PURPOSE, INC.

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Episode 1: Leadership Matters: The Critical Role of the Board in Defining and Supporting Corporate Purpose

Transcript

Participants:

Michael Young, Host

Anthony Goodman, Russell Reynolds Associates

Michael Young:

Welcome to Purpose, Inc., the podcast where we discuss corporate purpose and stakeholder capitalism. I’m your host, Michael Young. So, one of the key questions I want to look at on this podcast is how organizations can move toward inclusive capitalism and obviously, one of the big issues there is leadership which is why I am very excited to have today’s guest on the podcast. Anthony Goodman is Managing Director at Russell Reynolds Associates Board & CEO Advisory Partners and in that role Anthony is a specialist in helping boards and CEOs understand and face the challenges that are shaping the world from disruptive technology to shifting demographics, pressure from investors and regulators and how those issues impact leadership and governance. Anthony serves as the co-chair of The Conference Board ESG Center on Human Capital Oversight and Disclosure.

Prior to working at Russell Reynolds, Anthony spent more than 12 years at Tapestry Networks, an organization convening board directors, investors, regulators for peer learning and mutual understanding. He’s co-authored chapters on board-shareholder engagement in The Handbook of Board Governance published by Wiley. And for five years from 2009 to 2014, Anthony wrote The Leading View column for The Financial Times. He’s got a long and distinguished career in change management consulting. Anthony was educated at New College Oxford. He holds a Master’s of Arts in politics, philosophy and economics. He was also elected president of the Oxford Union, the world’s oldest and most prestigious debating society. Needless to say, we will not be debating Anthony here but looking forward to his insights and his views. Anthony is a former colleague and a good friend and I am thrilled to have him on the podcast. Anthony, thank you for coming on the podcast.

Anthony Goodman:

Well, thank you for having me, Michael.

Michael Young:

Excellent. So, Anthony, I think as we’ve discussed, one of the big questions that I want to investigate on this podcast is an elaboration of the central question which is whether and how businesses can recast themselves as constructive social actors. And while purpose and stakeholder considerations have been business norms for a long time, I think it’s fair to say that more organizations seek to become more purpose-driven and stakeholder focused and certainly, investors and asset managers are increasingly looking at organizations through the lens of ESG to understand and engage corporate risk across an array of issues and challenges. And so, an important and large question I think is how are organizations going to get there and who’s going to lead them? And I think it’s safe to say that leadership matters on the journey toward a more inclusive form of capitalism. So, from where you sit, Anthony, how do you think about that and how do you see it? And I’m looking forward to hearing your thoughts on leadership and stakeholder capitalism and in particular the role of boards and directors along this journey?

Anthony Goodman:

Yes, thanks, Michael. And I think you’re right when you say that leadership matters. I mean as with almost everything that companies do, at the end of the day, it is management that is going to do the work around purpose. But I think that there is a clear role for the board as well which is to hold management accountable for this. Some management teams may be reluctant to go down this path and they will need guidance from their board directors. It seems to me that one of the big challenges for both management and the board is to actually define the purpose of the company. It’s not so easy to do to come up with something that is authentic and meaningful and that is not, for want of a better word, purpose washing whereby we can come up with something like Google’s famous ‘Don’t be evil’. But does that really impact what people do on a day-to-day basis and importantly, does it impact the strategy of the organization in any way? Does it influence the products and services that are being provided? The fact is not every service and not every product is a great gift to humanity. So, thinking through carefully what the purpose of the organization is going to be, that may well need to be initiated, probably should be initiated by the CEO and the senior leadership. But at some point, there’s going to be a dialogue and the board will need to be involved in that dialogue because if the purpose is genuine, it is going to influence everything about the company and therefore, the board has to understand the purpose and understand how it applies to the different stakeholders the company has and what it’s intended to do and how could they measure the impact and have it influence management’s compensation.

Michael Young:

And you and your team as Russell Reynolds recently released a study on global corporate governance trends and I’d love for you to walk us through the major findings of that report in particular. And then I think out of those big findings, there are a number of topics and questions that emerge from that. So, could you maybe give us an overview of that?

