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Law360 (February 17, 2021, 3:41 PM EST )
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| Nicole Marie Crum |
Many Americans were outraged by the widespread violence, discrimination and marginalization of people of color in America made evident by the videos of police violence and discrimination that surfaced throughout the year, as well as the racist rhetoric associated with the Jan. 6 insurrection at the Capitol.
The events demonstrated the interconnectivity and complicity of our institutions — both public and private — in the legacy and perpetuation of discrimination based on race and socioeconomic status.
Fueled by the visceral reaction to undeniable manifestations of racially focused inappropriate behavior, recognition of the tipping point we have reached as a society and compounded by the impact of the economic COVID-19 pandemic, many companies have made statements and organized messaging around these events.
Many boards of directors, however, have been left wondering what they should do in response, and haven't always been engaged on these issues by management.
Stakeholder Concerns Are Increasingly Important to Boards' Corporate Purpose, Culture and Risk Oversight
Increasingly, boards have begun to consider how their corporate purpose, culture and strategic goals should recognize the interconnectivity of and further societal goals around racial justice and other environmental, social and governance, or ESG, issues.
One positive board response to a strategic failure in ensuring organizational sustainability has been a renewed focus on board diversity, particularly with respect to the representation on boards of people of color.[1] This area is one highly visible aspect of discrimination facing people of color in our nation and failure to maximize access to valuable human capital. While more can and should be done, this is welcome progress.[2]
Boards must be intentional about both increasing diversity in the boardroom and in management, and making space for the diverse perspectives of board members, shareholders and now stakeholders.[3]
Stakeholders include individuals or groups that have an interest in any decision or activity of an organization, such as employees and affinity groups, vendors or suppliers, customers, shareholders, investors, neighbors and local, regional, national and international communities.[4] The health and wellness of stakeholders directly impacts the performance of companies.
As BlackRock Inc.'s Larry Fink wrote in his 2020 letter to CEOs:
The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. ... [A] company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.[5]
He also noted:
Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.
An understanding of stakeholder issues provides the board with a perspective on how company operations impact individuals and communities. These concerns can help identify ESG issues relevant to an organization beyond those traditionally associated with the products or services sold, as well as create a more robust risk management structure and alignment of corporate purpose with actions.
For example, many boards have been surprised in the past several years by complaints of sexual harassment, assault and discriminatory practices and behaviors. Engagement with employees as stakeholders and requesting information from management regarding concerns raised — particularly from a diversity, equity and inclusion perspective — may have revealed these issues.
Steps to Formalize a Structure and Process
Boards should create a structure and process to understand and consider stakeholder interests and corresponding ESG priorities, including the implications for risk management and oversight, strategic and operational planning, and the allocation of resources and incentives within the organization.
The creation of the committee or task force should coincide with board education on these matters from management, third parties and potentially stakeholders themselves.
The following are steps a board can take to get started:
- Create a committee on stakeholder interests and ESG issues to identify the impact of corporate decisions and operations on stakeholders, as well as the ESG issues raised by the impacts and stakeholder concerns.
- Define the board's values around stakeholder interests and ESG principles as they relate to board process, corporate culture, operations and shareholder and stakeholder impacts.
- Request regular board-level presentations on stakeholder engagement and their concerns, including internal and external communications from management on stakeholder engagement and key ESG issues analysis.
- Identify primary and secondary stakeholders and the interests and concerns of each category based on independent board evaluations and input from management.
- Gather information regarding management's engagement with each stakeholder category, as well as management's views on the board's inventory.
- Receive management's views on how stakeholder concerns are factored or should be factored into the risk management framework and operations, and how they implicate ESG issues for the company.
- Consider how stakeholder concerns and corresponding ESG issues are or should be factored into the risk management framework, strategic and operational direction, planning and the allocation of resources.
- Seek advice on the concerns raised, responses and potential disclosures regarding board statements, standards, processes and considerations.
- Work with management to create or enhance management's process around stakeholder and ESG issues — including engagement, compliance, risk management, vendor oversight and other tailored applicable areas — and develop a board oversight process;
- Identify opportunities to engage stakeholders and understand their concerns, if needed, in collaboration with management.
- Develop action items in response to the issues above.
- Include committee reporting on the full board agenda and create a process for regular review and refresh.
- Consider public disclosure regarding this process.
Nicole Marie Crum is a partner at Sullivan & Worcester LLP and chairs the firm's corporate governance and board advisory practice group.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] For example, in response to the George Floyd killing in May, Morgan Stanley plans to invest $25 million to create an Institute of Inclusion. SIFMA has provided a sample list of member actions at: https://www.sifma.org/resources/news/the-financial-industry-takes-a-stand-for-equality-and-justice/.
[2] Why Do Boards Have So Few Black Directors? https://hbr.org/2020/08/why-do-boards-have-so-few-black-directors; How Black Lives Matter In Corporations—This Time Can Be Different, available at: https://boardmember.com/how-black-lives-matter-in-corporations-this-time-can-be-different/.
[3] Mutual Fund Boards and Diversity Through the Lens of Modern Portfolio Theory, available at: https://funddirections.com/news/77584/mutual-fund-boards-and-diversity-through-the-lens-of-modern-portfolio-theory/.
[4] Stakeholder Engagement and the Board: Integrating Best Governance Practices, https://www.ifc.org/wps/wcm/connect/bac56797-a3a7-4e24-90f6-efa9ab7363e0/FINAL%2BFocus8_5.pdf?MOD=AJPERES&CVID=jtCwtno.
[5] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
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