Are your board leaders ready for environmental, social & governance (ESG) issues?

Future board leadership must be prepared for ESG issues

Since the 2010s, the role of the company chair has been center stage — with increasing responsibility on stakeholders for years to come.

In a recent survey of chairs, directors, senior executives and leading investors, we looked at the challenges facing chairs and future responsibilities of board members as well as the transformation that they expect. One issue that repeatedly came up was societal and economic turmoil.

To succeed, future board leaders must be prepared to deal with an agenda that features environmental, social and governance (ESG) issues. More than ever before, stakeholders are concerned about climate change, social justice and corporate governance.

As a result, businesses must not only deliver a return for investors, but they must also show how they’re changing the planet for the better. And because stakeholders view companies as playing a crucial role in driving change, they also hold leaders accountable for both their actions and inactions.

4 ESG challenges that board leaders should be prepared to deal with

Here are four environmental, social and governance challenges that board leaders should be prepared to help the company navigate.

1: Addressing climate change

Leaders agreed that climate change is going to be a major issue for boards and chairs for decades to come. One silver lining of the COVID-19 pandemic was that it dramatically reduced greenhouse gas emissions. Now, there’s pressure to find ways to permanently adopt the changes we made during the pandemic.

Board leaders aren’t immune to the pressure to become more sustainable and climate conscious. There are high expectations that future board leaders will look for ways to rely more on renewable energy sources to reduce their fossil fuel consumption. The burden is particularly heavy on oil and gas producers and organizations with significant carbon emissions, such as companies in the construction and chemical production industries.

Company chairs, as the external face of the board, must find ways to lead on climate issues. Chairs must stay aware of the latest sustainability trends, understand its implications for the business and community and address stakeholder concerns.

Perhaps most importantly, they must figure out how their organization can make a meaningful contribution to sustainability and environmental strategy.

2: Advancing social justice

Though the environment and government aspects of ESG have long been in the spotlight, the pandemic and social justice movements of 2020 finally brought social issues that are part of ESG to the forefront.

Organizations and boards now recognize that financial performance and reputation depend heavily on employee relations as well as customer interactions and attitudes toward broader social and political trends. With millennials starting to take over workforces and consumer bases, they’ll hold organizations and leaders to a higher standard on social issues than previous generations.

Today, organizations that treat employees and customers with respect and empathy likely have gained a competitive advantage in the market. Organizations that haven’t reflected social values have faced criticism.

Board chairs should ensure their agenda covers social issues, focusing on inclusion, tolerance and diversity. And they must also become a leader in diversity, equity and inclusion issues, demonstrating a commitment to building a stronger, more inclusive board and organization as a whole.

3: Practicing strong corporate governance

The most successful organizations have a well-run board. A dynamic, strong chair is the key to running a successful board. Even before the pandemic, chairs had a lot on their plate and were subject to scrutiny. But now, pressures from stakeholders and investors have never been higher, and governance is a closely watched area.

Succession planning

Chairs must ensure that the board is following best practices and always serving the best interests of both the organization and its stakeholders.

One of the chair’s main responsibilities is to ensure that the business has the right CEO. This also means that chairs must recognize when a CEO is no longer effective. Therefore, succession planning is a key function for chairs to lead.

Our interviewees commented that CEO succession planning must start early — as soon as the CEO is in place, the board should plan to determine who is next in line.

Capacity to lead

Chairs also must ensure they have sufficient capacity to serve fully in their role.

For years, chairs and directors have joined multiple boards and chair roles. But today, investors expect directors, and particularly chairs, to have a narrower focus. Some institutional investors have a system for voting against the appointment of directors who they perceive are overextended.

Chairs themselves should recognize how taxing the demands of their role are and be prepared to step in to lead the organization if the CEO cannot. If chairs aren’t capable of carrying out their responsibilities in a crisis, they should rethink their availability and commitment to the role.

4. Ensuring fair compensation for all

Another area of controversy that chairs must handle is the issue of executive pay. Reports of excessive CEO pay are rampant in the media, particularly when that pay does not seem tied to performance.

Investors, policymakers and the public cast a skeptical eye on executives who continue to receive substantial compensation packages despite worsening economic conditions. Chairs, along with the board’s compensation committee, must make sure that executive compensation not only is fair but that it’s also perceived as fair.

Finally, chairs must ensure that the board walks the talk when it comes to diversity. The board must reflect the diversity of the people and community that the organization serves — and be prepared to back up their assertions with numbers.

Diversity should encompass gender and race, but it should also consider each director’s background, experience and thought. That means chairs must review the board’s talent acquisition process and make sure it’s designed to find diverse talent. The board must also implement effective development processes to promote diversity and inclusion.

Chairs must also have the skills and abilities to manage a diverse board with a wide range of opinions and views. Our survey found chairs must develop emotional intelligence, listening and facilitation skills to ensure everyone’s voice is heard and respected.

Next steps for managing environmental, social and corporate governance for current & aspiring chairs and stakeholders

In the last decade, the role and visibility of the chair of the board expanded. The pandemic has kicked off the 2020s by continuing and even strengthening this trend. With the chair serving one of the most critical roles in economic and societal leadership, businesses must ensure they have the leaders they need for now and tomorrow.

Our study, The company chair: Board leadership fit for the 2020s, sets forth environmental, social and governance issues and other challenges that we expect chairs to have to contend with in the near future. It also reveals the top 10 qualities that chairs will need to have to lead their companies to overcome these challenges through the next decade.

Download it now to learn what will make the difference between success and failure in your boardroom.