#ESGP: How boards can balance #ESG and Profit (P)

BRT

There’s no money in ethics. If there were everyone would be at it. There’d be no corporate scandals because you could make more money from being good.

And of course, there are lots of studies which show the long term connection between behaving with a good social purpose and sustainability. That’s no surprise.

The problem is that there’s a danger that business will repeat the CSR trend error and try to make a business case for good behaviour. It’s dangerous. Look at how long CSR lasted.

But ESG is here to stay. Why?

First, the language is plain. It’s not management speak. Environment, society and governance are three simple words which don’t need explaining. A sure test of management speak is that you need to explain at length what the words mean in practice.

Second, “big business” and, the media which writes about it, sees the writing on the wall: Larry Fink, the 181 signatories at The Business Roundtable, HBR, the Financial Times etc. are all mainlining on “purpose”. And they’re serious. Milton Friedman and his primacy of shareholder value are, as we say back in Ireland, totally fecked.

Third, with a political landscape dominated by extreme left and right behaviour, the vacuum in the centre will be filled by those, especially young adults, who are happy to make less money provided ESG is honoured.

So sooner or later, companies will have to confront the fact that ESG costs money; that to make genuinely ESG-based decisions in the boardroom you may have to make less profit, at least in the short-term and if you don’t you may find that society, which grants your board its licence to trade, may revoke it.

So how should a board make, what I call ESGP decisions, i.e. those that prioritise the need to protect the environment, society and governance ahead of profit and to maximise profit, as it must, within that framework? It’s not hard:

Step 1 What decision would you take as a board if you ignored ESG completely? How much money would you make? If you need help with this, have a look at some of the critical decisions that led to the big corporate scandals and collapses over the last 20 years, and to the 2008 Global Financial Crash. Think about a few less well-known questionable decisions that your board has taken.

Step 2 What decision would you take as a board if you took ESG issues fully into account and had them fully costed, and how would that decision impact your P&L, in the short-term?

Step 3 What decision would your board take if it, sort of, cherrypicked the least expensive bits of ESG? Sound familiar? This, I suspect, is commonplace.

Those are the steps. But in, truth, they are options or choices for your board. And these choices may cause conflict. How prepared is your board to resolve these? Whose personality will dominate these decisions? Who will remain silent? Who will speak up? Will ESG have a Devil’s Advocate in your board room?

It’s a new way of thinking and behaving. Boards will have to unlearn old ways to learn new ones.

If your board pays men and women equally as it should, and some don’t, it hits your P&L. It’s an ESG issue. That decision or, say, a decision not to dump chemicals in your local river does not require a business case. But many feel they do and the ESG business case bandwagon is rolling.

It will soon be stopped in its tracks by reality. The direction of travel is that society is coming to expect boards to take the hit where ever it must honour ESG or it may revoke its license to trade as quickly as it is starting to abandon dear old Milton.

ESG costs. Rightly. There’s no such thing as a free ESG.

Ciarán Fenton

I will be speaking on this subject at a session to be chaired by Sally Hughes, CEO of IACCM at The IACCM Americas Conference 2019 in Phoenix, AZ, on Monday 4th. November 2019.

#SupremeCourtJudgment was a “board evaluation” of the Cabinet

Para20

The full Judgment of The Supreme Court concerning the Prorogation of Parliament was, effectively, “a board evaluation” of the Cabinet.

Can you recall the top seven decisions your management or main board took last year? Imagine if 11 experts in corporate governance and best practice leadership behaviour were to sit in judgment on the most important of those decisions? How sure would you be of a judgment “in your favour”?

The Supreme Court Judgment contains a paragraph – Para 20 – which refers to the Minutes of a Cabinet meeting held by conference call on Wednesday 28 August 2019 shortly after the Queen was advised by the Prime Minister to prorogue Parliament.

CXOs/NEDs on management and main boards keen on learning from the decision-making processes of others may find Para 20 in particular, and the entire Judgment in general, of particular interest especially since Cabinet Minutes are usually not published for 30 years.

Para 20 states: “The Prime Minister explained that it was important that they were “brought up to speed” on the decisions which had been taken”.

This implies that the Cabinet was not up to speed and therefore presumably had not entirely or fulsomely contributed, as a Cabinet, to the decision by the Prime Minister to advise the Queen to prorogue Parliament.

Amber Rudd who resigned from the Cabinet, and the Whip, not long after the decision said that “Cabinet ministers had also not been shown legal advice to the prime minister about his decision to prorogue” (BBC News website).

Para 20 continues: “In discussion at the Cabinet meeting, among points made was that “any messaging should emphasise that the plan for a Queen’s Speech was not intended to reduce parliamentary scrutiny or minimise Parliament’s opportunity to make clear its views on Brexit….Any suggestion that the Government was using this as a tactic to frustrate Parliament should be rebutted”.

This means that the Cabinet took a decision on “messaging ” concerning a decision to which it had not fully contributed.

Is this familiar? Have you sat in management and main board meetings and been brought up to speed on decisions already taken and then discussed how these should be “socialised”? I have. Many clients have too.

So what?

The point is that in business and government there has been a falling off in recent years in honouring the role and purpose of formal meetings and in following good corporate governance practice and behaviour in reducing the risk of boards and governments taking poor decisions.

In the Chilcot Report into the invasion of Iraq, the then Prime Minister was criticised for what has become known as his “sofa” style government “which meant that the Prime Minister did not face ‘frank and informed debate and challenge’ over his actions.

The House of Commons Report into the collapse of Carillion states that the “system of internal and external checks and balances are supposed to prevent board failures of the degree evident in Carillion. These all failed…The company’s non-executive directors failed to scrutinise or challenge reckless executives.”

Carillion’s directors would surely have preferred that the company had not collapsed; the then Prime Minister would have preferred the Iraq outcome to have been different, and the current Prime Minister would surely have prefered not to have to been dragged back to Parliament by The Supreme Court.

Since even small changes in decision-making behaviour might have altered those outcomes why is that those leaders and many of the CXOs and NEDs you know, and I encounter in my practice, don’t appear to be sufficiently incentivised by the risks created by their conduct to avoid unilateral decision-making?

The answer lies in their belief that they will achieve better outcomes faster if they hog all the power. Conversely, they believe that if they yield power to others or discussions, that “things” will get “bogged down”.

It boils down to a lack of trust.

In my work, I facilitate members of management and main boards to take risks in trusting each other by yielding power through formal processes and then experiencing, over time, how that trust can pay off in reduced risk events and higher chances of exploiting opportunities that are frequently missed by that lack of trust.

When people on boards for whom distrust is a default mode try out trusting each other, just a little, they connect with a capacity to take better collective decisions and more creative risks in the service of a shared purpose.

Considering the impact on your organisation of your decision-making processes, would your management and or main board survive such a judgement process? Be honest, if only with yourself.

Ciarán Fenton