Crisis as an ESG Catalyst
By Deborah Elllinger

COVID-19 and Black Lives Matter have brought a harsh spotlight on environmental, social and governance issues (ESG), especially on the many “S” issues boards oversee. Your investors, employees and other stakeholders should know you understand and will react accordingly.

While the pandemic is still wreaking havoc around the world, many slogans have bubbled up, including “Black Lives Matter” and “Defund the Police.” I believe it is perhaps more important to become “anti-slogan.” Block the noise and the acronyms — instead, listen to your people and do the right thing. Ask management for meaningful employee surveys so that you can understand what your associates need in order to be successful and what concrete actions will help them.

A good starting point is an employee census. Most companies have reports on the percentage of diverse employees at different ranks, but it is important to go at least one level deeper if you want change to happen. Do you know what percentage of the applicant pool is diverse? What percentage of diverse applicants actually get hired? What percentage get promoted? How their pay stacks up? What percentage leave, voluntarily or involuntarily? By watching these types of metrics, you can engage in a much deeper discussion and help be a catalyst for change.

Improvement takes time, but it’s easier than you think.

Ten years ago, we used to hear, “I’d love to have a woman on my board, but there aren’t any qualified candidates.” That has been proved wrong — 100% of the S&P 500 company boards include women, and 26% of their board seats are held by women (as are 20% of Russell 3000 board seats). These percentages continue to increase, and there has been no reduction in board quality. Research shows that boards with women have better overall financial performance. This change in participation was achieved by expanding the recruitment network beyond “the people I already know.” Boards also stopped focusing only on former CEOs and C-suite executives, and instead sought skills like digital expertise, financial depth, leadership and global outlook. Could this approach help us with the next board milestone: ethnic diversity? To find accomplished women of color for board seats — and there are likely more than you think — the key is to expand the networks you tap and look for skills and potential instead of current status.

Focusing on social issues will improve employee retention during and after crises.

With partial or full work-from-home going on for many months, employees are stressed as never before. Parents of young children are faced with working, watching children and teaching. There is great concern the workforce could be irrevocably damaged, particularly with respect to women and, even more so, women of color. What can management do to help and reinforce strides made toward diversity and inclusion at the company for these at-risk staff members? WiFi access and tech tools? Childcare support — physically or financially? Teachers on call to help with remote learning? More flexible ways of measuring performance?

Key employees may not leave now, but when a recruiter calls in the future, employees will be much more likely to take the call if they believe the company did not provide support when they needed it the most. Senior executives are usually older and don’t personally face these issues, so boards should encourage executives to put themselves in their employees’ shoes, understand their pain and proactively address their issues.

Talk with your investors and other stakeholders about ESG.

Many companies defer investor discussions to their investor relations team, but now is a good time to bring investors into the boardroom. Some of the most interesting board meetings I have attended involved hearing from our largest investors about why they invested in us, what they hope we might do in the future and how they view topics such as ESG. Those meetings are refreshing and enlightening. They provide a deeper connection to your investors that gives you room to make the investments you need, in ESG or in other areas. The same is true for suppliers and customers, not just investors and employees. Talk to them and you might get some interesting food for thought that will help you develop a more concrete action plan.

Build a dashboard.

We hear many bold statements from CEOs about their ESG goals, but the best CEOs are not just talking. They are quietly putting measurements in place; reporting the results publicly, even when they aren’t pretty; and taking actions to improve. The big tech companies have long been reporting ESG statistics, even when the story isn’t always good — check out the diversity reports at Apple, Facebook or Microsoft. The most valuable companies in the world know that they need to address the interests of all stakeholders in order to be successful, and that transparency is the best way to achieve that. The board can encourage this by putting ESG on the agenda for regular review and discussion, by actively engaging with the management team on improvement actions and by reporting the results to investors. We shouldn’t need COVID-19 or social unrest to encourage us to do the right thing.

Now is the time to develop an ESG dashboard, and there are plenty of places to look for guidance. The World Economic Forum, in collaboration with several major accounting firms, has published a whitepaper that suggests core ESG metrics to consider (the whitepaper can be found at www3.weforumorg). The metrics you use will vary by industry and by company needs, but this is a good starting point. Examine your ESG scores from proxy advisers like ISS and Glass Lewis. They provide insight on how investors assess ESG performance and how your company stacks up against competitors. These scores can often be improved simply by disclosing what you are already doing. Although disclosure is a good step forward, don’t just stop there — identify and prioritize actions that can make a difference. They may be easier and less expensive than you think.

Customers, employees, partners, investors and others in the community expect companies to be proactive in ESG areas, or at least not be at the end of the pack. Don’t wait to be asked. The time is now.

2020 Third Quarter

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