Corporate boards cannot afford to be laggards in a changing governance landscape.Toru Hanai/Reuters
Peter Dey is chairman of Paradigm Capital and executive-in-residence at the University of Toronto’s Rotman School of Management. Sarah Kaplan is distinguished professor at the Rotman School and author of The 360º Corporation: From Stakeholder Trade-offs to Transformation. They are the co-authors of the Lee-Chin Institute for Corporate Citizenship’s report 360º Governance: Where are the directors in a world in crisis?
As boards of directors reconvene in person and emerge from their virtual boardrooms, they will be well-advised to review and update the purpose of the corporation to reflect the realities of easing pandemic restrictions.
What does it mean to have a purpose? “Making money” is part of it, but will not be the sole purpose of the corporation. The corporation needs to make money to function. But making money alone gives no definition to why the corporation exists, and no framework within which a board of directors can assess the best interests of the corporation.
And, according to the Supreme Court of Canada’s 2008 BCE decision – which changed the legal landscape for Canadian boards – the best interests of the corporation must account for the interests of the corporation’s stakeholders, and not just the shareholders.
The pandemic has had two important effects on the implementation of this legal framework and on the future of corporate governance in Canada. First, the crisis has created many stresses for corporations from which boards of directors can derive insight. Boards will need to assess what they learned in the course of overseeing their companies through the pandemic, and to implement changes to make the company more resilient to future crises.
Second, the pandemic has created increased expectations of companies concerning their role in society – not just as engines of profits, but also contributors to the environmental and social well-being of citizens. These expectations are not just coming from everyday citizens and activists – investors are also getting into the game by increasing their focus on stewardship of companies’ environmental, social and governance (ESG) performance.
Indeed, these two impacts are interrelated, as emerging research in finance and management shows that the companies that attend most carefully to stakeholder interests are those that are more resilient to shocks.
One of the most graphic illustrations of the changed world of corporate governance is a series of recent decisions regarding the climate impacts of oil and gas companies. Activist investors obtained three seats on Exxon Mobil Corp.’s board; a court in the Netherlands ruled that Royal Dutch Shell PLC’s climate abatement plans were inadequate and demanded more; and Chevron Corp.’s shareholders approved a resolution requiring the company to set tougher targets on the emissions from the products it sells. These events highlight the changing definition of a board’s duty of care to exercise good business judgment. Canadian companies can expect to be subject to similar scrutiny.
A specific message for directors coming out of these developments is that for a board to discharge its duty of care to the corporation, it must understand the risks to the long-term sustainability of the corporation’s business and have a strategic plan for dealing with those risks. Climate change is a good example of a development which creates a risk for virtually all businesses. Boards should be asking not just “How does climate change impact our business and what is our strategy for dealing with this impact?” but also, “How are we contributing to climate change and what can we do to mitigate our impact?”
The message goes beyond the environment. Many social issues – such as board and work force diversity, conditions in the supply chain and the inclusion of Indigenous people – must be credibly addressed by corporations in order to assure long-term sustainability. Further, boards will only be considered as committed to tackling social and environmental concerns if they develop compensation plans that tie executive pay to achieving positive outcomes.
Knowing and managing the expectations of the corporation’s stakeholders will become a larger responsibility for boards of directors as social accountability is demanded by the corporations’ stakeholders, including its shareholders. As we have argued elsewhere, stakeholder management is a 21st century competency that all corporate boards will need to have.
Corporate boards cannot afford to be laggards in a changing governance landscape. Environmental and social sustainability and corporate sustainability are increasingly one and the same, and the purpose of the corporation must reflect this new reality.
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