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From Our Briefings Newsletter

03 DEC 2018

The article below is from our BRIEFINGS newsletter of 03 December 2018:

Briefly . . . on the Board of Directors’ Perspectives on ESG 

As companies address the growing importance of environmental, social and governance issues, their boards of directors are increasingly weighing in. At the Goldman Sachs Sustainable Finance Innovation Forum in November, Ellen Kullman, former CEO of DuPont who also serves on the boards of companies including Amgen, Dell Technologies, Goldman Sachs and United Technologies, shared her thoughts with Goldman Sachs Head of Investor Relations Heather Kennedy Miner

Heather Kennedy Miner: Ellen, given your experience as a board member across various industries, can you share your perspective on how boards are approaching their discussions around environmental and social issues? What’s driving that shift?   

Ellen Kullman: Over the past decade, boards have adopted a broader, more inclusive definition of governance. Part of this stems from the rise of passive investments, which are managed by institutional investors who – rather than focus solely on short-term metrics, such as quarterly earnings – are increasingly active in pushing companies to focus on long-term performance. Shareholders are relying on the board to make sure the company is going in the right direction, which includes a higher set of expectations than before.

There are many different ways that corporate boards today engage on ESG. As directors, we discuss ESG and related reputational issues in our risk or audit committees. We consider ESG in our compensation committees when we’re evaluating whether the company has the kind of culture that attracts the next generation of people who want to come work for you. Then there are environmental and other important issues that the public policy committees are typically responsible for.

I sit on boards across various industries and importantly, ESG means different things to different companies. At DuPont, which manufactures a variety of industrial products, ESG was discussed in terms of the company’s environmental footprint. Pharmaceutical and medical device companies, on the other hand, may look at ESG issues through the lens of drug pricing or safety requirements. And service companies, such as Goldman Sachs, typically face a different set of ESG issues, such as how they can effectively manage reputational risk or harness capital to have an environmental or social impact.  While every company has a different set of issues they consider, at the end of the day, leading management teams are thinking about how to make the world a better place through their core business activities and risk management processes. And I think many shareholders today are asking management teams about those important issues.

HKM: So, how are boards responding to that increased focus from investors?

EK: The key question from investors is whether the company has the right processes and procedures for dealing with the myriad of ESG issues that come up. At the board level, whether it is the risk, audit, compensation or public responsibility committee, investors will look at the respective charters, what they cover and how each committee is measuring itself against its goals. And so as a Board, we need to be clear about our oversight responsibilities in this area.

HKM: That raises a question that investors often have which is on the benchmarking process. When you were CEO of DuPont  where you defined sustainability as a strategic imperative for the company  how did you evaluate success across your business? 

EK: At DuPont, we decided that when we released our Environmental Sustainability Report, we would be as transparent as we could and then continued toward greater transparency over time. And it served us well when we had issues or delays that we had to work through with our stakeholders. I think the kind of relationships that we built by being open really helped us in tough situations throughout the process.

HKM: Ellen, you’re also co-chair of Paradigm for Parity, which is a critical initiative that focuses on gender equality within the C-suite. How are boards focused on issues of diversity?

EK: Boards are very concerned about diversity because diversity is not just a social issue – it’s an economic issue. In my experience, I’ve found that diverse teams make better decisions. And diverse teams are more holistic in how they look at a problem. So from the board’s perspective, we want to know if the company has the type of culture that is accepting of people who look different than the majority of people at the firm. And do these people want to work for your company? Because if you have an inclusive work environment, you are going to get people who will be comfortable really looking at tough issues and making sure that the decisions come out in the right place.

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