Diversity in boards of directors, a key factor for environmental and social performance, according to Esade and Diligent
Environmental and social (E&S) performance is better in companies whose boards of directors are more diverse. This is one of the main findings of the report “E&S-Friendly Boards” [in Spanish] by Diligent and the Esade Center of Corporate Governance, which compares the E&S performance of 5,295 companies in 50 countries with the activity and composition of their boards. The report also highlighted that having an independent coordinator on the board, as in 28% of the companies surveyed, and in particular a sustainability committee, as in 12%, makes a crucial difference to environmental and social performance.
Mario Lara, director of the Esade Center for Corporate Governance, was clear that “this report showcases the need to step as far away as possible from the traditional models identified with homogenous, male, pale and stale board membership. Diverse board membership, particularly as regards gender, age, nationality and experience contributes social value and is linked to better non-financial results and environmental and social sustainability.”
“In short, the international experience of board members is crucial for better environmental and social performance,” added Laura Espinosa of Diligent. “These profiles have been exposed to a wide range of issues and spheres in the workplace, including ESG, and the same applies to board members who have executive experience or experience in corporate governance.”
The report also points out other traits of boards that achieve better environmental and social performance including the number of board members because, as the report says, “larger board membership increases the likelihood of having more experts in this field.”
Environmental and social performance by country
Of the 50 countries surveyed, the report “E&S-Friendly Boards” highlights that those with a civil law regime such as France, Switzerland and Germany, have better environmental and social performance than countries with common law regimes that afford greater protection to minority shareholders or are focused on short-term financial or share values such as Anglo-Saxon countries.
As for practices associated with board efficiency and its relationship to E&S performance, there are also differences between countries. The clearest difference, according to the survey, is that equality as regards the nationality of board members in civil law countries is not related to environmental performance, “possibly due to a lack of foreign board members in countries such as Japan, Italy and Spain,” whereas it does have a “very positive impact” in civil law countries.
In addition, the report’s authors note that board efficiency variables related to experience and gender diversity have greater correlation with environmental and social performance in civil law countries than in common law countries. The explanation might, according to the report, be that “civil law countries, focused on different stakeholders, have assimilated ESG issues more into their boards and their members are more aware of them, so they do not need experience in this field or greater diversity in order to achieve increased environmental and social performance.”
Good practices for efficient boards of directors
Finally, as regards ESG good governance, the report “E&S-Friendly Boards of Directors” provides a portrait of the most efficient boards. They are not excessively large, but very diverse in terms of age brackets, nationality and experience, and have virtually achieved gender parity. Management is also better in those that have a CEO succession plan and those with a high number of independent board members, providing their independence is not affected by long length of service.
On the other hand, overly busy board members, the fact they some sit on several boards or are not renewed each year, a practice known as classified board, cause board performance to suffer according to data compiled in this study by the Esade Center for Corporate Governance and Diligent.
