Environmental, social and governance (ESG) issues have largely focused on the “E” and the “G” because those are more easily defined. But any directors have struggled to explain what the “S” really means and how social issues can be measured. But these issues have now been pushed to the forefront in the midst of the pandemic and social unrest.
“None of us could have imagined where we are now and where we have been recently,” says Roy Dunbar, director for Humana Inc., Johnson Controls International PLC and SiteOne Landscape Supply. “It's allowed many of us to reflect on our personal world, family, friends, the companies that we work for, how we spend our time. We were on a treadmill before that was often going faster and faster. We've been forced to slow to a certain extent. In that slowing, I see no retreat around matters related to the E, S and G .
“The other thing which I would add is I see no letup in the funds that are ESG-orientated; more and more capital is flowing into them, I believe there is going to be continued momentum, if not acceleration of momentum, as we come out of these crises on matters of ESG.”
Brad Oates, director for CIT Group, says the events of this year will bing ESG further to the fore in 2021.
“I think we'll look back in coming years to see 2020 as a hinge year between 2019 and 2021. With the work I'm doing, we have been transitioning from what I call tactical governance — meaning the checklist approach — toward more strategic governance. I think ESG can be thought of the same way. I think last year and this were focused on more ‘little E, S and G' things and 2021 is being tapped for what I call ‘big ESG.'”
As an example, Oates says he believes protests around the world around racial inequality could be one “tipping point” that brings “S” into focus. “One of the things that boards are going to have to come to grips with is what the purpose of a corporation is in terms of this idea of ‘big S' social.
“We are, seeing a number of corporations coming out with statements about racial injustice, and I think that's good. But the deeper question is, at the end of the day, what is the purpose of a company in terms of bridging tribal divides — and racial divides are one example of a tribal divide. As a board member, I'm asking myself, first and foremost, if my company is internally bridging tribal divides first before we go out with statements and before we try to bridge divides outside of the company.”
Measuring any of these efforts in the social category is still difficult. Dunbar says the boards on which he serves tends to look to Sustainability Accounting Standards Board (SASB) goals. Oates says the developing standards are a good launch point, but he looks more at authenticity in corporate behavior and there is no “one size fits all” across corporate America.
Noting research the Diligent Institute completed with the Rock Center for Corporate Governance at Stanford University, the institute's executive director, Dottie Schindlinger, says there seems to be a disconnect between how well directors feel they are addressing stakeholder concerns versus how well stakeholders feel their concerns are being addressed.
“Roughly 92% of corporate directors told us that they were pretty satisfied with the job they felt the company was doing in terms of communicating out to stakeholders and addressing stakeholder interests,” Schindlinger says. “But only 57% of directors felt that stakeholders really, truly understood all the ways the company was trying to address their interests and needs.”
However, Dunbar says there are corporations making a real difference with their stakeholders, with tangible actions those stakeholders can see quite clearly.
“For example, Humana reached out to insured individuals who may have food insecurity issues, who may be elderly and not able to get out. The company literally has arranged for the delivery of food to vulnerable individuals who had no other way.
“A company has to figure out how it engages in a more intimate conversation with a constituent rather than say, ‘Look, we're communicating, we broadcast this.' That's pointless.”