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Report Shows Flaws In Sustainability Efforts

Though 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

Though 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. The research is based on a survey of corporate secretaries at 50 U.S. corporations. It found that what appears to be largely missing is access to independent sources of information on business operations' impact on the environment, as well as detailed procedures and metrics for integrating social objectives into daily corporate activities.

"The environmental catastrophe that has been unfolding in 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.

Documenting governance practices for several years, The Conference Board regularly found that only a small number of companies consistently elevate sustainability issues to strategic discussions taking place at the board level. For most companies, sustainability discussions with the board occur only in reaction to emergency situations like the Gulf oil spill. "However," says Tonello, "more directors are realizing the critical influence of stakeholder relations on firm performance and feeling pressure from regulatory bodies, enforcement agencies and activist investors."

Respondents to the research 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 a lack of the basic foundations for an enterprise-wide sustainability program, i.e., a clear mission statement, a dedicated functional department, and a system to assess whether sustainability activities help financial performance. As many as 61.9% of surveyed companies do not 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%) do not employ any of the widely endorsed standards existing today 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. -- In contrast to various European counterparts, U.S. public companies' sustainability reporting 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% of respondents indicate that their companies do not include any information on metrics in their disclosure.
  • Rising activism may make the difference in the near future -- Recent regulatory developments and 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.

Sustainability in the Boardroom 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. Director Notes is a series of publications through which The Conference Board engages experts from several disciplines of corporate leadership in an open dialogue about topical issues of concern to member companies.