Sustainability, governance and diversity: A view from the board

As part of the celebration of Black History Month, Freshfields hosted four Black public company board members to engage in a discussion on the intersection of racial justice, sustainability and corporate governance.

The panelists discussed how directors should be thinking about the duties of corporate boards and the balance between near-term profit and sustainability of the corporate enterprise, including the stakeholders that are vital to their business, and the role that diversity plays in ensuring that balance.

Moderated by Timothy Wilkins, Freshfields Global Partner of Sustainability, and Sebastian Fain, Freshfields Corporate/M&A partner, the panel included:

• Roy Dunbar (Boards of Johnson Controls and SiteOne Landscape Supply)
• Wayne Hewett (Boards of The Home Depot, UPS and Wells Fargo)
• Robin Washington (Boards of Alphabet, Honeywell and Salesforce)
• Deborah Wright (Board of Citigroup)

The following are the key takeaways from the discussion, which can be heard in full here. 

“Green is the New Black” 

The panel’s discussion was framed around the growing pressures on corporations and the boards that control them for corporate action on racial equity and justice.  The tragic killings last summer of unarmed Black men and women has moved the “S” to the fore of ESG (Environmental, Social, and Governance) priorities with many corporations making specific pledges to take some form of action.   These pledges ranged from internal efforts to recruit and promote diverse talent to external commitments to increase investments into predominantly Black communities.  Markets and investors rewarded those companies that were able to demonstrate how those commitments aligned with their core business strategies.  To quote Harvard Law Professor David Wilkins, “green became the new black; and black became the new green.” 

The focus on racial diversity comes at a time when the governance on boards has never been more complex.  Effectively communicating strategy to, and creating buy-in from, shareholders is paramount, but has been challenged by the variety of investor positions and desires, all being communicated much more actively by shareholders. Passively managed funds have become quite active in ESG topics; classic actively managed funds continue to be quite active in ESG topics; and even activist investors have funds and strategies that are also focused on ESG. Despite the focus on ESG matters, each of these investor types may have different views on diversity ambitions and how much they focus on those issues as compared to quarterly results.

Focus on doing what’s right

Fundamental to a director’s duties is to assure that the corporation remains focused on doing what’s right – whether it is with respect to the climate, governance, its people or other key parts of the corporate enterprise.  However, the corporation should not be assuming its obligation is to fix all the wrongs of society, but it should speak out when it sees things that are not right.  This includes with respect to its own people where its paramount for businesses to provide the best opportunities, irrespective of employee backgrounds.  Directors are finding they need to heighten their vigilance on hiring and promotion practices to put in place the diverse workforce required to service the growing customer demands for more differentiated products and services.  

Set a clear strategy for all stakeholders 

As with all aspects of corporate leadership, direction and tone at the top are critical.  In responding to the competing and sometimes conflicting demands of investors, directors should assure the corporation has first carefully considered its own strategy and implemented it throughout the organization.   In order to persuade investors to commit to a company long-term, directors should assure that the corporation is being transparent and clearly sharing its strategy on how a diverse culture around race and ethnicity sits in and benefits the corporation’s broader ecosystem of employees, products, supply chains and community.  The corporation should not rely alone on Diversity & Inclusion data reporting mechanisms to convey their goals and long-term direction. 

Regulation may be required for real change

Well intentioned corporations alone may not be able to make all of the required change.  Regulations have played an important historical role in advancing racial equality.  For example, the Community Reinvestment Act (CRA) in 1977 was a fundamental catalyst to the revival of many inner-city communities.  The CRA spurred banks to lend and invest billions of dollars in communities such as Harlem, South Bronx and Queens.  This was a profitable business for the banks as well.  The current public housing crisis could benefit from such a regulatory incentive structure to both change the life trajectories of the families in public housing as well as those in surrounding communities.

Risk oversight driven by macro trends

To be successful as an independent director, investors must be viewed as “owners” with an eye to their current holdings but also with an eye to the future creation of value. 

Directors must be alive to the risks of two important trends for creating future value:

• Demographic shift:  The world is becoming “minority/majority”.  The majority of 17-year-olds are diverse; the majority of new entrants into corporate jobs are diverse; and women are obtaining a higher share of bachelors, masters and PhD degrees than men.  Employees and customer bases alike are now sensitive to corporations that are focused on representation of the community.  As such, to win the battle for the best employees and attract customer spend, a corporation must hire people who look like their customers and can identify with their organizations from a racial and cultural perspective. 
• Investor shift:  It was estimated ESG investing has grown 10 times since 2018, now amounting to 20% of the net capital inflow into equities.   Further, ESG funds have outperformed their peer benchmarks.  These investors are clearly betting on those companies that can successfully manage ESG matters – including the “S” in taking care of their employees and their communities.

Having a successful human capital strategy around diversity is critical to assuring a corporation can outpace its competitors in the face of those demographic and investor shifts. 

Directing while Black

Directors often feel they do not know how their race or ethnicity is interpreted by others in the board room.  However, many Black directors believed they brought a special sensitivity to seeing how the effective management of diversity issues could create value for their corporations.  They did not assume they were at the table to just opine on “Black issues.”  But they did appreciate their unique voices could influence outcomes – especially when there was corporate politics involved.  For example, raising a concern about the passing over of a talented executive who happened to be Black was able to get the CEO’s attention to re-think the promotion decision. 

The diversity of opinion represented was universally agreed to be what made a board most effective.  Social science research has supported that diverse groups make better decisions – including boards.  It was felt the level of empathy and listening in the room had shifted from the summer with more board members being attuned to issues of race and its intersectionality with gender and other forms of diversity.  There was also more understanding that each person would not bring the same level of bias to interpreting a given issue.   Black board members felt more support to ask a new level of questions on diversity issues, including related to unconscious bias training and commitments to external and internal stakeholders. 

Conclusion

The panel affirmed that racial justice and equality are squarely on the board room agenda.  To build sustainable and profitable growth, good governance requires a plan to deliver on assuring just and equitable opportunities for a corporation’s people, customers and communities.