Study: Corporate Oversight Lacking on Sustainability Programs

Fragmented efforts, little standardization, and benchmarking under increasing focus by shareholder activism.

Published: Thursday, June 10, 2010 - 11:32

(The Conference Board: New York) -- Although many companies lack the structural framework to enable proper director oversight of sustainability programs, they rarely consult outside expertise, according to a report released by The Conference Board. The report, “Sustainability in the Boardroom,” reveals flaws in how corporate boards oversee their companies’ social and environmental initiatives. Based on a survey of corporate secretaries at 50 U.S. organizations, the research indicates that access to independent sources of information about the effect of business operations on the environment is often unavailable, as are detailed procedures and metrics for integrating social objectives into daily corporate activities.

“The environmental catastrophe that has been unfolding the last few weeks in the Gulf of Mexico is indicative of how closely intertwined sustainability and corporate strategy really are,” says Matteo Tonello, director of corporate governance research at The Conference Board Governance Center and author of the report. The Conference Board has been documenting governance practices for several years and regularly found that only a small number of companies consistently elevate sustainability issues to the strategic discussions that take place at the board level. For most companies, sustainability discussions with the board only take place in reaction to emergency situations such as the recent oil spill in the Gulf.

“More directors are realizing the critical influence of stakeholder relations on firm performance and feeling pressure from regulatory bodies, enforcement agencies, and activist investors,” adds Tonello.

Respondents to the report indicate that their directors continue to rely on reports by senior executives (89.2%). Directors almost never use additional sources (including peer-company benchmarks, environmental reports, director education programs, and consultants) that would help them critically verify and analyze any internally produced information on these matters.

Other key findings of the report:

Efforts are fragmented. The majority of companies report that they lack the basic foundations of an enterprisewide sustainability program, including a clear mission statement, dedicated functional department, and a system to assess whether sustainability activities help financial performance. As many as 61.9 percent of surveyed companies don’t use any metrics to link executive pay and accomplishments in the social or environmental sphere.

Standardization and benchmarking are lacking. Most surveyed public companies (76.5%) don’t employ any of the widely endorsed standards in many areas of social and environmental concern. Instead, these companies often resort to their own definition of sustainability, preventing the development of a level playing field for performance assessment by investors and other constituents.

Reporting is not always meaningful. Unlike some of their European counterparts, sustainability reporting by U.S. public companies remains embryonic. Companies that voluntarily disclose progress on their sustainability initiatives tend to do so via their public website or through an annual report. But as many as 42.9 percent of respondents indicate that their companies don’t include any metrics-based information in their disclosure.

Rising activism may make the difference in the near future. Recent regulatory developments and the increased sensitivity of enforcement authorities to the risk implications of environmental issues have opened the door to shareholder activism. In the last few years, socially responsible investment companies and large retirement funds have submitted a growing number of resolutions on matters of corporate sustainability, ranging from climate change to political spending and from board diversity to pay disparity. Approximately 57 percent of surveyed companies report having received an explicit request from an activist investor.

The “Sustainability in the Boardroom” survey was conducted with the help of the Research Working Group on Governance and Sustainability Integration, a joint effort of The Conference Board Governance and Corporate Citizenship & Sustainability Centers. It is the second in this year’s Director Notes series on sustainability oversight. The series of publications presents a forum in which The Conference Board engages experts from several disciplines of corporate leadership in an open dialogue about topical issues of concern to member companies.

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