The Link Between ESG and Business Continuity – What Boards Need to Know
Wherever they turn, today’s business leaders face unprecedented challenges on a global scale. As the challenges mount and shift, and as the pace of change accelerates, so do the questions that keep boards and executives awake at night. They need answers – fast. Insights for Leaders delivers the perspective leaders need to understand what today’s news will mean for tomorrow’s world, and to make smart, agile decisions that will ensure their organizations not only survive, but thrive in an uncertain world.
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Though much remains uncertain, it’s safe to say that in the months and years that follow, business leaders will be judged by how they respond to this crisis – and not only in managing cash flow, adapting supply chains and tackling business continuity issues.
“... consideration of environmental, social and governance issues are fundamental to what successful corporations do, and to the critical role these businesses play in society – providing goods, services and employment, and using their ingenuity to solve problems.”
We are also seeing how ESG factors into real-time decisions: around whether to hire, retain or furlough workers; decrease, maintain or increase R&D spending; or temporarily repurpose resources to manufacture essential goods. All of these decisions and more, Gregory says, are closely intertwined with ESG considerations.
“There’s this narrative that corporations have to choose between serving their shareholders and serving higher purposes like social good or employee well-being,” she adds. “That’s a false dichotomy. A company doesn’t last in business or deliver strong returns unless it does a pretty good job on all of those criteria. How companies are responding to COVID-19 brings that into sharper focus.”
“The board’s role is to focus management on how corporate purpose, values and culture should play a part in continuity planning, both during this crisis and in preparation for others,” Gregory says.
“The board’s role is to focus management on how corporate purpose, values and culture should play a part in continuity planning, both during this crisis and in preparation for others,” Gregory says. “They can challenge assumptions, asking the hard – but necessary – questions, while insisting that long-term impacts be considered.”
Those questions might include: How are ESG considerations factored into specific continuity actions? If, for instance, management decides to furlough workers, what projections were used and what assumptions were made? How were alternatives assessed and what plans are in place to mitigate the negative impacts? For example, absent a furlough, what other actions were considered to protect the business during a downturn? What will a furlough mean for our ability to come quickly back online? Can we keep furloughed employees on the company’s health insurance for a period of time?
What to Expect This Proxy Season – and Beyond
For example, in annual compensation reviews, boards should think beyond the pandemic, especially given the volatility in equities markets and the intensified scrutiny of these matters during and after an economic disruption.
“Say a company today grants more shares to executives, given low stock values, in lieu of a pay raise,” Gregory says. “What happens if in six months the crisis passes and stock prices soar? What are the optics, especially if workers were laid off? What do disclosures look like next year?”
She also cautions that because market volatility is often accompanied by shifts in shareholder activism, boards should ensure companies are prepared to defend against takeover attempts – and have up-to-date poison pills on the shelf. “There may not be a ton of contests for board seats right now, but activists haven’t gone away,” Gregory says. “And vulnerabilities may change drastically as the crisis unfolds.”
To guide organizations through these risks, boards themselves need high-energy directors who are not “overboarded” – a problem that becomes more acute now, as directors serving on several boards may be juggling several crises at a time. Boards also need to consider their own resiliency, including whether appropriate emergency bylaws are in place in case directors are incapacitated and a quorum can’t be achieved.
The crisis reminds us all just how dependent we are on corporations, for everything from groceries to information to healthcare. “Boards and corporate leaders have a unique opportunity to better articulate the value their corporations provide to society, through their provision of core goods and services, their innovation, their employment and training, and their role in the supply chain," Gregory says. "All of these activities have ESG implications, and corporate leaders need to become more comfortable in discussing these considerations in the context of their decision-making and in defining the corporation’s purpose and its values.”
This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.
Holly Gregory
is co-chair of Sidley’s global Corporate Governance and Executive Compensation practice, and counsels publicly held, private and not-for-profit corporations on the full range of governance issues, including governance structure and culture, fiduciary duties, risk oversight, conflicts of interest, board and committee structure, board leadership, special committee investigations, CEO transitions, board audits and self-evaluation processes, shareholder activism and initiatives, proxy contests, relationships with shareholders and proxy advisory firms, compliance with legislative, regulatory and listing rule requirements and governance “best practices.”