Green-Savvy Board Members Make Their Mark

Board members hold the fate of their organizations in their hands. So if organizations need to clean up their act and boost their environmental credibility, it seems to make sense for at least some board members to have expertise in environmental matters.

But hold your intuition — there’s plenty of debate on whether green-savvy directors are necessary. Some researchers have found that environmental experience on a board is associated with lower greenhouse gas emissions. Others, though, show that there is no relation between board members with environmental expertise and a firm’s environmental performance.

So what explains the disagreement and which side is right?

These questions are at the heart of a paper co-authored by Steven Salterio, Stephen J.R. Smith Chair of Accounting and Auditing at Smith School of Business, Daehyun Kim (University of Toronto), Michael Marin (University of Toronto), Gordon Richardson (University of Toronto) and Albert Tsang (Southern University of Science and Technology).

Their hunch was that something was off about how previous researchers measured environmental expertise. “A lot of them tried to find this magic bullet, this one trait that shows you someone has this expertise,” says Salterio.

But, as his corporate governance research over the past 25 years has shown, there is no magic bullet. “It’s actually the combination of things that allows boards to be more effective,” he says.

So, Salterio and his co-authors combed the research literature and other datasets to come up with new and comprehensive measures of board environmental expertise and engagement with society.

What these new measures found is that firms do a lot better on the environmental front when their board members have related expertise along with the motivation to improve society. A firm’s environmental performance also grows when boards have strong governance, when directors form corporate social responsibility (CSR) committees and when managers hire chief sustainability officers (CSO) to drive the environmental agenda.

Weighing expertise

It took some time for the research team to decide on the traits to focus on, but in the end they designed a four-item board environmental expertise measure (BEE) and a nine-item board social engagement measure (BSE).

The BEE measure included the average number of CSR committees that directors sat on, the average number of years directors sat on those committees, the average number of boards of environmentally sensitive firms that directors served on, and the proportion of directors with service on the boards of environmentally sensitive firms.

The BSE measure included the average number of government and university affiliations per director and the proportion of directors with non-profit experience, among other factors.

Why were two measures necessary? Salterio knew from his psychology background that when considering expertise and performance, a person’s willingness to use their expertise must be in the mix. “You not only need the environmental expertise, but you have to have the willingness to use it to better environmental performance,” he says. “We thought BSE would account for that.”

The researchers were also curious to see whether strong board governance leads to better firm environmental performance (prior research has suggested that it does). So they developed what they called a GOV measure that included four of the six items shown to correlate with strong governance: board independence, board size, the presence of a female director and majority voting standards. 

Linking governance to sustainability

With the measures set, the researchers applied them to board information they had on 600 firms from the S&P 1500 between 2010 and 2015. They cross-referenced the data with firm scores on the Thomson-Reuters ASSET4 (EN), a widely used environmental grade system that captures a firm’s resource reductions, emissions reductions and product innovations.

The results showed the value of board governance in improving sustainability. The biggest board-related “bang for your buck”, as Salterio puts it, comes from having strong board governance in general. In their study, firms with higher GOV measures saw higher EN scores. More specifically, a one standard deviation increase in GOV resulted in a 16.4 per cent increase in the average EN score.

The next most important board measure was the environmental expertise of directors (BEE), with an average EN score increase of 11.2 per cent, followed by directors’ social engagement (BSE), with an average EN score increase of 6.9 per cent.

The researchers also found that when management hired a CSO, the EN scores went up by a whopping 28 per cent on average. And when boards created CSR committees, firms saw another 7.3 per cent boost in their grades.

Boards matter

There are two major takeaways from this research, says Salterio. If a firm wants to improve its environmental performance, having experts on the board matters — as does having board members with a proven commitment to the social good.

The two go hand in hand, he adds. As the researchers found, board members’ environmental expertise can be enhanced by the board’s empathy for societal needs. 

But perhaps the biggest takeaway, says Salterio, is how important boards can be for reducing a firm’s environmental footprint. He points to the GOV and CSO appointment numbers in particular. “Appointing a chief sustainability officer is a management decision, but a good board will appoint good managers who will then implement things like a CSO,” says Salterio.

Of course, some firms do perform environmentally well with a weak board, Salterio admits. But it’s usually because they have a strong CEO. As he has seen time and again, as soon as the CEO departs, the firm loses its focus on environmental gains.

Salterio offers British Petroleum in the early 2000s as Exhibit A. An environmentally focused CEO, John Browne, remade much of BP’s approach to environmental performance; it was the first major oil company to accept the reality of global warming. When Browne left in 2007, Salterio says, BP’s board was heavy with inside directors (five of 14 directors were company executives) and there was only one female director, two prime indicators of weak overall governance. Only one board member had evident environmental experience and not a single director described their voluntary sector experience in their BP bio. No surprise, BP went from a leader in environmental performance to the middle of the pack.

“That’s one of the major underlying lessons here,” Salterio says. “If you want sustained environmental engagement — not CEO-specific environmental engagement — you need to have the board superstructure to ensure that it is a corporate decision as opposed to being a CEO project.”