Directors’ Q&A: boards and ESG

 
Rima: ESG is often equated with the emergence of “stakeholder capitalism”—a focus more broadly on the interests of all stakeholders of a company, and not just shareholders. From a Canadian perspective, where directors have a duty to act in the best interests of the corporation, not limited to shareholders, do you think this is a new concept? Do you think the increasing focus on ESG has broadened the scope of your duties as a director?

Colleen: I don’t think stakeholder capitalism is a new concept at all—legally or in terms of governance leadership. I think back to the Peter Dey report on governance from 1994, which was quite groundbreaking at the time, which talked about the responsibilities of directors to consider stakeholders beyond shareholders. I also think of the triple bottom line of “people, profit and the planet”, which is certainly not a novel concept. And I believe in that. There are some directors that believe more strongly in shareholder primacy. But to me, it’s important to focus on all dimensions of performance—the short, medium and the longer term—and apply a broad definition of success. I remember somebody once asked the prior CEO of TD, Ed Clark, “What do you want us to focus on, the short term or the medium term?” And his answer was “yes”. I think that’s how the best companies and the best boards look at their role and look at the world.

Lorraine: Stakeholder capitalism is something that’s been around forever. If you look back at good companies that are sustainable, lasting multiple decades or longer and see what they did to be successful, ESG (or CSR) was always embedded in how they operated. What has happened in the last five years or so is the velocity of ESG: more companies are now looking at their strategy through the lens of an ESG framework. And the companies that had always been doing so will hopefully now be rewarded.

What we’re also seeing is that ESG is now becoming a product. The “ESG brand” in some ways reflects a lack of understanding of the fundamentals of how a company operates. Every sector and every company within that sector is going to have different measurements in how they embed ESG factors in their strategy—it’s not a one-size-fits-all approach. I think things will come together once we get our standards of measurements right and companies continue to focus on embedding ESG into their strategy. Is a director’s job any different? I don’t think so. I think the expectation has always been there.

Rima: When you're thinking about joining a board, how do you assess the company’s performance on ESG-related matters?

Colleen: You want to learn as much as you can about management and the board and how they look at the world. You want to make sure you’re compatible. And I tend to believe that a focus on ESG is a sign of enlightened leadership on the part of a board and management team: I’m not that interested in being part of an organization that’s focused solely on the short term. So I make reviewing their reporting part of my due diligence. And you may say “Everybody can put a shiny ESG report together. Does it really tell you that much?” But you know, because of my deep experience in investor relations at TD, I’ve been asked to be a judge for the last number of years for the Canadian Investor Relations awards, where the best ESG reporting for small-, medium- and large-cap companies is assessed. You can tell a lot about a company’s commitment to ESG based on their disclosures, their narratives on the topic and the degree of integration between ESG and financial reporting—not only in terms of what they publish, but also how they talk about performance. There are lots of indicators in terms of how a company conducts itself to reflect that ESG and corporate social responsibility aren’t just off to the side, it’s more integrated in the story. In talking to management, you can also get a good sense of a company’s level of commitment.

Lorraine: Having worked at Shell for many years, a similar version of the triple bottom line that Colleen referred to of “people, profit and planet” was integrated into how we made decisions. And, having spent my career in the oil and gas sector, that certainly is a value set for me. When I look at a company or its board, I look at how they create shareholder value. The key to that is looking at their metrics: what are they measuring, what is unique to them, how are they competing, what do they care about? I look at the narrative in their proxy and think about the story they are trying to tell, whether they are just doing “vanilla” reporting or whether they are taking ESG seriously. I also look at how they are ranked by third parties. So I look at all of these things to find out what the values of the corporation are, their culture and how the company lives its purpose.

Rima: What role do you think companies can and should play in addressing social concerns, such as racial inequity? Is this the board’s responsibility?

Colleen: When it comes to issues like racial inequity, I don’t think of it as just a social concern or outside of the purview of a board and management: it’s a business issue, being frank about it. If you look at Canada’s population, we’re a very diverse country. So first and foremost, companies need to get their own houses in order and ensure a diverse and inclusive workplace. Leading by example is important. This is not just a social cause: this is about attracting and retaining the very best people—so board leadership on DEI is very important. And I think corporate leaders also have a significant influence and impact on society. Those same organizations that have diverse workforces, they have many employees who are impacted deeply when world events occur. You think about the hurt that is created, for example, in some of the high-profile cases we hear about of racial inequity. Taking a stand publicly on these issues is important because it communicates your values—not just to the broader public, but also to your employees.

