Board effectiveness & evaluation
#2 Short Talks: Sustainability and Independence
Sustainability could transform the investment landscape, so what stance should Boards take? What does the concept Director independence mean in practice? Two expert panels of experienced local corporate governance professionals debated these questions and more at the latest “Board Effectiveness – Short Talks sessions” held on 11 February 2020.
Sustainability and ESG driving Board agendas
The session began with an overview of the EU regulatory outlook by Julie Castiaux, a senior manager with Deloitte. She highlighted items such as the EU’s coming green investment taxonomy, which could help asset managers add sustainability impact to their portfolios, new EU ESG reporting requirements set to come into force from March 2021, and plans to reform MiFID suitability tests to include sustainability risk.
When asked in a poll if ESG was a real need and opportunity, 86% of the audience said yes. However, how should Boards effectively put this into practice?
ESG questions for Boards to ask
Questions that directors should ask, and possible steps to take regarding ESG, included:
• Do boards have the correct information needed to be able to properly evaluate ESG risks?
• Does the Board or the organisation need a sustainability committee?
• Who on the Board has sustainability competences?
• Is the board meeting ESG expectations?
• Is the Board meeting shareholder value expectations?
• Is external ESG reporting complete, accurate and reliable?
• Are there clear sustainability responsibilities for finance, investor relations, legal, risk, strategy, HR, operations, …?
These ideas were then discussed further in a panel discussion. Jane Wilkinson, an independent director, suggested “many equities are either under- or over- valued because markets are not taking account of ESG risks and opportunities.” As an example, she pointed to penalties which will be imposed on EU car makers from 2021 if their global CO2 emission levels are not under certain levels. The panel agreed it can require a lot of persistence to shift colleagues towards a greater focus on ESG considerations.
The question of independence & managing conflicts of interest
Monique Bachner, Henry Kelly and John Li, three experienced corporate governance practitioners, then debated the sometimes equally hard-to-quantify concept of Director independence, noting in particular the lack of consistent definition in Luxembourg.
“Conflicts of interest are not always evil, however they must be pro-actively identified and managed” Monique noted, adding some industry knowledge, for example, can be useful on a Board. If they become too significant and cannot be properly managed, the Director should however leave the Board. Henry agreed adding: “it depends on the nature of the conflict in question, but in all cases declarations must be sufficiently clear and be minuted.”
An audience member raised the point that the relationship between Fund Directors and a Fund promotor is inherent with risk of conflict of interest. The panel noted that regardless of sector, all external Directors will normally be remunerated. As a result, the degree of a Director’s dependency on a particular mandate will be important to bear in mind. A good Board will want - and value - independent input, which should help with the inherent power dynamics.
Striking a balance
Illustrating the wider point with his experience on boards with and without independent Chairs. “Both work", John explained “having someone senior with good connections to a company can help the Directors reach the right people. Independent Directors need to also invest time getting to know the right people”.
When discussing independence in the context of cooling-off periods between leaving employment and joining a Board of the same group, John noted that having been a senior executive with a firm means there will often be a perception of closeness regardless of whether a cooling-off period of one, two or five years is observed. Monique suggested that independence of mind can be a very personal notion. “How long you have worked for a company can affect how long it takes for emotional attachment to dissipate,” she said, adding “sometimes it can be challenging, as it is human nature for people to want to be liked.” For Henry it was also a state of mind. “Codes of conduct are ultimately there to remind all Directors of their role, which is to challenge in a constructive manner,” he said.