Anthony Goodman:

Yes. I’m happy to do that, Michael. And as you say, we do this. Every year, we speak to about 40 governance experts around the world. Either they’re a part of large institutional investors or they may be activist investors. They may be working for the proxy advisors and they may be just observers of the corporate governance world. And we ask them what they think the major trends are going to be for the next year because we want to try and give our clients who are boards and senior leadership in the company some kind of a heads up about what to expect in the coming year. And we published early January and there were really sort of five key things that came out this year and I’ll briefly talk about each one and then you can ask me questions about them.

But the first was the big emphasis around the E and the S of ESG. So, for those who aren’t familiar, ESG stands for Environmental, Social and Governance. It’s a framework for thinking about companies, for thinking about investments and it’s become more and more influential and we can get into why later on in the conversation. But the last few years, the focus has been very much on the G for governance and a lot of pressure on boards to move towards you say in the United States things like majority voting and proxy access. But there’s now much more of an emphasis going to be on the environmental and social part of the equation. Environmental is really boiling down right now to climate risk and opportunity. And the social side could reflect a number of different things whether it’s labor practices in one jurisdiction or one particular sector or it could be how the company’s interacting with the community in another place. So, big, big emphasis around this and we’re going to start hearing about organizations like SASB which is the Sustainability Accounting Standards Board which helps set standards around materiality for companies who want to report on their sustainability or their ESG. Some of these terms are going to become more boardroom understood over the next year or so than they have been to date. So, that’s the first thing.

The second thing is actually around purpose where we started our conversation that there’s a lot more emphasis on this in the U.S. last year. The Business Roundtable put out their statement on the purpose of the corporation. That was followed by The World Economic Forum who put out their statement at the end of the year. And basically, what they’re both pushing for is much more of a stakeholder view of capitalism than has been the case to date. And I think this is going to be really important actually for organizations. If you look at the kind of pressure that is going to exist if say President Bernie Sanders gets elected, the companies are going to be under a lot of pressure to be thinking about the different stakeholders. And so, getting a head start around some of this at an early stage is going to be important and it’s important to invest well.

The third trend was better oversight of corporate culture and human capital management. Sometimes that gets lumped under the S of ESG because it's a way of thinking about employees in particular. But really making sure that the company understands what the corporate culture is, what they desire it to be, how to get from one to the other and how they're going to attract and retain the best talent in order to deliver on their strategy. The fourth one is taking a more expansive view of board diversity. So, up till now, the focus pretty much globally has been around gender diversity and we've seen in different countries either laws or regulations put in place to increase the number of women on boards. What's been behind all of that is the fact that investors want cognitive diversity on the board. But they'll happily settle for gender and increasingly racial and ethnic diversity as a proxy for cognitive diversity because they believe that the decision-making the boards make is going to be better the more diverse they are and what you'll see this year is a bigger push around ethnicity and race particularly in the U.S. where Vanguard and the New York City Controller’s Office have really pushed quite hard around this issue and it will be about disclosure to begin with but eventually it's going to come down to what are you actually doing.

And the final thing is companies facing increased activism. So, we've had the traditional activist investors for the last few years and they've made great headway in getting companies to settle with them and put their directors on the board. But increasingly, you're going to see NGOs getting into this space and you're going to see employee shareholder activism. We've already started to see that at companies like Google where employees will use their shareholdings to push proposals at the annual meeting which even if they're not going to succeed does have the ability to embarrass the company into taking action. But we think there will be other forms of activism companies will need to face sort of over the years ahead.

Michael Young:

Excellent. Thank you for that. And if I could maybe just to go back on each of those and spend a further moment in looking at them, the first, the E and the S of ESG becoming more salient and predominant. I think one of the findings in your report was that boards and management are mostly playing catch-up on how to define and E and S and you mentioned some of the reporting frameworks SASB in particular but there are a number that have been out there, UN sustainable development goals, GRI. Is your view that there will ultimately become a narrowing and consensus around the reporting frameworks? And do you think that is the vehicle through which boards and management can in essence get around on these issues faster and more coherently?

Anthony Goodman:

Yes, I think so. For a long time, if you put these issues to boards, directors would say well, look, there isn't a standard that everyone accepts. So, why should I do something? Let's wait and see what emerges as the sort of front running standards here and then we can react. I think getting into that territory now, there was certainly in the conversations we had with the 40 plus people we spoke with a sense that SASB and something called the Task Force on Climate Related Financial Disclosures, sometimes also called the Bloomberg Commission and it is the same one, Michael Bloomberg, who chaired that for the Financial Stability Board, that those two are starting to move ahead of the pack compared with some of the others. Because what investors would really like to see is comparability at the end of the day and they can only get that if companies start using similar approaches to how they report on sustainability.

