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In the latest installment of the Salzburg Questions for Corporate Governance, James J. Killerlane III, corporate secretary, managing director and deputy general counsel of BNY Mellon, reflects on the challenge for boards to identify and select directors who are proficient in ESG issues
This article is part of the Salzburg Questions for Corporate Governance series by the Salzburg Global Corporate Governance Forum
Not long ago, environmental, social, governance, and human rights ("ESG") issues were considered unconnected to financial or investment fundamentals and a company's underlying business strategy and performance. However, the effects of the COVID-19 pandemic and climate change, various human rights issues around the globe, and the focus on promoting diversity have quickly changed this perception and brought these ESG-related issues to the forefront of the corporate boardroom agenda.
As a result, boards recognize they need members with the appropriate ESG skill-set to ensure their companies' strategies are sustainable and relevant in the current environment.
Globally, regulators are mandating ESG reporting for issuers, and stock exchanges are similarly developing ESG-related listing requirements. In addition, investors are drawing connections between ESG, materiality, and financial performance. As part of their engagement, investors are increasingly demanding boards have proficiency regarding ESG matters relevant to the business and industry in which their companies operate. Investors are also generally more focused on the role a board plays in utilizing its ESG-related competencies to promote the resilience of a company's assets and its long-term business strategy. As a result of these factors, boards and individual directors must demonstrate they are at least knowledgeable and hopefully proficient in ESG issues.
So how can boards accomplish this task? Right now, a large percentage of boards do not review and discuss ESG-related issues regularly. There are even fewer boards that can demonstrate which directors, if any, have ESG credentials. Ultimately, for directors to demonstrate proficiency in ESG-related matters, they must understand or have experience in how companies establish ESG goals and strategies and how that ESG-related framework integrates into a company's overall strategy, operations, and risk management framework. The challenge for boards is to identify and select directors who have the appropriate skill set.
In focusing on developing ESG skills at the board level, there are many parallels to how cybersecurity reached boards several years ago. Due to the increase in technology-related issues facing companies, the SEC expanded its focus with respect to cybersecurity and technology resiliency, which, in turn, led to an effort by boards to increase their expertise concerning these areas. Boards often accomplished this by hiring some "technology or cyber expert" to join the board.
As part of this trend, the prominence of cybersecurity-related topics began to increase on board agendas. However, owing to the fundamental importance of cybersecurity to the modern business enterprise, companies learned over time that one director's technical experience alone is insufficient to ensure the full board is prepared to address cybersecurity-related issues. Instead, boards must integrate the technical expertise from that cyber expert into the company's overall strategy and business operations.
Many companies maintain a skills matrix for the directors on their board, and public companies will publish it as a part of their annual proxy statement. Similar to "technology expertise," the increased prominence of ESG has channeled many companies to consider whether to highlight some category incorporating "ESG expertise." In assessing whether their directors possess ESG expertise, companies should consider the following traits and characteristics when selecting ESG-proficient directors.
There are many excellent and compelling reasons to have a diverse board. One significant reason is a diverse board is more likely to appreciate and understand ESG-related issues. It is also much easier to pursue an agenda that addresses racial injustice and social inequity with board members who personally understand the depth of the problem. Diversity is identifiable in many different aspects – differences of viewpoints, professional experience, education, skills, and other demographics, such as race, gender, ethnicity, and sexual orientation.
Directors (and the board overall) must understand how evolving ESG trends and issues impact access to capital and relationships with investors. They should be familiar with standard setters, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosure (TCFD), and the International Integrated Reporting Council (IIRC).
Directors should be sufficiently informed to confirm whether the company effectively capitalizes on ESG-related trends and issues to attract long-term investors and secure shareholder support. These individuals should also understand the ESG raters and rankers, such as CDP, MSCI, Sustainalytics, ISS, Glass Lewis, and Bloomberg, and appreciate how the feedback from these organizations affects their companies.
Boards should consider widening their searches when looking for new directors to include people outside of the "mainstream" or who have not yet served on a public company board. These people may consist of not-for-profit CEOs and leaders of organizations dedicated to ESG matters; former government officials, academic officers, and faculty; subject matter experts in an ESG field related to the company; or leaders from federal or local environmental agencies. Potential director candidates could also include a candidate who represents or has experience with a stakeholder group relevant to a company's ESG impacts.
This trait is similar to the prior item. Still, as ESG increases in prominence across all companies, there will be a growing pool of executives whose full-time position relates to ESG-related matters and who may be considered ideal candidates to satisfy ESG-proficiency on a board. Heads of ESG at companies or chief sustainability officers are excellent examples of these roles.
It is not enough to have one or two directors who are ESG-proficient so companies can "check the box" on a skills matrix. The entire board must be ESG-fluent and understand how ESG relates to company strategy and how it affects its financial statements. These risks and opportunities are already present at most companies, and boards should be prepared to address them.
James J. Killerlane III is the corporate secretary, managing director and deputy general counsel of BNY Mellon. Jim oversees all corporate governance and securities matters at BNY Mellon and supports the board of directors for the BNY Parent, Institutional Bank and Wealth Bank. He is also a member of the legal department's senior staff. He previously worked in senior roles at AIG, Morgan Stanley and Lehman Brothers. Jim is currently admitted to the bar in New York and Connecticut. He currently serves on the National Board of the Society for Corporate Governance, and previously served as the president of the New York chapter. Jim serves as the chairman emeritus of the Junior Council of the American Museum of Natural History and also serves on the board of the Red Bull Theater and several non-profit institutions. Jim graduated from Princeton University and received a J.D. from Fordham University Law School. He is a Fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter