The Director: Gain from the green game

Boards of directors, it seems, sometimes stymie their company’s environmental agenda. According to some new research by University of Canterbury academic professor Chris van Staden working with University of Auckland’s Dr Charl de Villiers and associate professor Vic Naiker, corporate boards play key role in promoting, or otherwise, strong environmental performance.
A company’s governance structure is, therefore, linked to the impact the business has on the environment. Boards with more independent directors, and less directors appointed with chief executive involvement, perform better environmentally.
“Directors appointed by the CEO are more likely to be influenced by him or her, compromising the board’s independence,” says van Staden. And companies with larger boards including CEOs from other enterprises and directors with legal expertise, are also more likely to act green.
Bigger boards give better performance because, collectively, they are more knowledgeable, diverse and richer in expertise and experience. “Larger boards are more independent, particularly if members are not involved in the company’s management or financially involved in the business,” he says. “And lawyers understand the risks involved if company’s activities contravene regulations.”
The natural environment can, says van Staden, provide companies with useful competitive advantage. “Consumers are becoming more aware of environmental issues and want products that are environmentally friendly and not produced in ways that pollute.” Companies can enhance their market opportunities by taking environmental impacts into account. The risks of not doing so can, on the other hand, be huge. “Look at what happened to BP after the Gulf of Mexico oil spill.
“Hopefully our research will go some way towards helping companies that want to improve their environmental performance by telling them what kind of board they need to achieve this,” says van Staden.
The researchers believe companies with strong environmental performance reduce operating costs, improve access to resources and reduce employee turnover. 2008 study by global accounting firm PricewaterhouseCoopers showed that more than 40 percent of executives think the “green movement” creates significant market opportunities liabilities.
The link between environmental performance and investor interest is becoming increasingly apparent. Research consistently shows positive relationship between financial returns and environmental performance indexes. Other studies prove that firms which adopt stringent environmental standards have higher market valuations than those that don’t. “Our results suggest that shareholders can motivate strong environmental initiatives by ensuring that boards have more directors; fewer directors who are easily influenced by the CEO; and greater representation of outside directors,” say the researchers.
For doubting-Thomas directors, the link between governance, environmental impacts and better overall performance is becoming increasingly apparent. This comprehensive study shows rather convincingly, that boards can play diverse roles in promoting environmental initiatives that are good for business.
It is, say the researchers, the first study to provide real “evidence of associations between strong environmental performance and board characteristics, such as director independence, concentration of directors appointed after the CEO, the size of the board, active CEOs and legal experts on boards”.
The study is based on cross-section of companies across range of industries. Its environmental performance measure evaluates performance across range of environmental strengths. And the study goes beyond the traditional focus on polluting industries and emissions-related performance measures.
The practical implication of the study is, according to the research, that companies wanting strong environmental performance should look for “vigilant” directors with the expertise to deliver. “Directors should not be appointed haphazardly but, rather, with the view to improve elements of board design that provides the necessary monitoring skills and resources to pursue strong environmental agenda.”
The researchers think activist shareholders might use their findings to pressure boards to lift their green game. And the study might also catch the eye and interest of policy makers because: “we identify elements of board governance that may deserve further regulatory focus in order to achieve the public policy objectives or environmental innovation”.
Future studies might, the researchers suggest, consider how particular board processes, such as strategic planning, can directly or indirectly influence environmental strategy and performance. “While we assume independent directors act independently, we have no way of really knowing the independence in the thinking, attitude and actions of director,” they caution. “Similarly, our focus on directors with legal expertise may not accurately capture directors with considerable experience with environmental issue.”
Food for future research thought perhaps.