Temperatures Are Rising in Boardrooms, Too

By voting against management-backed board directors, big investors are increasingly demanding boards pay attention to climate change.

Boardrooms are feeling a little more heat over climate change, but not just from the weather.

Investors have cited climate change as a reason for opposing the election of a management-backed director at 225 US companies, up from 157 in 2021 and 83 in 2020, according to shareholder disclosures through July 7.

The opposition hasn’t kept any directors from being elected or re-elected, but it is a sign that investors are increasingly concerned about how companies intend to combat climate change or, at least, address it at the operational level. “They have to be responsive to the pressures they’re getting,” says Joe Griesedieck, vice chair at Korn Ferry and managing director of the firm’s Board and CEO Services practice.

The primary opposition to the management-backed directors has come from institutional shareholders— investors who hold large tracts of shares. Over the last several years, many of these investors have become more vocal in their desire for organizations to tackle environment, social and governance, or ESG, issues. Experts caution that while ESG is important, it shouldn’t override the board’s primary role of protecting the interests of all shareholders. “Boards must do what they deem as right for the company, while being respectful of the voice of the shareholders,” says Alan Guarino, vice chair of Korn Ferry’s Board and CEO Services practice.

Climate change is one of the ESG issues that could have the biggest financial impact on an organization. However, it’s an area that many directors don’t feel particularly confident about. According to a spring 2022 survey from the business school INSEAD, 70% of directors reported they are only moderately—or not at all—effective at integrating ESG into company strategy and governance. Less than half—47%—believed their board has sufficient ESG competence and experience to challenge management on ESG plans and exercise board oversight on execution.

To some degree, climate change has taken a back seat to diversity and inclusion, according to experts, since the murder of George Floyd in summer 2020. Directors from underrepresented groups occupy 17% of board seats, up from 14% in 2020, according to the shareholder analysis group ISS Corporate Solutions.

But it’s not as if investors have been silent on climate change issues. At S&P 500 firms, there were 115 shareholder proposals submitted around climate change or environmental sustainability in 2021, a nearly 30% increase from 2020. It was the second year in a row that the number of environment-related proposals increased.

Climate change is likely not something that boards can ignore, since institutional investors will continue to bring up the issue. Boards could consider directors who have experience working with the challenges around climate change, Griesedieck says. For example, firms could bring on a new director who has worked with solar companies.

Boards might want to steer clear, however, of bringing on someone whose sole specialty is climate change, because there are many different issues to juggle. “Boards have to be conscious about what they have to deal with,” Griesedieck says.