Practical Integration of ESG in Private Companies
NACD Private Company Directorship
Practical Integration of ESG in Private Companies
November 22, 2020
By Karen Smith Bogart
Business leaders increasingly recognize the interdependent relationship of society and the firm. This linkage has been heightened by COVID-19, economic fall-out, racial justice tensions, trade conflicts, and stakeholder requests for company response. These events have prompted firms to reevaluate their strategy, risks, and forecasted outcomes. This has encouraged them to integrate ESG into daily business processes rather than treat sustainability as a tangential effort. This inclusion has spurred clearer priorities, investment, and operational execution. Closely held private firms have an advantage of longer-term horizons and related operating flexibility in achieving this integration.
The following provides practical suggestions for private company management and directors attempting to strengthen the fit of ESG in business purpose; stakeholder engagement; strategy and supporting commitments; performance goals, metrics, and assessment; people; and governance.
- Business purpose: Use your company vision, mission, and values to explain and connect the firm’s purpose, differentiation, desired impact, sustainability commitments, and value creation aims. Consistently leverage their guidance in strategic and operational decisions, investments, and organizational performance assessment. This framework will address internal and external “why” questions and encourage employee alignment. It will also build internal belief that the business purpose and related commitments are vital and lasting.
- Stakeholder engagement (external and internal): Start or expand active company-stakeholder engagement processes with customers, suppliers, employees, and community organizations. These conversations often surface insights regarding constituent concerns, interests, and expectations. Identified needs may be creatively addressed through collaboration, product and service innovation, and enhanced capability. Some issues might require the company to ally with other firms and community organizations to mutually devise solutions to broader societal challenges.
- Strategy and commitments: Strategies define participation, desired advantage, operating means, expected performance, and forecasted value creation. They indicate what will be prioritized, resourced, and rewarded. Include the business purpose and ESG commitments regarding people, profit, and planet (3P) in strategy and annual plans. They will shape the company’s focus, investments, capabilities, operating approaches, and expected value creation. The strategy and commitments provide a critical reference tool for managing the business and reinforcing priorities.
- Performance goals and assessment: Multi-year and annual goals and related measures tangibly express the company’s priorities, including those related to ESG. This “dashboard” reflects key business choices, emphases, value creation, investments, and expected benefits. Objectives and metrics provide a visible basis for performance assessment and reward. Goal explanation, emphasis, and weighting tell the organization “what really matters.” Planned and impromptu management reviews of financial and non-financial performance affirm 3P objectives in innovation projects, operational processes, marketing efforts, and capability development. Likewise, leadership can reinforce the reality that profitability enables reinvestment in the firm’s capacity, success, and sustainability.
- People: Motivated, capable, and mission-aligned employees are a powerful force in achieving the company’s business purpose. Accordingly, leaders should consistently connect organizational, team, and individual deliverables to desired company achievements and their expected ESG impact. They can also recognize the importance of employee diversity and inclusion, capability, and work-process effectiveness in innovation, customer satisfaction, and value creation.
- Governance: Governance processes enable the consideration, approval, and resourcing of strategies and commitments to business purpose, long-term value creation, and strategic resilience. They assist in risk management. They also encourage effective management succession planning processes and company continuation.
Business purpose and ESG commitments should be practically integrated into daily business processes. They can be realized through strategy, stakeholder engagement, performance goals and assessment, people leadership, and governance. This incorporation makes them guiding, actionable, and lasting for the organization.
Karen Smith Bogart is the president of Smith Bogart Consulting. Bogart currently serves on the boards of Mohawk Industries, Michelman, and NACD’s Pacific Southwest Chapter. She is also an NACD Directorship Certified Director.