So, those are the frontrunners in the pack. We think they'll probably break away and you'll start to see consensus emerging around this. And then the excuse that well, we can't do anything because there's no globally accepted standard will start to diminish. So, this is going to be a big issue for companies and it's inescapable. The investors have been here earlier because they all signed up to the UN principles of responsible investing and they're being held accountable for this. And in many jurisdictions there's actually not just a corporate governance code but a stewardship code that also holds investors accountable and of course, the investors are global. So, if they have to abide by the stewardship code in the UK and react a certain way there, it starts to impact how they operate around the world because you're going to move your practices to the standard that you have to meet in the toughest jurisdiction.

So, for companies in the U.S. who've long thought that they could escape the microscope, I think that's going to diminish very, very clearly and Larry Fink's letter this year and the statement from State Street Global Advisors that followed has made it clear that they are looking at companies to respond appropriately and take environmental and societal issues a lot more seriously than maybe they have been.

Michael Young:

And to the whole question of corporate purpose, I appreciate your comment that not every organization can and necessarily will align behind some large umbrella corporate purpose. But many are trying to do better and I think you mentioned public opinion as one of those pressures, internal/external regulator investor all coming to bear. What do you think are the hazards and the opportunities for organizations as they embark on a purpose journey?

Anthony Goodman:

Well, the issue I think that they have to be careful about is the CEO getting out ahead of his skis here and not having the board alongside. One of the things we heard very clearly from the investors was that they want to make sure that CEOs have discussed positions they're going to take with the board before they take those positions and they want to understand how those positions are going to fit with the strategy and the purpose of the organization. So, the risk is the CEOs are under pressured or want to take position on something and you can think about controversial issues that particularly in the U.S. in an election year, things like gun control, gender pay gap and so on. And they just I think need to make sure that they've got the organization alongside them, the board alongside them before they set down a particular road because that I think is a big risk.

Michael Young:

Definitely. And some good and bad examples always emerging in the landscape on that particular topic. Moving onto culture and human capital management and this seems to be increasingly where a spotlight is being shined and human capital management often as a proxy for corporate culture and talent attraction. Can you talk a little bit more about that particular dimension of what you're seeing and the role that not only cognitive diversity on the board but what that should translate into within the organization and within the corporate culture?

Anthony Goodman:

Absolutely. And boards haven't played a serious role here before and we sometimes still come across board directors who will say I don't really understand why this is an issue that the board is looking at. It's an issue for management. But I think that when we look at some of the big culture debacles that have occurred over the last few years in the banking world and elsewhere, we can see that the absence of board interest has been problematic to say the least and investors are clearly looking for boards to act on their behalf to ensure that the risks and indeed opportunities around culture are being dealt with appropriately by management because culture is important in attracting and retaining the talent you want in the organization.

So, having a really good culture makes a big difference. But also, it contains within it potential risks when you get a bad culture that people behave badly, there's no accountability mechanisms and you end up in some very difficult situations. So, they're not destroying shareholder values. You can see why the shareholders want to make sure that this is being handled correctly. But the challenge for boards is that a lot of the mechanisms that they typically want to see like really good data aren't there yet around human capital management and culture. So, we talk to boards and they'll say well, yes, we see the annual employee survey data and that's about the only thing they're seeing. But that is only one expression of the corporate culture and there are many other things and within each company and within each industry, there would be a different set of data you'd want to look at. If you were in the oil and gas industry, you'd want to look at health and safety data, for example.

So, being able to put together a dashboard of the key metrics and making sure that they are regularly coming in front of the board and the board can keep track, I think it's a challenge a lot of companies are dealing with right now. But not only because management often don't know all the data that's available but also because the data is embedded in different functions and different divisions across the company and being able to pull all of that together in a coherent way for the board is going to take a little bit of time but it's going to have to be done. Now when that stuff comes to the board, here's where board diversity kicks in because everybody hears the story differently and having a diverse board means that you're most likely going to get the right questions being asked. For instance, if you're making a big deal of diversity and inclusion as part of your culture, it rather helps if you have a diverse board that's actually having that conversation and indeed, we've seen diverse board directors, ethnic and racially diverse board directors, gender diverse board directors actually get involved with employee resource groups inside companies because they are seen as role models and they are seen as being important. And sometimes there are more of them on the board than there are diverse people in senior management. So, the board can play a very important role.

