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Board Oversight of Sustainability: Highlights of Current U.S. Practice

November 13, 2013

For some time, institutional investors have been urging U.S. companies to formally assign oversight of sustainability matters to a specific committee of the board of directors. Companies that do this, advocates of the practice believe, will be more likely to attend to the social and environmental issues material to their core businesses, and to integrate them into strategic planning at the highest levels.

Data collected in the fall of 2013 by GMI Ratings shows that at least at large-cap U.S. firms, many companies are heeding investors’ calls for board oversight of sustainability. Seventy percent of S&P 100 firms now assign such responsibility to at least one board committee. The wording of most committee charters, however, leaves investors uncertain about whether boards truly view sustainability in strategic terms.

Most commonly, committees are assigned to “monitor,” “oversee” or “evaluate” a company’s corporate responsibility policies, programs, or positions, and if necessary to make recommendations to the entire board about them. It is typically unclear through what specific means (e.g., what kinds of reporting systems or data-gathering methods) this oversight or evaluation will be exercised. Many committees appear to focus on charitable and political donations, evaluation of shareholder proposals, and compliance with laws governing environmental and labor matters. While these are useful functions for directors to perform, they are far from what most responsible investors mean when they speak of integrating sustainability into the conduct of a firm’s core business. Relatively few firms indicate that directors are asked to evaluate the risks and opportunities posed to the business by sustainability issues; to oversee reporting to investors on sustainability topics or communicate with stakeholders about them; or to assess the role of sustainability issues in key transactions (such as acquisitions) or other business decisions.

Moreover, nearly 40% of the board committees charged with overseeing sustainability are key board committees – typically Nominating and Governance Committees. In nearly all of these cases, sustainability is only one of the committee’s responsibilities (and typically a very subsidiary one, far down on the list after the primary tasks of selecting directors and setting corporate governance policies). Investors may well be skeptical about the amount of time and attention sustainability issues are likely to receive under these circumstances.

In general, when a company has a separate committee oversee sustainability matters – as over 60% of firms with board-level sustainability oversight do – disclosure about how that oversight functions is more detailed. Perhaps unsurprisingly, some of the most detailed commitments to sustainability oversight have been made by companies in more highly regulated industries – such as utilities and pharmaceuticals – and companies that have already faced serious public controversy. For example, Exelon has two committees that oversee the environmental and worker safety issues related to its power generation, as well as its initiatives on climate change and other sustainability issues. Pfizer’s Regulatory and Compliance Committee’s charter gives extensive detail about how the board is seeking to avoid a repetition of the company’s legal violations related to off-label marketing. Nike’s Corporate Responsibility and Sustainability Committee charter mentions integrating sustainability into the company’s business, including through sourcing and supply chain practices. Finally, Halliburton discloses charters for both a board committee and a management committee on Health, Safety and Environment, which are charged to work together to manage HSE policies and mitigate related risks.

To be sure, the committee charters companies disclose on their websites may or may not give an accurate picture of how the committees function in practice. Two committees that look nearly identical on paper may act in diametrically opposed ways – one highly active and engaged in critical and strategic thinking, one purely focused on compliance and “checking the box.” In the end, it always comes down to the particular individuals involved and the corporate culture in which they operate. But, in the aggregate, committee charters reveal high-level trends. Board oversight of sustainability, they tell us, is now the default at America’s largest companies. The quality of that oversight, however, remains very much in doubt.

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