How Boards Work: And How They Can Work Better in a Chaotic World
Dambisa Moyo
304 pages, Basic Books, 2021
The damage caused by the 2020 global pandemic—both in economic terms and in the cost to human health—has intensified a debate about corporate power that was already underway. Popular opinion is turning against large corporations, and political, social, and cultural landscapes are shifting at a rapid clip.
In light of this intensifying sentiment, what, exactly, is a corporation’s social responsibility? Companies are more frequently taking on a central role in addressing social and environmental concerns. Around the world, people have become skeptical of capitalism and the dominance of the private sector. This widespread mistrust of market capitalism means that conventional wisdom—such as Friedman’s opinion on the narrow responsibility of a corporation—is due for a reboot. Corporations are now expected—by employees, investors, governments, and society at large—to become outright agents of change. This puts these social and environmental issues firmly on the board’s agenda.
Increasingly, a board is tasked with ensuring that its organization represents and reflects the fact that its customers, clients, and regulators are changing. For all these reasons and more, the world needs strong corporations governed by strong boards. Rather than dismantle the economic system writ large—which would cause immeasurable harm to our lives and societies—we should focus our energies on reforming them.
In my book, How Boards Work: And How They Can Work Better in a Chaotic World, I argue that should start with corporate boards.—Dambisa Moyo
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Board members are not deaf to the loud calls for corporations to take the lead in addressing social and environmental concerns. Every single board that I have served on in the past decade has engaged in considered and constructive debates on these issues. On most occasions, these discussions have led to sweeping changes in product design, sales practices, recruiting and promotion methods, and the tone and culture of the organization itself. But here, too, the speed and manner of change must be weighed against a corporation’s immediate mandate to deliver its prescribed goods and services in a safe, cost-effective, and efficient way.
Moves to address societal concerns must be made constructively and methodically. If they are undertaken hastily and without proper consideration, they can bring considerable costs that may actually hurt, not help, society at large. While it has become fashionable to campaign for the breakup or even shutdown of companies and whole industries, there is often little thought given to the consequences. For example, large, traditional energy companies are facing spirited and virulent campaigns undertaken by environmental lobbyists calling for the companies’ shareholders to divest and for banks to stop lending to them, on the grounds that they contribute to climate change. These actions would lead to the destruction of enterprise value, lost jobs, lost revenue to governments, and many other second-order effects that could permanently harm whole communities. Moreover, such efforts actually undermine progress toward cleaning up the environment as well as toward finding better, cleaner, and more efficient sources of energy by defunding the scientists and engineers who are at the forefront of discovering those sources.
Nevertheless, more and more boards are being confronted with their company’s impact on society, notably in the areas of environmental and social concerns. In order for the company to survive, boards must reallocate human and financial capital to avoid being out of step with societal shifts and capitalize on these trends by going into new business lines. Take the example of a fast-food chain. Its core business relies on producing and selling millions of hamburgers. This satiates a need and meets the demand of a well-established market. In 1994, when McDonald’s stopped publicly updating the number, the company had sold ninety-nine billion hamburgers in roughly forty years.
Think about it: such an expansive global operation delivering a consistent, cost-effective, and tasty offering requires that the board work with management to monitor and oversee employee matters, supply chains, health inspections, costs, the company’s reputation, and long-term strategic planning. Under these pressures, staying in business is already a demanding balancing act.
Yet issues of societal and environmental import are also creeping onto the crowded board agenda. These may take the form of concerns about global obesity: At a time when around one billion people are deemed obese, how does a fast-food company justify selling its products? Or they may revolve around hunger: When forty-two million people (roughly one in seven) struggle with food insecurity in a developed economy like the United States, what is a company in the business of feeding people doing to fight hunger? There are also questions about the environment: Livestock are estimated to contribute around 14.5 percent of the world’s greenhouse gases every year. What, then, are food companies doing to offset those emissions?
All these factors have a direct impact on the company’s core business: the production and supply of hamburgers. Rapidly shifting customer preferences, changing policy decrees, and the advent of technology will each surely play a role in complicating the food business’s future. Estimates in the United States and UK suggest that a third of consumers are cutting down on meat. In response, the appearance of the meatless Impossible Burger on fast-food menus is thought to have attracted new customers and improved profit lines. Policymakers might institute new laws that materially change the business model— such as higher taxation or even outright bans on meat—and of course technology could usher in future substitutes that affect the company’s strategy.
