Survival of the Fittest Requires Extreme Adaptation

Published in NACD BoardTalk

June 8, 2022

In his 1869 book On the Origin of Species Charles Darwin notes that species that survive are the ones with the ability to adapt to changing environmental conditions. It seems that we have reached another historic societal inflection point. Those individuals and companies that can adapt and change purposefully will have greater opportunities to thrive and innovate.

Shareholder concerns during the 2022 proxy season are focused on environmental, social, and governance (ESG) issues and US Securities and Exchange Commission (SEC) disclosure requirements. This year there were 576 ESG-related shareholder proposals submitted by April 12, 2022, up from 499 in 2021. More than 300 are expected to be voted on, up nearly 60 percent from 2021. The highest percentage of proposals are related to climate change (21 percent), corporate political influence (19 percent), human rights (15 percent), and decent work (12 percent). Shareholders have more questions and are requiring more answers and actions than ever before—whether it be’s shareholders asking for an audit on racial equity or Carl Icahn focusing on ending the confinement of pregnant pigs at McDonald’s Corp. and The Kroger Co.

Stakeholders have expanded beyond employees, shareholders, partners, and clients to include society as a whole and the environment. Five years ago, the nominating and governance committee, which is currently most often charged with the oversight of ESG, had no responsibilities in this area. Also new are chief sustainability officers reporting directly to CEOs.

Meanwhile, implementing new regulations that create value is the shared responsibility of leadership and the board. Innovative growth strategies will be required within this new working environment that directly reflect the values of the board and leadership culture. Strategic communication throughout the organization and community at large around strategies that are being created and executed on becomes a critical part of the skills required of leadership. The issues are immense, whether it is climate, energy, water, diversity, human rights, corporate culture, talent recruitment and development, CEO succession, crisis management, or shareholder engagement. The topics included under the category of ESG are expansive, creating the need for continuous education, collaboration, communication, and decisive decision-making and actions.

The 2022 proxy season will require directors to take proactive steps to make sure that they are staying ahead of requirements and shareholder hot-button issues including climate emissions targets and climate risks, human capital, and workplace diversity. Shareholder activists are influencing the election of board members who have a long-term vision for these issues, while individual directors who do not support board diversity and ESG oversight are now being identified. Last year offers insight: three directors were removed from the Exxon Mobil Corp. board by the collaboration of small and large environmentally focused investment firms and replaced by candidates these investors supported.

Hearing quarterly from the CEO on issues surrounding the many topics of ESG will become critical to the investor community as well as employees. This communication, working with the investor relations community and Wall Street as well as internal and external stakeholders, needs to be a strategic initiative that is planned and executed effectively. Sharing information about changing policies within corporations positions the organizations as forward thinking and engaged in matters that mean something to stakeholders and talent.

That the SEC is dictating these changes, as well, means that they are going to stick. Just looking at financial performance is now a thing of the past. Serious discussions around accountability and reporting will be required by boards, as will the reallocation of corporate funds and capital to these new ESG areas and stakeholder demands.

Continuous learning for directors is now a critical factor to remain relevant, based on the tremendous changes occurring in governance, global politics, and expectations from the workforce. Requirements that did not exist a few years ago are now coming into focus. Sustainability must be built into strategies, policies, processes, and all other operations. Building values-based cultures that support the growth of the next generation of leaders will be a determinant for successful results.

Participating in conferences and webinars with other committed attendees will stretch your thinking and enable you to continue to contribute to strategic discussions regarding the allocation of financial and human capital. Staying relevant and forward thinking requires stepping out of your comfort zone to study, engage, and learn both individually and collectively with your boards and your C-suite.

In addition, success will be determined by having a wide, diverse circle of friends and colleagues who share new data and thinking. Maintaining relationships with engaged people will help you stay current, have discussions at the highest of levels, and stretch your learning capacity. Forcing yourself to read papers that are difficult to understand at first provides your brain with stimulation and perspectives that enable you to connect the dots in innovative ways.

The new reality is here. Only the strong will survive. This changes the risk profile for any organization today. On a positive note, corporations are now being measured in more than just profits and cashflow. Values, which used to be something “nice to have,” are now being required to lead corporations into the future. Boards and management will be judged by their ability to evolve rapidly to better align their companies with their corporate purpose and connectivity to society.