Directors need to rewire corporate missions
IN THE first case of its kind, ClientEarth – a UK-based organisation that works with NGOs (non-governmental organisations) to fight legal battles on environmental issues – is taking Shell’s board of directors to court for failing to properly prepare for an energy transition.
This involves moving from carbon-emitting fossil fuels in line with climate science, and at a pace and scale that aligns with the Paris Agreement goal to keep global temperature rises to below 1.5°C by 2050.
In mid-March, the campaign group began legal proceedings based on the claim that the Shell Board’s mismanagement of climate risk puts it in breach of its duties under the UK Companies Act. Under English law, company directors have a duty to assess, disclose and manage material risks to the company.
In an age-old narrative of litigation where the interests of the planet and public are often outgunned by the corporate dollar, pound, renminbi or rupee, the entrance of an empowered NGO into the courtroom arena to strike at the legal duties of the board changes the rules of the game. And it should make board directors everywhere sit up and take note.
It called on them to do their “moral duty” and resign over the invasion of Ukraine.
In a poll of its members and the wider community, 86% supported the view that all British directors should now resign their Russian board mandates.
Many answered the call and relinquished their well-paid positions in Russian companies, but some chose to stay put, risking public opprobrium and legal action.
Larry Fink, US billionaire and chairperson and CEO of the investment company BlackRock, asked CEOs in his now-familiar annual letter this year if they wanted to be a dodo or a phoenix.
He stated categorically that stakeholder capitalism is capitalism driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.
In this context, the Intergovernmental Panel on Climate Change released its latest assessments. They outlined with brutal clarity the effects of climate change and the narrowing window for action left to humanity. In his response to the latest mitigation report, UN secretary-general Antonio Guterres laid out the facts for everyone when he said:
Some government and business leaders are saying one thing, but doing another. Simply put, they are lying.
Boards are facing pressure from inside and outside the tent to find relevancy and step up to the new world order.
And it is clear that to respond to this new challenge, board directors need to pay full attention to the state of society and the planet for the simple reason these are two vital elements of their operating space.
If our climate and nature can’t thrive, nor can business. As many an activist and sustainability thought leader has put it “you can’t do business on a dead planet”.
Social instability or violent conflict can undermine economic growth and development – revolution or war, even more so. Scarcity of vital ecological “infrastructure” – such as water, or the agricultural conditions needed to feed the near-9 billion global population, will threaten the business prospects or operations of many companies.
Building on earlier scholarship work on corporate transparency, my current research focuses on shifts in corporate law and governance indicates that directors will increasingly be held to account for failures to take such external risks into account.
From many years of experience serving and advising boards, my sense is that directors are “diligently coasting”. They deliver what’s expected rather than seek what is needed. Now, a step-change is needed. A combination of systemic shocks and global pressures suggests a seismic ratcheting up of risks and also social, legal and political changes.
It is time for boards to challenge the sacred cows of business-as-usual and refashion themselves in response to the new reality.
They must step up to meet the challenge of the age and ask difficult questions. This is the gauntlet we at the University of Cambridge’s Institute for Sustainability Leadership are throwing down to boards – to reset their mission and rewire their approach to leadership, so as to fundamentally rethink the role of business in society and the economy.