Surprising as it may seem, the world’s largest institutional investors are now placing greater demands on boards and corporations to address a multitude of social issues. Since 2012, Larry Fink, the founder and CEO of BlackRock, has published a letter to CEOs in which he outlines key areas of focus for his company, which is one of the world’s largest asset managers. His yearly letters have included calls for a new model of shareholder engagement (2018) and a call for companies to fulfill their purpose and responsibility to stakeholders (2019). Also in 2018, a group of the world’s biggest investors—including BlackRock, other asset managers like Vanguard and Schroders, and several large pension funds—called on companies to commit to a common set of metrics for societal and workforce issues. The signatories to this agreement, which became known as the Embankment Project for Inclusive Capitalism, together control more than $30 trillion. Collectively, they agreed to push companies to disclose hard-to-quantify measures such as staffing, governance, and innovation, as well as societal and environmental impacts. In 2017, the investment firm JANA Partners and pension and health-care fund CalPERS, both major shareholders of Apple, urged the smartphone maker to create ways for parents to restrict children’s access to their mobile phones. They also pushed for the company to study the effects of heavy smartphone usage on mental health.
Another instance of this sort of pressure went public in December 2018, when the oil company Royal Dutch Shell agreed to link executive pay to carbon-emissions targets. This followed pressure from shareholders, led by the Church of England and Robeco (a Dutch asset-management fund) and supported by Climate Action 100+, a five-year initiative to engage with companies around the world to achieve the goals of the Paris climate agreement. Significantly, just five months earlier, Shell’s CEO had appeared to oppose such a proposal and had reportedly said that setting hard emissions targets would risk exposing the company to litigation. It may not be such a surprise that big investors can get results, but there are deeper stirrings of dissatisfaction too. Larry Fink’s 2015 letter to CEOs may well have proved to be a tipping point in prompting investors to force corporate action on a slate of issues from environmental sustainability to female representation on boards. However, one underlying impetus for investor action is no doubt a recognition that members of the millennial generation—now the largest population cohort in the United States—have different priorities for what they deem societally acceptable.
Given the magnitude of these changes, boards will most certainly need to act. But how a board goes about changing its business requires consideration and reflection. There is, after all, a workforce to manage, a company to operate, and customers who are still willing to pay you because they want your hamburgers. While management is the first part of the company to deal with many social issues, in our highly challenging times, these matters are also of immediate concern to the board, since they go to the heart of governing and overseeing the company strategy, succession, and culture.
A thoughtful board will weigh its current strategy and consider whether it needs to change. Perhaps such a change includes selling different products. As mentioned above, conventional energy companies are facing increasing challenges due to environmental concerns. Warnings from international agencies and governments are forcing boards and corporate leaders to embed explicit environmental agendas into their strategies. In October 2018, a report from the United Nations Intergovernmental Panel on Climate Change demanded the urgent phasing out of fossil fuels, stating that coal-fired electricity must end by 2050 and that the world has just twelve years to limit a climate catastrophe. This was part of the UN’s wider call to reduce greenhouse gases by 45 percent and limit the rise in global temperatures to 1.5 degrees Celsius. In November 2018, a US-government-sanctioned report cautioned of the significant damage that climate change will unleash on the country, both environmentally and economically. Policymakers in China, the UK, and France have already made proclamations that they plan to ban fossil-fuel cars by 2040.
All this necessarily forces energy companies to recalibrate their strategy, even at a time when the global demand for oil-based energy continues to rise. Boards and management of energy companies have been forced to invest in alternative energies—geothermal, wind, solar, battery, biofuel, nuclear—that have emerged as contenders to meet the needs of the future.
Even in the absence of detailed environmental law, energy companies are responding to customers’ changing sentiment and their desire to reduce their carbon footprint. This trend has far-reaching implications for the boards of airlines and car companies, as customers pledge to scale back on air travel and appear keen to use more shared ground transportation. Of course, the boards of global banks are also affected, since they are under increasing pressure to reassess their lending to the energy sector. Already, some financial companies have committed to curb or eliminate lending to the coal industry.
Yet, cutting against the environmental needs, these same companies face an entirely different challenge: today over 1.2 billion people around the world lack access to reliable, clean, and affordable energy. This puts the livelihoods and futures— the education, health care, and commerce—of billions of people at stake, mainly in the world’s most densely populated and poorest regions. Grinding poverty, greater disorderly immigration, and slowed human progress are all direct consequences of a world where conventional forms of energy and the companies that deliver them are banned. Given that forecasts suggest a nearly 50 percent increase in energy use by 2050, the boards of energy companies do not have the luxury of doing nothing.
The broader takeaway is this: virtually every board, in every company, in every industry is contending with sometimes conflicting demands for environmental and social change with urgency. One would be hard-pressed to find a board of any reasonable size, stature, or recognition that was not reviewing and considering the ramifications of their corporate actions on society—socially, environmentally, and beyond.
Excerpted from How Boards Work: And How They Can Work Better in A Chaotic World by Dambisa Moyo. Copyright © 2021. Available from Basic Books, an imprint of Hachette Book Group, Inc.