifying diverse candidates by gender, ethnicity, experience and areas of expertise so that boards can make wise decisions to help them compose a board that’s prepared to take advantage of opportunities and address the risks of today.