For our latest Future Global Leaders Programme seminar, we convened an expert panel to discuss how boards best engage with their shareholders. What does good engagement and stewardship look like? How relevant is ESG – Environmental, Social, and Corporate Governance? And where’s the line between money and mission for today’s business leaders?

The panel included Simon Fraser, Chair of The Investor Forum, Leon Kamhi, Head of Responsibility at Federated Hermes and David Blood, co-founder of Generation Investment Management. The discussion was chaired by Edward Bonham Carter.

The importance of ESG

The panel agreed that ESG is a fundamental part “of doing good business” as Simon put it. “There’s been huge progress but there is still a long way to go,” he said. “A lot of companies are still in catch-up mode.”

For David, integrating ESG was a key driver when he set up Generation Investment Management with former US Vice President Al Gore. “We had a very strong point of view that long-term investing is best practice. That sustainability drives economies and will continue to drive economies – issues like climate health, human health, inequality, racial injustice. These are relevant to economies and so relevant to businesses.

“We always thought ESG factors were relevant to understanding what a company does and how a company does it. We always thought these issues allow us to be better investors. We never thought of this as trading values for values or as ‘a nice to have’.”

Leon agreed, and stressed the importance of thinking of ESG as part of your strategy, not a bolted-on extra. “The last thing I would do is put a section about how we were doing ESG in my Annual Report, because that would be box-ticking. We’ve got to think about how different environmental, social and governance factors sit alongside the running of the business.”

Can pay drive ESG commitment?

The panel chair Edward Bonham Carter proposed that ESG policies would be galvanised if they were linked more to executive pay. Simon agreed – “It should probably be in people’s packages more explicitly” – and said that boards needed to shift to long-term thinking.

For Leon, that means deleveraging packages, to create compensation that isn’t, “overly focused on the short-term plan, hitting this target and that target. We want things more on underlying performance rather than the vicissitudes of what might go on in the market.”

But David cautioned that pay is not the be-all and end-all. “Increasingly CEOs are driven by more than remuneration. They are driven by mission.”

Long-term thinking has to come from the board

“Too often boards give too much of the focus on the strategy of the business to the executive, without necessarily testing it themselves,” Simon explained. “But if that strategy is going to take you on a very long-term journey, it has to potentially survive several generations of executives. And therefore, in my view, the better companies are the ones where clearly the executive is involved in putting together the strategy, but it's something the board has fully bought into and supports through generations of executives.”

Communication and accountability are also vital. David explained that you need to explain to business owners with both short-term and long-term interests what the plan is, and show how you will measure the success of that strategy. “You can’t just say, we are long-term thinkers – trust us,” David said.

The role of stewardship

How can shareholders and other investors add value and advise a business without interfering? Leon said it comes to down stewardship – “Good stewardship is about stewarding the whole business. Not to box tick, not to be too transactional and not campaigning. One needs to act as a partner, an informed you can hold a conversation with the company.”

That relationship should be built on consistency, David believes. “We typically have the same analyst talking to the CEO or the board year in, year out,” he said. “We may not always agree – often we don’t – but it’s being consistent in explaining why we have the point of view that we have. That allows us to make progress. The very best board and management teams understand that, and embrace it.”

Investing in high-carbon companies

When it comes to environmental matters, the panel felt that investors shouldn’t ignore companies that deal in problematic commodities like oil and coal. Instead, they should work from within to make changes.

“By engaging with the best practice in the industry, you make them better and set the bar higher,” Leon said. “That will create some vacuum for the laggards to come through. But engaging directly with the laggards is absolutely critical too.”

Simon warned that you need to be wary of companies that flash their green credentials but whose genuine commitment to change is “deplorable.” He cited the Danish company Ørsted as a great example of a genuinely sustainable company that’s performed very successfully.

Will COVID derail ESG efforts?

The panel acknowledged that given the huge pressures created by COVID-19, focus will shift towards financial survival. But that shouldn’t mean abandoning ESG issues. Simon said, “Covid is accelerating trends, both in ESG factors but also general good business sense. It’s separating companies that have stronger franchises and stronger business models from those that haven’t.”

David said the pandemic has underlined the importance of ESG, and there are opportunities among the challenges.

“The challenges of COVID-19 are helping remind us that planetary health, human health, social justice and racial justice are interlinked. We think this is a once-in-a-century opportunity to build back better, and rethink the interrelationships between these different sectors. We need to think about it holistically, with a long-term horizon."

Purpose-driven business is not a fad

“We think purpose matters immensely,” David said. “Purpose-driven businesses can be the most robust business models. But they have to be true, critically, and it has to reinforce itself. It’s increasingly clear that consumers are not going to be supportive of business whose sole purpose is to make the CEO or a small group of people wealthy.”

Simon agreed. “It's one thing to have a good purpose, but then actually enacting it and creating the right framework across the whole organisation is critical. The next most critical thing is communicating it clearly and consistently to your shareholders, and this is an area that I think companies and boards – particularly larger companies – can do a lot better.

“You need to ask – are you a long-term investor? Are you here for the course? Are you more interested in the growth of the business or the income from the business?”