Nederlandse versie making business work for society

Time top management took lead to make companies more sustainable

november 10, 2016

Many share a sense of optimism about the economy becoming more sustainable. The climate agreement reached in Paris; a recent national climate summit here in the Netherlands; covenants for international corporate social responsibility; a responsibility for sustainability in the Dutch corporate governance code — all indicate a positive trend.

Sustainability in the context of corporate governance has become 'acceptable'. Indeed, Eumedion, the platform for Dutch institutional investors, has even devoted its anniversary conference on 17 November to the topic.

The leading positions held by DSM, Philips, PostNL and Unilever on the Dow Jones Sustainability Index confirm that Dutch multinationals are vigilant in this area. Nevertheless, I’d like to guard against complacency: scoring high on ranking lists and achieving good positions in benchmark exercises have more to do with the ‘ratings game’ than any genuine transition to a sustainable economy. If sustainability is to become core business, Executive and Supervisory board members will need to take the lead.

You see this reflected in research I’ve begun in order to better evaluate the engagement of top management with sustainability issues. Interviews I held with a dozen or so directors and board members of multinationals, as well as a few academics, confirm a picture of detachment and guardedness. The research is ongoing, but four preliminary conclusions can already be drawn: 

1)     First, many directors and board members lack the internal drive to put sustainability on the agenda. The topic is complex, calls for more than a ‘business as usual’ mindset, and many find the incentives unclear. A good number of them don’t believe in sustainability as a source of value creation. Pressure from the capital markets means the focus is primarily on the short term (for which members of Eumedion must take some blame). Only when an incident occurs do board members feel they should be ‘doing something about sustainability’. 

2)     Secondly, board members accept the picture of a rather bureaucratic approach. Ranking lists and reputation management prevail, all dealt with by their Sustainability Unit. Top management is removed from this activity, simply approving items and ticking boxes. "And that’ll get you a long way" as one of the directors interviewed admitted.  

3)     Thirdly, some interviewees conceded they have difficulty dealing with an articulate and assertive society. Putting a dialogue on sustainability on the agenda means making yourself vulnerable, which brings with it a fear of possible negative publicity. Some directors say they feel prisoner to a system from which they don’t know how to break out. Though one Supervisory Board member countered this by suggesting that many directors have big egos that get in the way, hampering dialogue, as they see being held responsible by outsiders as ‘being harassed’.  

4)     Finally, it seems directors who do take sustainability seriously often shy away from the full complexity of the challenge. To achieve fundamental change - which is what is called for here - a director must implement a clear and unequivocal vision. And they can only do that credibly if the operational results and shareholder value are good. The theory being that, only by building on those robust foundations can you attempt to link value creation with societal challenges. Interviewees suggested that there is a lack of sufficient believe, stamina and/or incentives for them to stick their neck out on this issue.

Despite all this, there is something still niggling away at many directors. They see that society is changing. Globalization is under pressure, through criticism of the distribution of economic earnings and the alleged privileges of multinationals. They have taken note of international ambitions such as the UN’s Sustainable Development Goals. What’s more, they get challenged by their children and grandchildren. But how do you leverage this?

To my mind, it’s crucial that the Board itself takes the lead. Multinationals have huge potential to make a positive contribution to society. But the connection with society is broken under the pressure of short-term interests. It’s unclear how a company, not only serves the market and stock market, but also creates added value for society. At best, codes, covenants and rules offer only guidance in the search for real answers. To genuinely make a difference requires personal commitment. The Supervisory Board must act if the Executive Board doesn’t take the initiative; and if it does, ensure for sufficient reflection and ambition when it comes to sustainability.

Another director I interviewed said that he had committed in a "robust and principled" manner to the mission to integrate sustainability into the company’s core business. This was perceived by those around him as a risk. He saw it differently, arguing that "nowadays it’s actually the inability to demonstrate social added value that’s a strategic, financial and commercial risk." An insight that can be an inspiration for other top managers. Society is becoming more demanding, and as an organization you need to prove your relevance. Which you don’t do by ticking off lists, but by connecting with society and delivering tangible results. Directors and Board Members: it’s time to leave your comfort zone and take the lead!