By Helle Bank Jørgensen, Founder and CEO at Competent Boards
Over the past two decades, the role of the corporate director has undergone a seismic shift.
We’ve moved from concentrating on financial performance and shareholder value to taking on a wider range of responsibilities, especially in areas like sustainability, climate, and nature. This change recognizes how tightly business operations are linked to the world around us and highlights the crucial role corporate governance plays in tackling these new challenges. It also reflects a broader recognition that sustainable business practices are not just a regulatory requirement but a strategic imperative for long-term success.
Every director now has little choice but to embrace this expanded duty of care if he or she is to effectively navigate the complex landscape of modern corporate governance.
The Early 2000s: Financial Focus and Emerging Awareness
In the early 2000s most directors were laser-focused on financial performance, risk management, and regulatory compliance. Environmental and social considerations were often sidelined and relegated to the realm of corporate social responsibility (CSR) initiatives. These initiatives may have been well-meaning, but they were typically marginal to a company’s overall business strategy. Directors were navigating a landscape where the primary expectation was to maximize shareholder value, and CSR was often seen as a do-good add-on rather than a necessity.
However, the winds of change were beginning to blow. The Sarbanes-Oxley Act of 2002 was a significant milestone in enhancing corporate governance and accountability. While it primarily targeted financial reporting and fraud prevention, it set the stage for broader discussions about corporate responsibility and transparency. The law demanded higher standards of accuracy and integrity in financial reporting, forcing companies to consider how their overall practices, including environmental and social impacts, could withstand outside scrutiny.
The 2020s: A New Era of Accountability and Action
Fast forward to the 2020s. The urgency of climate change and biodiversity loss has transformed the landscape of corporate governance. Directors are no longer just the stewards of financial health but also guardians of the planet’s future. An array of recent legislative and regulatory developments reflects this shift, underscoring the need for greater accountability and proactive governance.
Today’s directors are expected to be stewards of sustainability, integrating its varied facets into the core of business strategy. Recent legislative mandates are not just regulatory hurdles; they are catalysts for innovation and leadership. For example, in Canada, Bill C-59 on Environmental and Social Claims requires companies to substantiate their environmental and social claims, enhancing transparency and accountability in their reporting. This isn’t just about compliance; it’s about building trust with stakeholders and positioning a company as a responsible leader in its industry.
Similarly, Bill C-372 on Misleading Advertising on Fossil Fuels and Bill S-243 on Climate Action Plans and Climate Expertise on Boards require directors to ensure that their companies are not only compliant but also proactive in addressing climate-related risks and opportunities. Failure to comply with these laws may result in hefty penalties and reputational damage. More importantly, they will push directors to think beyond traditional business metrics and consider the broader impacts of their decisions on the world around them.
The Canadian initiatives are mirrored in many other countries. In the United Kingdom, a landmark legal opinion published in March 2024 clarifies that directors must consider nature-related risks as part of their duties. The opinion highlights the financial relevance of these risks and their incorporation into decision-making processes.
In Australia, a landmark legal opinion published in October 2023 concluded that under the Corporations Act 2001, directors must consider nature-related risks as part of their duty of care and diligence.
These decisions, and others like them, underline the necessity for directors to integrate nature-related considerations into their governance practices and to adequately disclose these risks in their reports and corporate governance statements.
Proactive vs. Reactive Governance
In today’s context, choosing between proactive and reactive governance is not just relevant—it’s critical. Proactive governance is all about identifying risks before they turn into crises. It’s about foresight, resilience, and grabbing opportunities even in the most uncertain times. On the flip side, reactive governance is like firefighting—you only deal with problems when they blow up. This approach all too often ends in crisis management, regulatory penalties, and serious reputational damage.
Proactive directors are visionaries and Stewards of the Future. They don’t merely follow regulations; they anticipate changes and position their companies ahead of the curve. They foster a culture where sustainability is a core principle, not an afterthought.
Global guidelines and standards like the International Sustainability Standards Board (ISSB) increasingly recommend proactive leadership. I had the pleasure of interviewing Jingdong Hua, vice-chair of the ISSB, about the implications for corporate boards in applying these global sustainability standards. He noted that the ISSB standards offer a structured approach for boards to systematically analyze material sustainability risks and opportunities. This helps boards incorporate these issues into their governance responsibilities proactively. He emphasized that such an exercise goes beyond compliance. It enables a company to consider how it can survive as a long-term going concern amid changing regulations and sustainability factors that can have a dramatic impact on business models over time.
In my book, “Stewards of the Future”, David Pitt-Watson, co-founder and former chair of Hermes Focus Asset Management, describes how he feels about the consequences of not acting proactively on critical issues, such as climate change:
We could be in a very sticky position in fifteen years’ time if we have failed to address the climate problem. Naturally people will be looking for someone to blame. And they may go back to the Principles on Climate Obligations of Enterprises, or some other authoritative source and say: “You did not do this as a board of directors of the company. If not, I am going to sue your company.” My sense is that if you’ve done nothing, they’d have a very good case in a world where we have not managed to get control of the climate. Thus, even on a purely self-interested basis, climate has to be something that every board of directors thinks about. David Pitt-Watson, co-founder and former chair of Hermes Focus Asset Management
This topic has come up in many of my interviews for our global sustainability and ESG designation (GCB.D) program and the global climate and nature designation (CCB.D) program. The 180+ members of our global faculty unanimously agree that boards need to be more proactive. They make the point that many tragic circumstances, like the war in Ukraine, could have been anticipated through scenario planning, but that many boards tend to take a short-term view rather than a long-term one.
Boards would be wise to ensure they address systems risk within existing committees and consider how future events may affect their company and how to prepare for them.
Let’s consider some specific actions:
- Integration of climate and nature-related risks: How can we, as directors, embed climate and nature-related risks into our strategic planning? We need to do more than just recognize these risks—we need to make them central to our business strategy. Assess the long-term impacts of climate change on your supply chain, operations, and markets. How can you turn these potential risks into competitive advantages? Think about scenario planning and stress testing to anticipate various future situations, then prepare accordingly.
- Ensuring compliance with evolving regulation: With environmental regulations evolving at an unprecedented pace, compliance is no longer a box-ticking exercise. What steps can we take to stay ahead? It involves continuous learning, staying up to date with the latest regulatory trends, and fostering close relationships with regulators and policymakers. How can we leverage technology and data analytics to enhance our compliance capabilities? Are we prepared to adapt swiftly to a new regulatory climate?
- Fostering a culture of proactive governance: Proactive governance is a mindset, a culture. How can we inspire and lead our organizations to move in this direction? It starts with us, the board, setting the tone at the top. We need to champion sustainability, celebrate innovation, and reward forward-thinking. How are we empowering our teams to think ahead, to innovate, and to act responsibly? How can we ensure that our values are reflected in every decision at every level of our organization?
- Consequences of failing to address climate and nature-related risks: The cost of inaction is immense. Failing to address climate and nature-related risks can lead to catastrophic outcomes—financial loss, regulatory scrutiny, and irreparable damage to our reputation. More than that, it’s a moral failing. As leaders, we have a duty of care to our stakeholders, our communities, and our planet. Are we prepared to bear the weight of that responsibility? How can we transform potential threats into opportunities for growth and innovation?
As we move forward, it’s crucial for directors to keep evolving and adapting, making sure our companies not only follow the latest regulations but also actively contribute to the global sustainability agenda. We need to push ourselves beyond simply reacting to problems. This is our chance to inspire, innovate, and lead with purpose and conviction. Upskilling is no longer an option; it’s a vital tool to stay ahead of the game. To guide businesses in these transformative times, we need leaders who are well-informed so that they can lay the groundwork for a long and prosperous future.
I’m proud of all the board directors and business leaders in more than 55 countries who are putting their hard-earned Competent Boards qualifications to work not only for the benefit of their companies but for society as a whole.
Thank you for being Stewards of the Future!
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