Friday, January 29, 2010

CSR & Corporate Governance - Part 3

By Wayne Visser

The second lever of change for integrating CSR through corporate governance is the role of non-executive directors (NEDs).

There is no explicit CSR-related role for NEDs in the corporate governance codes – only an emphasis on their role in questioning the strategy, performance and controls for risk management. So once again, CSR would have to be inferred. There are a few hooks, however:

The Tyson Report on Board Diversity suggests that non commercial NEDs (i.e. from NGOs, academia or civil society) have important contributions to make, including their understanding of social, political and environmental issues.

There is a recommendation in the 2009 Walker Review of Corporate Governance of the UK Banking Industry that boards should provide expertise to NEDs to receive increased support, training and access to external experts in areas of risk. The implication is that NEDs would have an enhanced ability to challenge boards.

The Walker Review also recommended that an increased amount of time and attention should be paid to risk governance and independence of risk management functions, implying a more critical role for NEDs.

Mervyn King believes NEDs most important role is to ask “intellectually naive questions”, which tease out corporate responses to strategic issues such as sustainability. However, they should not become siloed, i.e. the only place on the board where sustainability is considered or where accountability lies.

NEDs have a tricky balancing act, as they have to be a team play, yet also retain some distance/independence from the executive board members. King believes the current trend in the US to stack the board almost exclusively with NEDs is a mistake and will backfire; it is the combination of executive directors and NEDs that gives the board strength.

At the end of the day, integrating CSR and corporate governance requires strong and socially aware leadership. However, it also requires an enabling environment. In a report I worked on for Cambridge University on what makes a ‘sustainable economy’, many of the gaps identified were governance gaps – issues like short-termism, divided purpose, inappropriate incentives and misleading measures.

I am also struck how many measures in the Accountability’s Responsible Competitiveness Index relate directly to corporate governance – indicators like efficacy of boards, ethical behaviour, wage equality, strength of audit and accounting standards and transparency of transactions.

So it is clear to me that, not only is corporate governance a key vehicle for communicating and embedding CSR, but it is also part of building a responsible, sustainable and competitive economy. CSR, as part of corporate governance, needs to become – to borrow a phrase from Mervyn King – the plugged in ‘rhythm’ of organisations and economies in the dawning age of responsibility.


Sustainable Economy Dialogue report