An expert briefing with Professor Michael Hilb.
Our Expert Briefing Series provides summaries from academic and industry experts on key climate issues, presenting recommendations to inform ongoing industry and policy debates. Drawing on the Centre for Climate Engagement’s expertise, these briefings summarise key research findings or the state of knowledge about a particular issue.
This briefing explores, with Professor Michael Hilb, the role of board directors in the governance of sustainability. Professor Hilb is founder of the DBP Group, Chair of the Board Foundation and a board director at multiple companies, among other positions. He is a titular professor at the University of Fribourg and teaches strategy, entrepreneurship and corporate governance at universities in Europe and Asia. This briefing draws upon concepts in Professor Hilb’s recently published book, Governance of Sustainability, 20231
Briefing Highlights:
- Organisations have generally pursued one of two different approaches to governance of sustainability issues: corporate governance of sustainability, which treats it as a standalone function; or sustainable corporate governance, which embeds sustainability at the heart of the organisation.
- Sustainable corporate governance fundamentally changes the way the organisation operates and will ultimately deliver more meaningful and longer-term action.
- Organisations looking to embrace sustainable corporate governance need to ensure a diverse board, open exchange with all shareholders and a clear sense of purpose.
Effective corporate governance underpins a business like the foundations of a house, according to Michael Hilb. However, as new business challenges arise, additional management processes are often bolted on as extensions, rather than integrated into the fabric of the building. Governance of sustainability is no different. For organisations to truly incorporate sustainability and climate action into their operations, and make the transition from corporate governance of sustainability to sustainable corporate governance, board members must revisit the organisation’s purpose, whilst also, and critically, taking into account the views of all stakeholders. This renewed purpose will then guide the design of organisational structures and processes.
Sustainable corporate governance vs. governance of sustainability
Corporate governance establishes the foundations for how a company operates. It describes the structures, systems and processes that an organisation uses to manage its business activity and ensure the organisation can deliver its strategy.
The governance of sustainability is often treated as an additional feature or ‘add-on’ to this foundation of corporate governance and in many cases is managed by a dedicated team or department. For Hilb, this means that sustainability-related activities remain limited in scope. The organisation may achieve a number of defined goals and targets, but does not fundamentally change the way it operates.
Sustainable corporate governance requires the organisation to revisit its core purpose in a ‘structured and inclusive way, with involvement of all stakeholders,’ Hilb notes. The purpose identified then determines what rules, management systems and processes an organisation must put in place to govern its operations and deliver on the corporate purpose.
‘You need to have a clear alignment among the shareholders about the purpose of the company, but then you also have to understand social expectations,’ Hilb notes. ‘You also have to incorporate these expectations into the way you set up your governance. Then you make decisions within that system.’
Companies that have done this well tend to be very close to their stakeholders, particularly customers. It ensures the organisation remains ‘open to incorporate any changes in stakeholder perspectives and societal expectations which come along’ and to evolve their governance system and market approach accordingly.
Similarly, family-owned businesses have tended to integrate sustainability much more fully into their operations because of their focus on long-term management and stewardship of the company. The family owner tends to prioritise the longer-term resilience and prosperity of the organisation that they will pass to future generations, rather than meeting the shorter-term needs of shareholders.
Figure 1: The five impact levels of sustainable corporate governance vs governance of sustainability
Diversity of perspectives and governance lenses
Boards need to become much more inclusive of, and responsive to, the needs of the different stakeholders that they represent. It is difficult to have a meaningful discussion about changing societal expectations and their impact on the organisation if all members of the board have similar backgrounds and experiences. Hilb recommends, therefore, that organisations wishing to embed sustainability more fully start by examining the board composition, adding new members where necessary to reflect different perspectives.
However, diversity of board members is not enough on its own. Board members need to develop a greater awareness of how group decisions are made, and how individual perspectives can shape discussions. Whilst board directors may only meet a few times a year at board or committee meetings, they are required to discuss important strategic issues and undertake strategic decision-making. No individual can be an expert in all issues, meaning that even when careful consideration has been given to the board composition, decision-making can suffer from gaps in knowledge or incomplete information.
‘Very often, we assume that once you’ve defined the right systems and structures, it’s going to work accordingly,’ Hilb comments. However, we all have inherent biases in how we frame issues. It is impossible to eliminate these biases, but scrutinising decision-making from three different angles, which Hilb terms ‘governance lenses’, helps to identify and address areas of potential weakness. This approach can also help board members to explore what factors may be a barrier to consensus on key issues.
The cognitive lens explores factors that may influence decision-making, such as context, previous experience or lack of knowledge, helping to minimise the impact of any bias. For example, there is still a tendency in many organisations to regard sustainability as a risk rather than opportunity, or that action to reduce emissions is costly. These beliefs shape organisational ambition when setting climate goals. The political lens acknowledges that all decision-makers have vested interests which influence their actions and the decisions that they support. This is especially pertinent when it comes to sustainability topics and how different stakeholders lobby for action on issues closest to their heart. Meanwhile, the ethical lens focuses on how our values affect decision-making and the actions that we are prepared to support.
