Non-executive directors can make climate neutrality a reality

By Joanna Radeke, Center for Sustainable Business and Leadership, ESMT Berlin

What would you protect first in a global crisis: jobs or dividends? The business community’s response to the coronavirus pandemic reveals national differences. In the US and UK, the answer is primarily dividends. In Germany, where the social market economy is very influential, the answer is mainly employment. This is also true for the climate crisis, with German companies calling for any recovery plan linked to COVID-19 to be linked to climate action, but also to jobs and growth.

Germany’s corporate governance system is different from that of many other countries. Its listed companies are required to have a two-tier board of directors: first, a board of directors with executive directors responsible for operations; and second, a supervisory board made up of non-executive directors responsible for leading and advising. The supervisory board includes staff representatives, appoints the members of the management board and approves major company decisions.

In March, ESMT Berlin joined the World Economic Forum’s Climate Governance Initiative (CGI) and launched CGI Germany, joining partners from government (German Council for Sustainable Development) and industry (Board Academy eV). We jointly examined the role of non-executive directors on supervisory boards in driving environmental, social and governance (ESG) solutions for German companies.

Four key strategies have emerged in what non-executive boards can do to help the transition to climate neutrality and sustainability: involve your employees in sustainability decision-making, diversify your board, develop sustainability expertise and encourage. With these, non-executive directors and supervisory boards can be even more powerful engines of environmental responsibility and corporate sustainability.

Strategy n ° 1: involve your employees in sustainable development decision-making

There is no doubt that all directors who sit on boards of directors have an important role to play in driving the long-term viability of their business. “Companies are increasingly placing sustainability at the heart of their values ​​and strategy,” said Simone Bagel-Trah, Chairman of the Supervisory Board and Shareholders Committee of Henkel, a German multinational chemicals and goods company. of consumption. However, the principle of co-determination allows for greater integration of various sustainability issues, whether economic, environmental or social. Co-determination allows employees to play an active role in decision-making, in particular through employee representation on supervisory boards. “Worker representation is an important issue for fostering dialogue and therefore enforcing social governance,” said Joe Kaeser, Chairman of the Supervisory Board of Siemens Energy.

According to a 2020 report titled ‘Codetermination for Sustainable Business’, companies with a high level of codetermination are more likely to integrate sustainability into their day-to-day decision-making, to be part of a sustainability index, to publish a sustainability report, explain their engagement with stakeholders and partially link executive compensation to sustainability goals. This demonstrates that structured employee involvement in sustainability can lead to improvements in sustainability performance.

In addition, according to researchers at the WZB Berlin Science Center, there is “a positive relationship with ‘substantive’ policies such as the adoption of pollution reduction targets, but not with ‘token’ policies, such as adherence to the United Nations Global Compact. “Setting and meeting clear environmental targets is essential to reducing greenhouse gas emissions and achieving climate neutrality.

Employee involvement is not only crucial in setting strategic sustainability priorities, but also in agreeing on how best to achieve them. “It is not enough to agree on climate targets,” said Reiner Hoffmann, chairman of the German Trade Union Confederation (DGB) and member of the supervisory board of Bayer AG. “It will become even more important to define how we will achieve these goals. Therefore, we must take into consideration the employees. Giving workers a voice in the process, recognizing them as drivers of change and innovation and allowing new perspectives to emerge is the way forward. “

Strategy 2: Diversify your board of directors

Another smart strategy for achieving climate transition and other sustainability goals is to cultivate a wide range of ideas within the non-executive board. As the recent study by global leadership consultancy Egon Zehnder and the University of Göttingen shows, this could be achieved by appointing directors from different backgrounds with diverse demographics and professional perspectives. Supervisory boards with a higher proportion of women and young directors as well as shorter terms – as shown in the study “A new impetus for greater sustainability in boards: the importance of board composition in European companies ”- are linked to better performance in terms of sustainable development.

This is confirmed by the experience of Kaeser, who has worked for Siemens for over 40 years and has led the company as President and CEO for the past seven years. “We have to make sure that there is enough diversity of experiences, international and gender norms. And we have to push for more ethnic diversity in the future. “

The appointment of various non-executive directors can provide an impetus for the sustainable transformation of companies.

Strategy n ° 3: Develop expertise in sustainability

Non-executive directors also need to acquire knowledge and skills to address climate change and other sustainability topics and align business models with ambitious climate policies. “Supervisory boards have a special role to play in monitoring the strategic direction of companies,” said Werner Schnappauf, Chairman of the German Sustainability Council and member of the CGI network. “In order to be able to assess climate-related opportunities and risks, additional expertise is needed at this level.” The creation of specialized sustainability committees with the appropriate expertise can also improve the company’s sustainability performance.

Having knowledge and expertise on sustainability topics on boards of directors as well as exchanging views and good practices with other companies and boards can lead to a better integration of sustainability into the business. business.

Strategy n ° 4: encourage

Establishing a sustainability incentive structure is one of the core tasks of the supervisory board. Henkel, for example, includes ESG objectives in executive board compensation. ESG objectives are part of the individual contribution to the implementation of strategic priorities. At Siemens, the executive compensation system includes the component of long-term sustainability as well as specific and measurable objectives on social aspects (such as employee engagement), on environmental issues (such as reducing CO emissions2 footprint) and governance (such as diversity).

Having incentives to act in a sustainable way can lead to focusing more on the environmental and social impacts of the business rather than on simply achieving financial goals.

Conclusion

The principle of co-determination – as seen in the German corporate governance system – provides a solid basis for achieving climate and sustainability goals. However, it is a global fight. Employee involvement needs to be combined with more diversification metrics used for the appointment of non-executive directors, as well as strengthening sustainability expertise and appropriate incentives to act sustainably. The Climate Governance Initiative in Germany, among others, can help non-executive directors become stronger and even more competent sustainability ambassadors within their companies.


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