Blog post by Margreet Lommerts
Climate change is one of the biggest challenges we are facing today. This is true for countries and companies that must adapt to a changing world. However, many companies struggle to transform their business models.
In this blog, I uncover the pivotal role corporate governance plays to ensure the long-term value creation of a company based on my research. I found that today, more than ever, supervisory boards play a key role in the transition to the new sustainable economic business models. So how do you do this?
Below, I have summarized my key findings into practical guidance on the abstract and complex transition to a sustainable economy for the leadership of companies and anyone interested in this question. I was able to test and validate my findings through interviews with Boudewijn Siemons (COO of the Port of Rotterdam), and Ineke Dezentjé Hamming-Bluemink, who has extensive supervisory experience as a member of the supervisory board of Vopak Netherlands, Eindhoven University of Technology and ANWB (Royal Dutch Touring Club).
What Governance questions should you ask?
My research takes into account current corporate governance trends and initiatives around sustainability including Environmental Social Governance (ESG) and the United Nations Sustainable Development Goals (SDGs), as well as European legislative trends regarding corporate sustainable governance, due diligence and reporting.
Based on these findings, I uncovered which questions the supervisory board should ask to facilitate the company’s transition to a new sustainable economic business model. These questions relate to four key themes;
- Long-term value creation
- Sustainability strategy
- ESG and renumeration
Below I briefly describe each of these themes and propose the most crucial questions for a supervisory board to ensure the company develops sustainable policies and ultimately transforms into a future-proof business model.
1. Long-term value creation
The supervisory board handles the long-term value creation of a company and acting sustainably is part of that. This also implies that the interests of shareholders must be considered.
The questions that the supervisory board should ask in its oversight of long-term value creation are:
- What are the most important issues affecting our long-term value creation?
- What is our business model, including in terms of ‘non-financial’ value?
- In what ways are we creating social value?
- Do we know which sustainability issues matter to our stakeholders?
2. Sustainability strategy
Besides handling long-term value creation, the supervisory board bears responsibility for the company’s interests and the interests of everyone associated with it. Hence, the Board should look beyond the interests of the shareholders.
Questions the supervisory board should ask to oversee the sustainability strategy are:
- What are our sustainability ambitions? What are the priority areas for action, given our values and ambitions?
- What is our position relative to the rapidly evolving European legislative agenda?
- What is our position relative to the 17 SDGs? What are we doing?
- How has the (sustainability) strategy been integrated in the organisation?
- What is the quality of our sustainability reporting?
The supervisory board has the task of advising and supporting the Executive Board. Since members of the supervisory board usually have years of experience in the business world, they bring different types of experiences to the table. They may have experience in managing companies with different types of shareholders of working in different sectors, with different ambitions. Such experiences are unbelievably valuable and keep the Executive Board on its toes.
To properly fulfil the advisory role, the supervisory board should ask the following questions:
- Are we knowledgeable about the rapidly developing European legislative sustainability agenda in relation to our strategy, and are we capable of fulfilling our advisory role?
- Do we share enough information in our organisation to give us an adequate understanding of the implementation of our sustainability strategy and its accompanying culture and business conduct?
- Do we have the necessary sustainability expertise in-house, or do we need to hire (temporary)external expertise?
4. ESG and renumeration
ESG developments are increasingly linked to remuneration policies, an important part of the shareholder agenda.
Subsequently, the supervisory board should ask questions, such as:
- Do we have a remuneration policy that does not only focus on financial performance?
- Which of the ESG themes are important to our organisation and would we like to see reflected in the remuneration policy as a directors’ incentive? Consider environment and climate, culture, remuneration, the position of employees, diversity, etc.
- How do we define the performance criteria and how do we measure the result?
- Do we know what the top executives earn in comparison to the organisation’s average employee?
In conclusion, for the transition to a new economic model, the supervisory board can play a crucial role. From approving the (sustainability) strategy, to appointing directors capable of shaping and implementing the company’s sustainability ambition, the supervisory board holds the key to overseeing the company’s sustainable value creation based on its supervisory, advisory and employer functions.
Do you want to know more about the expertise and services of Dr2 Consultants on sustainability, or how we can assist you to make this transition? You can reach out to Margreet Lommers here.