Working ESG Into Your Board Playbook
The traditional board playbook—the day-to-day rituals and tactics employed by corporate boards—has not typically taken environmental, social, and governance (ESG) issues into account. These matters have historically been delegated to human resources, compliance, public relations, investor relations, or other functions and have not been seen as a board-level concern.
But as investor focus on these issues intensifies and the purpose of the corporation evolves, ESG issues are becoming more important than ever, making them a new imperative for all boards and increasingly business critical—not just a “nice-to-do.” Although private companies do not face the external pressure of the broader investing public, they nevertheless should address the same issues for the sake of their stakeholders and incorporate ESG into their strategies to do what’s right for their businesses and corporate reputations.
So, how can private company boards reinvent their playbooks to become ESG-fluent and guide their companies to set and reach impactful social responsibility commitments and goals?
Know how to get shareholders and management on board. Public companies must meet the ESG demands of a wide range of investors, but private companies have a more limited shareholder base. It is therefore likely that any private company shareholder direction on ESG is more definitive, though it may slightly differ from broader market views. As a private company board member, you are uniquely positioned to communicate with all shareholders, build consensus and support around ESG issues, and steer the organization toward long-term success.
Private company board members also have the freedom to speak directly with company management. ESG should be a focus of the regular dialogue between board members and management so that plans can be made to mitigate and address ESG issues; ensure management’s ESG goals are in line with both shareholder and wider market expectations; and report progress to shareholders.
If going public or selling the business to a public company, it is even more imperative that private company boards focus these conversations early on to ensure that shareholders and management will be prepared to meet the public market’s expectations around ESG, which are discussed further below.
Work with management to create an ESG thesis. Private company leadership can set the values and priorities of their organizations, often without the outside pressure that many public companies face. However, many private companies are smaller and may not have the resources that larger public firms do to support ESG programs. Boards can work with their organizations to create ESG theses that align with their values and are achievable with the resources available. Boards can also help their organizations ensure that the proper mechanisms are in place to allow them to live up to their ESG theses and commitments.
Boards can further guide their organizations by:
setting measurable, actionable, and realistic ESG goals that align with the overall ESG thesis
creating a process for management to rigorously track, measure, and monitor how they are tying ESG aspirations to action
working with management to come up with a plan to ensure data is collected and reported to shareholders
breaking down silos between departments to ensure that all of the necessary functions—from legal and compliance to finance to human resources—are in constant communication and working toward the organization’s shared ESG commitments and values
Boards can also allocate specific ESG subcategory responsibilities to committees—for example, ESG disclosure and related controls to the audit committee and human capital management to the compensation committee—to ensure that the entire board has a role in overseeing ESG issues, while staying in close contact about overall goals.
If your company is gearing up for an initial public offering (IPO), prepare for heightened scrutiny around ESG. If your company isn’t going to be private forever, it is even more imperative that your management team understands what investors will expect and demand when it comes to ESG. Going public comes with a new set of expectations about disclosure and engagement with stakeholders, so setting your organization up for success sooner rather than later will ensure a more seamless transition from a private company to a public one. And, thanks partially to the Internet and social media, a company’s pre-IPO actions can easily be researched and scrutinized by public investors—all the more reason to ensure your ducks are in a row as soon as possible.
Regulators are also demanding a new level of specificity and accountability from boards and companies. California and Washington states have mandated board diversity quotas. Nasdaq is requiring many of its listed companies to disclose board diversity in a standardized, tabular format by August 2022. And the US Securities and Exchange Commission’s latest annual regulatory agenda notes that the agency will create disclosure rules relating to climate risk, human capital, and diversity, signaling that companies will be held to a standard they have not been in the past.
Even if your company has no plans to IPO, founder- or family-owned companies may still seek outside capital from private investors, who are also likely to want to ensure that your organization has the mechanisms in place to meet its ESG commitments down the line. And if your company is involved in any mergers or acquisitions, ESG is becoming a core and routine aspect of due diligence.
One thing is certain: the ESG pressure from stakeholders—including the government, employees, clients, and customers—is not going to let up. Private company boards have a critical role to play in helping their organizations effectively meet these new demands in a way that is genuine and consistent with their values.
Dave Curran is co-chair of the sustainability and environmental, social, and governance (ESG) advisory practice and executive director of the ESG and law institute at Paul Weiss.