“You Cannot Direct the Wind, But You Can Adjust Your Sails.” – The SEC Speaks on a Board’s Role in ESG Matters

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

On June 28, Commissioner Allison Herren Lee delivered the Keynote Address at the 2021 Society for Corporate Governance National Conference.  In it, she spoke on the ever-increasing role a company’s board of directors has within the environmental, social and governance (ESG) space. Notably, she provided some “key steps” for boards seeking to embrace their growing role in ESG matters and capitalize on the opportunities they present.  Some of these key steps are highlighted below:

Enhance Board Diversity for New Perspectives

Despite the plentiful evidence that makes clear the important role that ESG plays in a company’s long-term growth and capital raising opportunities, Commissioner Lee referred to some evidence that suggests directors have been relatively slow to appreciate the need to integrate ESG into governance practices. In her view, board refreshment introduces opportunities to put new directors on boards, and prioritizing diversity helps increase the chance that new directors will bring new perspectives. This, in turn, may facilitate more up-to-date and proactive approaches to ESG governance by a company’s board.

Increase Board Expertise on ESG Matters

To effectively address ESG risks, Commissioner Lee expressed that company boards must have adequate expertise on ESG-related subjects. Ways to increase “ESG competence” on boards could include integrating ESG considerations into the nominating processes to recruit directors with ESG expertise; training and education to enhance board members’ expertise on ESG matters; and possibly engaging experts to provide advice and guidance to boards in this area.

Incentivize Management Success

Commissioner Lee reasoned that our economy is built on, and responds directly to, financial incentives. Therefore, executive compensation is a powerful tool for achieving strategic company goals – including ESG goals.  Commissioner Lee believes that boards that tie executive compensation to ESG metrics are utilizing one of the most effective tools they have to make meaningful progress on ESG goals while simultaneously communicating to stakeholders the seriousness of their commitment to ESG issues.

Commissioner Lee closed with a profoundly practical point regarding the often discussed “right course” for companies to take for ESG matters. She affirmed there is no one right answer for each company on how to mitigate risks and maximize opportunities for ESG issues. As she pointed out, they are complex, evolving and, in some cases, highly charged issues. Companies should be prepared to tackle this space in a collaborative, thoughtful manner, and that may very well be a difficult, but not impossible, task.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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