The apparent fraud at personal assistance and international aid charity Caritas has launched a debate in Luxembourg about the effectiveness of governance at non-profit entities. But there are broader questions about the evolving responsibilities concerning boards of organisations of all kinds in a changing business and social environment, especially relating to environmental sustainability and social responsibility.
The uncovering in July of an apparent massive fraud against Luxembourg social care and international aid provider Caritas has prompted a round of soul-searching about the quality of governance at non-governmental organisations and other non-profit groups. It has also spurred a wider consideration of whether boards of directors and equivalent bodies are capable of meeting the challenges of a more complex operational environment in which addressing criminal threats of all kinds has become more pressing.
In a much remarked-upon LinkedIn post, lawyer and former ALFI deputy CEO Charles Muller, now an independent director at The Directors’ Office, questioned whether the preparation of NGO boards was adequate for the substantial responsibilities they sometimes bear, noting that such positions should no longer be viewed as honorary and risk-free. Muller enquired about the potential role of ILA in the training of NGO directors – an area the institute is in fact already engaged in, establishing a Non-Profit-Organisation Working Committee [1] to examine the specific needs of the sector.
But the Caritas fraud, along with well-publicised governance failings at other Luxembourg NGOs and privately managed but publicly funded entities – along with financial sector issues such as the collapse of FWU Life Insurance Lux and the withdrawal of Banque Havilland’s operating licence after repeated failure to remedy deficiencies of internal organisation and anti-money laundering controls – have led to a wider-ranging consideration of whether the expectations of especially independent directors’ roles are appropriate to new and evolving challenges.
The question is addressed in a report drawn up by the Cambridge Institute for Sustainability Leadership [2] , an entity within the UK’s University of Cambridge, which examines new pressures on corporate boards stemming from greater scrutiny by investors and regulators, notably the impact of national and global sustainability initiatives and regulatory requirements. Increasingly, boards are set to be on the frontline of the debate on how to balance the delivery of shareholder returns, corporate policies on use of resources including energy consumption, and positioning businesses to thrive in the long term.
The authors of the report identify three ‘big picture’ trends: growing attention to ESG and sustainability factors, which have an impact on boards’ work and regulatory compliance; increased pressure on board practice resulting from a complex and diverse mix of external pressures, as well as growth in the areas subject to board oversight; and a broadening of the role of boards and of the scope of corporate governance as a whole.
At the same time, the institute’s researchers argue, the role of boards and individual directors are affected by a range of emerging legal trends. These include corporate governance and stewardship codes that embrace sustainability principles, a shift in sustainability reporting and disclosure from voluntary corporate self-regulation toward mandatory legal frameworks, and the new litigation and liability risks arising from sustainability issues.
These factors are creating increased stakeholder pressure to clarify the fiduciary duties of boards and align them consistently with companies’ sustainability considerations. Meanwhile, the composition of boards is itself becoming the subject of legislative and regulatory diversity requirements, and of public pressure – even if mandatory standards do not exist. At the same time, board responsibilities will increasingly include corporate compliance with legislation on supply chain due diligence requirements, notably under the European Union’s Corporate Sustainability Reporting and Corporate Sustainability Due Diligence directives, plus the emergence of innovative corporate forms designed to meld private and public benefit.
In response, the Cambridge institute says, board composition and practice are evolving. The report finds that boards are gradually becoming more diverse in terms of gender, background, experience and other factors, although there are still significant national differences, including between European countries. Meanwhile, the proportion of genuinely independent non-executive directors is growing, with stricter rules governing the degree to which former insiders can be considered independent, partly as a result of regulatory requirements, but also due to pressure from shareholders.
There is greater consideration about whether board structures and bodies are appropriate to companies’ changing needs and the environment in which they operate, including the emergence of sustainability sub-committees. Board dynamics and evaluations, and human and collegiate leadership skills, are becoming of greater importance, along with a greater priority placed on attracting a wider range of skills and knowledge – notable in areas such as sustainability, but also regarding technology – to ensure boards have the capabilities required both to help set overall corporate strategy and to hold executive management to account.
The report identifies an increase in strategic engagement by boards, and of greater integration of sustainability issues and corporate purpose, although to a large extent this focuses on information provision; actual understanding of the concept of purpose remains limited, and there are fewer signs that this is feeding into strategic considerations. Nevertheless, there is greater consideration by boards of materiality assessments, and indications that they are viewing sustainability and ESG reporting, and related data collection, as part of the overall strategy development process rather than just as a compliance requirement.
Boards are now much more ready to engage with shareholders, including activist investor groups, and a wider circle of non-financial stakeholders, both at annual general meetings and through other channels, although friction remains common and readiness to engage varies considerably according to the sectors in which companies are active, as well as the political environment regarding corporate sustainability commitment.
The ability of directors to fulfil their responsibilities effectively is complicated by a complex legislative and regulatory backdrop, especially in terms of sustainability reporting requirements and companies’ increased duties to address social impact imperatives within their supply and distribution chains. Fiduciary duty has become an increasingly fraught concept in the United States, a battleground between the responsibility to generate returns for investors and business models that promote companies’ long-term sustainability and even survival.
Drawing on these trends and considerations, the report identifies four key characteristics of a board fit for the future:
• It should operate proactively in a dynamic and complex context with a clear sense of its roles and responsibilities.
• It needs to anticipate and help shape the rapidly changing legal and regulatory landscape relating to sustainability.
• It must ensure that its composition, capability, culture and dynamics are fit for purpose.
• Its purpose should be aligned with strategic decision-making, supported by effective materiality assessments, use of appropriate data and engagement with stakeholders.
The authors conclude: “Boards with a purpose-driven logic will seize the opportunity to unite around a shared and meaningful reason to exist that aligns the fundamental value-creation goal of the company with a sustainable future, while also ensuring that no harm is done to underpinning social and environmental systems.
“As a result, they will be in a stronger place to overcome many of the tensions, challenges and drags on innovation that organisations currently face, have a clear sense of their role and responsibilities, a broader and more strategic perspective, and a framework for making high-level and fundamental decisions about the future direction and operations of the company.”
[1] Note that as of 25 September 2024, ILA reestablished the Non-Profit-Organisation Working Committee, which Manon Loison and Charles Muller now co-chair.
[2] ILA and DLA Piper will discuss this report during a sold-out event on 1 October 2024. Link to the event: https://www.ila.lu/event/the-future-of-boards-a-view-of-what-is-coming-to-the-boardroom-4208/page/introduction-the-future-of-boards-a-view-of-what-is-coming-to-the-boardroom