Sustainability - Peter Crow | Helping boards govern with impact

Published on: 30 June 2022

Are TLCs important, or are they NMP?

The opportunity to embrace a transport technology that is cleaner, quieter and considerably cheaper to operate (than petrol or diesel alternatives) is attractive—once the initial purchase price hurdle leapt. The purported benefits seem to be significant, but does the reality match the rhetoric? As with any proposal to embrace system-level change, the costs of moving from one technology to another are far from trivial. If an assessment is to be complete, the total lifetime costs (TLCs) need to be considered; that is, the sum total of all costs incurred over a product/system’s lifetime (includes manufacture, operation, disposal).

In the case of electric vehicles, what of the economic, environmental and social costs of extracting metals for battery ingredients; logistics and manufacturing; replacement of batteries when they are spent; battery disposal; and, of upgrading the power generation and distribution network to provide adequate electrical power to recharge batteries? Many of these are being quietly ignored, it seems. Not my problem, some argue, as if out of sight is out of mind. This short article argues that when the TLCs are factored in, the benefits associated with a seemingly compelling technology (in this case the adoption of electric powered vehicles and other devices with battery power packs) may not be as great as what has been claimed.

And so to the purpose of this muse, which is not to argue the benefits or otherwise of adopting electrically powered vehicles. Rather, it is to table an issue often overlooked by board of directors considering so-called strategic projects: total lifetime costs.

When faced with a strategically-significant proposal, boards first need to check for alignment, by testing whether the proposal is contributory to the corporate strategy (spoiler alert: often linkages are tenuous). Assuming it is, directors should satisfy themselves that total lifetime costs have been included. Only then can the question of whether the recommendation should be embraced or rejected be debated.

Why might this be important? Directors are duty-bound to act in the best interests of the company. That means taking all relevant information into account.

If boards ignore externalities, or abuse the social, environmental and economic capitals consumed in the operation of the company, the governed company is unlikely to endure over the longer term. And in so doing, directors may be exposing themselves, unwittingly, to legal challenge as well.

Published on: 27 May 2022

Is ESG a harbinger of something big, or just a TLA?

The June solstice is almost upon us. Davos, the World Economic Forum's annual meeting of elite political, academic and business leaders (some would say, talkfest), is over for another year. Private jets have returned to base, and the thoughts of leaders (in the northern hemisphere, at least) are turning to summer holidays and, with it, relaxation, reading lists and an opportunity to cogitate. Meanwhile, leaders south of the equator press on, for the June solstice marks the onset of winter.

Metaphorically, the June and December solstices are signposts: marker pegs that signal pending change.

Over the past couple of years, I have been watching intently one signpost in particular, wondering whether it might portend a change in relation to board work, or whether it might be a mirage that can be ignored. ESG, a three-letter acronym for environmental, social and governance, was coined in 2005 by a group associated with the United Nations. The stated goal was to put pressure on companies to think beyond financial indicators as the primary indicator of business performance, and to report accordingly.

A veritable industry of so-called experts (many self-styled) has emerged in recent years, all claiming to help businesses respond well to ESG demands and expectations. Many business leaders, activists, politicians and directors’ institutions have latched on too, themselves motivated by various self-interests. That interest in operating sustainably and improving reporting is high is no bad thing.

However, to date, evidence to support the proposition that the embrace of ESG leads to better performance is yet to emerge. Indeed, cracks are starting to appear. Several critical thinkers have called out ESG as offering less than what has been claimed. Some have gone as far as asserting that ESG is a ‘solution’ looking for a problem (read: wasted effort). Whether it is or not remains to be seen. However, there is cause for concern: discussion has reached the point that advocates have deemed it necessary to make counter arguments, to defend ESG. That several different definitions of the term are circulating doesn't help. Boards also need to be very alert and ask probing questions, to ensure they continue to discharge their duties. In particular, boards need to assess whether ESG proposals are conducive to improved business performance, and if ESG is a harbinger of substantive change in the way businesses need to operate or yet one more TLA, a fad that will ultimately be consigned to the history books and, in time, forgotten.

That questions are being asked—openly—should be a catalyst for political, civic and business leaders to check that the aspiration (claim), intention (strategy), actions taken and resultant outcomes are aligned. On the evidence to hand, ESG is unlikely to be a panacea. Thus, a level of scepticism in relation to the purported benefits of ESG is warranted.

Published on: 29 April 2022

The case to SEE beyond ESG

ESG and sustainability are hot topics in business and, increasingly, civil society. Hardly a day goes by without one or both being mentioned in newsfeeds and across social and mainstream media. Since the term ESG was first coined in 2005, and more so through the coronavirus pandemic, researchers and commentators have promoted ESG as the answer to what have been held up as great issues of our time—issues such as changing climatic conditions; the impacts of fossil fuels; population growth; modern slavery; the excesses of capitalism; geopolitics; and, more besides.

Shareholders are starting to acknowledge companies should be doing a better job, in terms of appropriately stewarding the resources used in the operation of their business and fulfilling their duties. Institutional investors in particular are applying direct pressure to refocus board attention and business priorities to tackle the great issues—their underlying belief is that ESG-based approaches provide more sustainable long-term value creation.