Being a good corporate citizen and a leader challenges you to have a view on those things that are well beyond social issues. Many argue that it’s at your peril, that taking a stand could yield some backlash. It takes courage and it takes leadership.

Lorraine: Companies exist within a society, and I think they have a huge opportunity to address racial inequity. There are historically disadvantaged groups that companies can reach through the community, through philanthropy, through education. I’ll give you an example with Shell. We wanted to partner with an Indigenous-led company that didn’t have robust health, safety and environmental systems in place. So we decided to train them on these systems and then make that company part of our supply chain. That is a good example of operating in a way that advances equity by facilitating another company’s capacity to be able to compete. Having a robust talent management strategy that is focused on DEI, as I mentioned, is another example of how companies can and should address social inequities. And all of these activities are certainly part of the board’s responsibility to make sure the company is attracting and retaining the best people and the company is using all of the tools at its disposal to achieve the best results.

Rima: Many Canadian companies—including all of the major financial institutions—have set net zero targets by 2050. As a director, how do you get comfortable setting long-term targets which are subject to many variables that are often difficult to predict?

Lorraine: The majority of countries have set net zero targets. It’s a global challenge requiring a global solution. Companies have to rally behind a target to be able to really make an impact. So net zero by 2050 is a galvanizing target. You get comfortable as a director having a long-term goal, by making short- and medium-term goals. They are required to allow you to navigate progress and adapt along the way to different external events while staying focused on the long term. For example, the war in Ukraine immediately impacted energy security which has become front and center now, but ESG and climate change didn’t just go away because of that event. Goals and a clear roadmap, matched with capital allocation are critical. In my world—the energy space—30 years is not a long timeframe, so you’d better be working on it now. And for the companies where I serve as a director, it is an important part of the strategy.

Colleen: I haven’t been as deeply involved in recent years in those targets. And I’m sure the banks and other large companies are doing a really good job with it and I applaud their efforts to put a stake in the ground. When it comes to net zero targets by 2050, I think that shows strong commitment. But when you look at it in a practical sense, these very long-dated commitments with many variables, while well-intentioned, are set by boards and management teams that won’t be around in 2050. The key is to set those long-dated commitments, but have a road map for the shorter-term goals and with a clear sense of whether progress is on track. I think that is a credible approach. But when you’re looking at something that’s 27 years down the road...

Rima: ...It’s aspirational.

Colleen: That’s a good way to put it. It’s aspirational. I heard a very eminent CEO speak recently in a private session and he was asked about whether companies collectively can combat climate change, and he was pessimistic. He doesn’t think humankind can solve the problem. I hope he’s wrong. I hope he’s wrong for the sake of future generations. But governments have to come to the table as well. There’s a tremendous amount of pressure on corporations right now for all the reasons we’ve talked about, and investor pressure. But governments are a vital part of this equation; there are many organizations that have to come to the table.

Colleen Johnston is the former Chief Financial Officer of Toronto-Dominion Bank. Prior to her retirement in 2018 Colleen spent 14 years at TD, 10 of which she spent as Group Head, Finance, Sourcing, Corporate Communications and Chief Financial Officer. Prior to TD, Ms. Johnston held senior leadership roles at Scotiabank over the course of 15 years, including as CFO of Scotia Capital. Ms. Johnston currently serves on the board of directors of Shopify Inc. and Q4, as well as a number of private companies and non-profits, including as Chair of the Unity Health Toronto board of directors.

Lorraine Mitchelmore is a leader in the oil and gas sector with over 30 years of international industry experience. Since her retirement from Shell Canada as President and Country Chair and EVP for Royal Dutch Shell’s America heavy oil business, she has acted as a national advocate for Canada to develop climate and innovation policies that will position the industry as a leading responsible developer globally. She is an active mentor to a number of technology start-ups and women executives. She serves on the board of directors of Bank of Montreal, Suncor Energy, Cheniere Energy and Aimco. She is the co-founder and co-chair of Smart Prosperity and in 2018 chaired the federal government’s Resource of the Future Economic Strategy Table.