Governance In The ESG Era

As urgency around ESG continues to gain momentum in the investor community, panelists at "Building Better Boards" shared insights on how to adapt to emerging metrics and communicate more effectively with stakeholders.

NCR and Henry Schein’s Kurt Kuehn, Community Capital Management’s David Sand, Cleary Gottlieb’s Pamela Marcogliese

At the recent Corporate Board Member two-day summit, “Building Better Boards,” members of a panel on ESG discussed the urgency around environmental, social and governance factors, which continues to gain momentum in the investor community, and shared insights on the need to adapt to emerging ESG metrics, while communicating more effectively with investors and stakeholders on developing areas of concern.

How do you reconcile ESG with a director’s fiduciary duty to deliver returns?

Kurt Kuehn, Director, NCR and Henry Schein: “To me, a lot of this is just an enhanced form of risk awareness and management, and companies that are engaged in the significant sustainability issues tend to see a little farther in the future…. That ability to anticipate risks and adjust to them, I think, is one of the base cases for this ESG environment and for corporations to be aware of it. As a board member, you at least want to know that management is thinking about the issues that are significant in their industry segment. And it may not have hit them yet, but if it’s a key element in other companies in that industry, you probably want to make sure that management is thinking about how the world will look different in the next five years, or contingency plans.”

Pamela Marcogliese, Partner, Cleary Gottlieb Steen & Hamilton: “The other thing that is fascinating and actually really scary is the reputational aspect of it. It’s just unbelievable how the stakeholders and the constituencies have changed and become more vocal. So, now, you have just an increasing number of employees that are willing to walk out on gender pay equity issues, on issues relating to immigration and other kinds of governmental policies, which is really interesting. The other thing that we’re seeing is an increasing number of companies where employees own equity and so are becoming shareholders and, therefore, shareholder proponents and bringing proposals at shareholder meetings and getting on the ballot. And so, to me, that’s really changing the dynamic.”

What do investors want to hear about when engaging with companies on ESG?

David Sand, Chief Impact Strategist, Community Capital Management: “People have been around long enough to see that what seems crazy and out of the box one year can move very quickly in the environment that we’re in right now to being something to which companies internally and externally need to respond. I mean, LGBTQ was a fringe issue, and now it’s a mainstream issue…. In my view, it just comes down to responsiveness, to the company that will engage with someone—engagement doesn’t mean you have to agree with them at the end of the day, but there needs to be an open dialog around the issue.”

Kuehn: “I think the investment community wants, number one, consistent metrics. Pick your top six or seven metrics, and let us get those easily and consistently. Don’t change the rules every year, especially for all the quant-driven stuff and the models—that’s a huge issue I hear about when I talk to the big investment groups. But I think the future is finding a way to bridge to where the finance function in a company can explain why this is or isn’t an important issue from a sustainability viewpoint: “We looked at doing this, but it really wasn’t relevant or it wasn’t a material issue,” or “We did this and this, and this is why we think this is important for the future.”