Investors now are speculating which companies have the environment, social and governance (ESG) credentials to thrive in the incoming Biden administration. The reality is that few companies are equipped for a resurgence in environmental regulation. Their governance structures are outdated and rigid. For meaningful change to occur, the boards of companies must be reformed — how they are selected, who sits on them, and what perspectives they bring to the table — if we want to drive meaningful, lasting change.
Over the past decade, corporate social responsibility (CSR), ESG, and “responsible corporate governance” reports, promises, and metrics have been common in corporate America — a concession to mounting demands for change, but largely a hollow PR-focused gesture. These efforts to measure and plan fail to get at the heart of the issue: traditional corporate governance structures are ill-equipped to handle stakeholder expectations in 2021 and beyond. In an age when corporations wield unprecedented power and wealth, Americans expect more.
There are no guarantees that a report’s goals will be met, a CEO’s letter to investors will translate into action, or that a company’s mission, vision, and values will be followed. Most companies aren’t accountable to the people their operations, products, and decisions affect.
In most public companies, under the current structure, board members are there to advise the company’s senior leaders in their pursuit of profits and, to a lesser extent, ensure the company is accountable to its shareholders. But in true stakeholders’ capitalism — where corporations are accountable to everyone they impact — board members are advocates and promote nobler aspirations beyond maximization of profit.
To accomplish that lofty goal, you need the right people in the room. Boardrooms, as they stand now, are monolithic. Many board seats are filled by executives of other successful companies; the prevailing wisdom was, they succeeded and ran a profitable business, they can help us do the same.
But these flawed assumptions led to some exclusionary practices and blocked women and people of color from positions of power. Of the boards of Russell 3000 companies, less than one in five seats are filled by women. Less than one in 10 are filled by a person of color. More than half of all directors are themselves CEOs. Many corporations tasked with solving problems of socioeconomic inequality and racial injustice in fact are run by people who have never experienced such hardships.
Board compositions should more closely resemble the United States, not the Harvard Club.
Corporations should set bold, public goals for how their boards will change in the coming decade. Board compositions should more closely resemble the United States, not the Harvard Club. For example, given that 12% of the U.S. population is Black, at least one out of every 10 board seats should be as well. More than half of Americans are women, so more than half of board seats should be too. Inequality is a scar on our social fabric— corporations will only be equipped to do their part to address that inequality if every demographic is adequately represented.
The structural issues go even further than board composition. On many company boards, the CEO and chair positions are held by the same person. Many founders, notably of major tech companies including Facebook, Uber Technologies, and Alphabet’s Google, retain sizable or even majority voting rights, thereby keeping de facto control of the board. In cases where a CEO’s sole focus is profit, the myopic view of the corporation endures and creativity and faithfulness to stakeholders both suffer.
Lack of transparency in public company boards’ decisions and operations is also a sizable problem. One example is the fossil fuel industry. Multi-billion dollar organizations such as Exxon Mobil, BP, and Chevron are responsible for a huge amount of greenhouse gases yet fail to adequately report their emissions, all the while internally planning expansions and greater CO2 output. Such disclosure should be decided by their boards, yet these organizations’ boards are unresponsive to outsiders’ well-founded environmental concerns.
None of this is to say that the status quo — CSR reports, letters to shareholders, and so on — is misguided or mistaken; it’s just insufficient. Unless the boards of public companies change to reflect stakeholders’ interests, no amount of performance metrics will matter.
Corporate culture has to change to bring about a more sustainable, stakeholder-conscious economy. The business world must recognize that these changes are in their best interest. Without meaningful, voluntary structural reform, change could be mandated by government, as happened in California. I don’t believe the government should get involved, but unless corporate America takes action, it may not be a question of if, but when.
M. Rashed Hasan has been a serial entrepreneur, management consultant and business executive. He serves as Executive in Residence at “Business for a Better World” Center and is a faculty member at George Mason University’s School of Business.