To achieve sustainable corporate governance, competent board members must be comfortable to challenge their own beliefs, those of fellow board members, and to question the status quo.
Embedding purpose at the heart of the organisation
A clear purpose sits at the heart of effective corporate governance. However, it is not enough to have a beautifully worded mission statement, board members need to go beyond the headline statement and interrogate how the organisation’s purpose plays out in practice.
Importantly, this means exploring the trade-offs the organisation is prepared to make. For example, is the organisation prepared to walk away from historically profitable areas of business? Or to invest heavily in the short term to achieve its long-term climate ambitions? Taking time to discuss these points will provide a clear mandate and ensure a consistent approach to commercial challenges and opportunities.
Hilb acknowledges that defining purpose is far from easy. Historically, businesses were issued with a charter or clear parameters for their role in society. They were appointed as the official provider of a defined service, e.g. a royal bakery. However, over time, the role of business has expanded and evolved significantly in response to societal concerns, e.g. around workers’ rights or the environment.
‘I believe we have to acknowledge that there are different viewpoints of what business should do in society. This won’t be resolved.’ In fact, the debate about the role of business re-emerges every 10-20 years with a ‘different intensity and different characteristics,’ Hilb observes.
Despite this expanded scope, there is still a tendency to believe there should be a single model for how companies operate. Hilb advocates for different operating models that stem from an organisation’s purpose, a concept which he terms ‘the multipurpose corporation’.
This could give rise to several organisations producing similar goods and services in different ways. ‘They will find their employees, their investors and their shareholders’ that identify with their purpose. ‘It creates competition among different models. If one model is more successful, other companies might be motivated to refine their purpose and shift models.’
A five-step transition to sustainable corporate governance
The regulatory environment has evolved significantly in recent years, forcing companies to focus on how they measure and report on climate and sustainability activity. In many organisations, this has turned reporting into a technical task that is delegated to a specialist team.
‘I believe it’s not the right sequence to start with reporting and action,’ Hilb comments. In fact, it is another clear sign that an organisation is pursuing stand-alone corporate governance of sustainability.
At best, this approach may mean that organisations, while achieving valuable emissions reductions, are failing to implement, measure and report on the actions that will make a true strategic different. At worst, it could be counterproductive, with sustainability reporting becoming a ‘tick-box’ exercise without the board or wider organisation having asking why and how the organisation is taking action.
Hilb recommends a five-step process to move towards sustainable corporate governance with motivation and purpose as the starting point. Measurement is the final step. Again, all stakeholders should be involved as the organisation works through the various steps, or impact levels, to ensure alignment.
Sustainability and climate action is only successful if everyone is in agreement about what the organisation is trying to achieve. This means that all stakeholders must have a common mindset and motivation for action, while still acknowledging that there are other views and mindsets at play. This enables stakeholders to agree on a common mission, sense of direction or purpose.
Having defined the aspiration, an organisation can start to explore the goals, or metrics, that it wants to put in place. This allows the organisation to discuss how long the sustainability transition should take, the budget and the trade-offs it is prepared to make. Only then can metrics be broken down into measures and action plans, and measurement and reporting procedures put in place accordingly.
‘I believe that if you take time to clarify the motivation and the mission, the rest will be quite clear. This is a consequence of the first stages. But unfortunately, I observe boards spending most time on the latter stages of this process and missing the critical discussion around motivation and mission.’
Understanding the risks of both approaches
While Hilb advocates for sustainable corporate governance because it is more integrated and drives more meaningful progress, it is important to note that neither approach is without challenge.
Corporate governance of sustainability is largely cosmetic, and sustainability progress with this approach is both limited and discrete. Organisations must be careful not to oversell what they do otherwise they may encourage accusations of greenwashing. The board could also be liable for anything that has been over-represented in the organisation’s sustainability report. Any form of misrepresentation is also highly damaging to corporate reputation. ‘Investors, employees and consumers are not stupid. They notice it’s just a cosmetic PR stamp. You can lose credibility and that’s very hard to recover.’
Given how few organisations have, so far, truly integrated sustainability into their operations, organisations that have adopted sustainable corporate governance may face a tough time truly convincing stakeholders that they operate in a different way from their peer group. This hurdle can only be overcome by truly involving all relevant stakeholders from the beginning and throughout the organisation’s transition.
Conclusion
Organisations face increasing pressure to act on a broad range of sustainability issues, including climate change. The need to demonstrate their commitment has prompted many organisations to focus on reporting, and particularly on isolated areas where they can show rapid progress.
For Hilb, this is jumping in at the end of the process. It has resulted in corporate governance of sustainability being treated as a standalone task that brings only cosmetic benefits. Organisations also risk losing credibility if stakeholders begin to question their commitment and the importance of individual actions.
Organisations need to shift their focus. This starts by being much more inclusive about who they appoint to the board, and board members themselves being open to the views of all stakeholders. This will allow the board, and the organisation, to examine its motivations for sustainability action, define a clear purpose, and decide what trade-offs it is prepared to make along the way. Only then should action and measurement follow as part of a system of sustainable corporate governance.
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