What is one to make of these developments?

Evidence to support claims that ESG-based investments outperform other investments is yet to emerge. The question of why this might be the case remains open. It could be that investments have been poorly placed; expectations are unreasonable; measurement systems are inappropriate; and, probably, more besides. Of these possibilities, the spectre of inappropriate measurement systems looms large.

A couple of years ago, Ethical Boardroom, a magazine read by tens of thousands of board directors, advisors and executives, commissioned an article on the matter. I concluded that a measurement and reporting framework founded on the three main capitals used in business would probably provide a more informative and complete measure of sustainable business performance than ESG. A copy of that article follows. If you have any comments and suggestions on this, including criticisms, please do let me know—either in the comment box below or, if you prefer, a private message.

pdf eb19_seeing_beyond_esg.pdf

Published on: 4 March 2021

Where are we headed, and are we making progress?

Have you ever wondered what it would be like to travel in a plane without any knowledge of where you might be headed? While this prospect may excite some, the idea of flying without a destination or purpose in mind beggars belief for most people.

Successful air travel is predicated on knowing the destination; a precursor to the pilot creating a flight plan to make the journey and arrive safely. Air travel is, generally, safe and straightforward when this principle is applied. But things can go wrong, and if they do, pilots must be ready to respond well. For that, years of training and accumulated experience are vital. And vigilance too: continuously reading onboard and external signals to verify progress, and to spot and respond to any emerging problems.

Successful governance is directly analogous. Knowledge of the destination and how to get there (purpose and strategy) is vital, as is constant monitoring of both the general direction (to verify progress is being made towards the desired goal) and the current situation (to detect any emerging problems).

Boards are, in general, reasonably good at reading and understanding the current situation. But they are not nearly as good when it comes to general direction. Knowledge and agreement around the ultimate goal, how to get there and how progress might be measured remains problematic. If directors and boards lack clarity on these matters, their ability to govern well and ensure the performance of the company into the future is lost. The consequential risks are high. Chances are, the board and the company will be knocked around—moving but not making progress, just like a cork in a washing machine.

Does your board have this in hand?

Published on: 1 July 2019

SEEing beyond ESG

ESG (environmental, social, governance), an indicator and measure of corporate priorities and performance, has become topical in business circles, very topical. Its emergence has coincided with a rising tide of concerns about the effects of the doctrine of shareholder maximisation, as espoused by Milton Friedman some fifty years ago. A bevy of academics, consultants and politicians have responded by jumping on a bandwagon; much has been written, arguments abound. The objective of much of this rhetoric seems to have been to establish a counterbalance to perceived excesses of capitalism (because capitalism is evil, apparently).

The idea of using a range of financial and non-financial measures to assess company performance is not new. It was normal practice until the early 1970s. But things began to change relatively quickly after Friedman's thesis was published. A broad church of managers, boards, shareholders and activists embraced the thesis (with evangelical zeal in some cases) to justify a primary, even exclusive, focus on profit maximisation. And with it, interest in other (non-financial) indicators of corporate performance waned—until the emergence of corporate social responsibility (CSR) and, more recently, ESG.

ESG has gained an enthusiastic following. Many proponents have argued that the widespread adoption of ESG principles could redress some of the imbalances and inequities that have become apparent in recent decades. Is that reasonable? Is ESG all it is cracked up to be?

Drucker's insight is salient (what gets measured gets managed), but the use of ESG as an appropriate measure of corporate performance doesn't sit that comfortably with me. Two things stand in the way:

First, only two of the three elements measure company performance (E and S illuminate a company's commitment to various environmental and social goals). The third, G, measures something else: the (supposed) performance of the governance function (i.e., the board).
Second, the ESG construct relegates economic performance to such an extent that it is not mentioned. But it remains important: economic performance is necessary if an enterprise is to endure over time.

If ESG contains such flaws, what other options might provide a better (more complete) indication of enduring company performance?

SEE (social, economic, environmental) merits close consideration. It reinstates the economic dimension to its rightful place, alongside the social and environmental dimensions. Thus, the three capitals that fuel sustained business performance, economic growth and societal well-being are re-united. If a company is to thrive over time (read: achieve and sustain high levels of performance, however measured), all three capitals need to be measured, managed and protected, as Christopher Luxon so ably asserted, in 2015.

And what of 'G'? Rightly understood, governance is about providing steerage and guidance (a lesson dating from the Greeks), the means by which companies are directed and controlled (hat tip to Sir Adrian Cadbury). As such, governance is a function performed—not a consequential outcome or result—and Drucker's maxim should be applied.

So, to the courageous question: has the time to SEE beyond ESG arrived? I think so.

Published on: 31 October 2012

Available for meetings in Australia or South-east Asia (Feb '13)

As mentioned last week, I will be presenting a paper at the ICMLG Conference in Bangkok, Thailand. The conference dates are 7–8 February 2013.

If you require any assistance with strategy, governance or related topics, and would like to take advantage of me being in the region, please let me know. I have time available immediately before and after the conference—and am happy to meet with Boards, CEOs or any leadership group in Thailand, Singapore, Malaysia, Indonesia, Hong Kong or Australia, if required.

Please contact me directly if you have a requirement.

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