Michael Young:

Just that whole idea that capital in human capital is central to risk mitigation because it is in we've seen so many examples of what's going on inside the organization subtly metastasize and come into the public view in ways that were not visible previously. And maybe just a comment about and because I'm here in San Francisco, Silicon Valley and I pay some attention to the big tech giants, a number of them are structured around multi-class share structures which by my reading and in some observations tend to limit board authority or governance if you will. And I think we’ve seen a couple of examples recently where founder shares and voting rights had to be taken away with extreme measures. How do you think that is going to evolve given all of the broader macro trends that we've been talking about here?

Anthony Goodman:

I think it’s clearly a big issue. It first came to prominence when Snap did their IPO but it carried on and then, of course, with WeWork, it was sort of one of the big issues there. But we've seen it elsewhere as well. I think what the investors are really looking for is to have some set provisions. So, I think they understand that in order to get our companies to be as successful as they are particularly in Silicon Valley, it takes a certain type of structure to help a certain type of entrepreneurial personality be successful and have control of the organization and get it to a certain stage of growth. I think the issue is when they IPO and they want to take money from other forms of investors, institutional investors who have beneficiaries of their own to think about that as part of the IPO, the investors would like to see that those provisions will eventually diminish. And so, you might say after five years, after seven years, those dual class structures would go away and then I think investors would be a lot more comfortable. So, they're not saying no and they're not saying never. I think what they're saying is they have a role, they have a place but like training wheels on a on a kid's bike, after a while you got to take the training wheels off and let the kid race its bike along with all the others.

Michael Young:

Yeah, absolutely. So, some sun setting provision to those structures make sense and maybe Adam Newman saying that his descendants would be running WeWork in 300 years probably wasn't a message that was terribly well received. Maybe the last question and we'll wrap it up here is if you've got a particular view on how boards are looking at and thinking about ESG ratings and in particular MSCI, Sustainalytics. So, there are others there and you see I've seen at least in annual reports and on sustainability portions of company websites mention of inclusion in rankings, etc. And I guess related to an earlier topic when we were talking about consensus around reporting frameworks, how do you see ESG ratings as a dimension to accountability transparency and maybe to an extent pressure on the organization? How do you think about that?

Anthony Goodman:

Well, as you point out, there are a lot of different ratings organizations out there and I think companies right now will have to take a look at all of them and think about how to maximize the way they tell their story to really maximize their ratings in the directions they want them to go because others are looking at them, investors are looking at them, NGOs are looking at them, others are looking at them. So, being able to ensure that you're getting your story out is really important and that's why some of the other frameworks like SASB are really helpful to companies in telling the story that will enable it to be a little bit comparable with others in their sector. If you don't put the data out yourself, you are still going to be rated by others but they're going to be rating you based on their opinions, their data or not on things that you've put out in the public domain. And so, it's never going to reflect that well on you. So, I think it's important that you are disclosing, you are telling your own story and as much as possible, you're attempting to maximize the ratings the way you want them to be and looking at all of them or at least the most important ones and seeing how you measure up. And sometimes quite small innocuous changes can make a big difference in the rating.

Michael Young:

Yeah. That's a great point and I think that you mentioned storytelling and narrative and the tension between what you say yourself versus what others will say about you inevitably is something that definitely needs to be managed.

Anthony Goodman:

The good news is that the biggest institutional investors have got large teams who will take the time and effort to look at the data you put out there and are not just reliant on third parties to tell them what to think and do.

Michael Young:

Well, Anthony, this has been a—I can't believe it's 35 minutes—this has been a fantastic half hour and a great survey of a board leadership and governance issues. And I really thank you for your time and for coming on the podcast.

Anthony Goodman:

Thank you very much for inviting me. These are really great topics to be talking about and the more we can have companies and boards understand them, the better it's going to be for all of us.

Michael Young:

And Anthony, just real quick, how can people get in touch with you?

Anthony Goodman:

They can get hold of me, I'm on Twitter @AnthonyGoodman and they can also email me at Russell Reynolds and if they go to the website, RussellReynolds.com, they can find my email there.

Michael Young:

Fantastic. Anthony, thank you again. Have a great day.

The Purpose, Inc. is a production of Actual Agency, helping innovators communicate in a changing world. More at www.Actual.Agency.

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